A Few Things: Revenge of The Old Economy, End of The Unipolar Era, Asking Beautiful Questions, Psychology of Money
May 14 2022
I am sharing this weekly email with you because I count you in the group of people I learn from and enjoy being around.
“It’s easy to get drawn into focusing intently on macro. And there is no shortage of pundits telling you what will happen next. But there’s a large literature that shows that experts are poor predictors. Be macro aware and macro agnostic. Think probabilistically. No one knows.”
- Michael Mauboussin
“Happy the man who early learns the difference between his wishes and his powers.”
- Johann Wolfgang von Goethe
“Some things break your heart but fix your vision.”
- Anonymous
“If you judge a fish by its ability to climb a tree, it will live its whole life believing that it is stupid.”
- Albert Einstein
“Middle age is when your broad mind and narrow waist begin to change places.”
-Joseph Cossman (American inventor)
A. A Few Things Worth Checking Out
1. Jeff Currie, Global Head of Commodities at Goldman Sachs was on the Hidden Forces podcast discussing the Revenge of the Old Economy.
Jeff had a bunch of good points, here are a few memorables ones:
“This market is long on conviction, short on positioning”
Meaning: while people may believe the Commodity bull market, it’s hard for real investment $$’s to flow into commodities since the investment teams aren’t there, the IP and systems compounded over years aren’t there. There is just a lot more friction to invest into commodities than just to keep doing what we have been doing for a decade.
The other big issue he discussed was the role of the Petro-dollar and foreign reserves accumulated in the Middle East, China and Japan. In the prior decades, assets were priced in USD and global flows were denominated in USD. Any reserves were put into US Treasuries since many of these countries didn’t have current need for that money and didn’t have the internal capital markets or economy to absorb that much money. Today, the holders of USD & US Treasuries have something to do with the money. They can build stuff, they can create infrastructure, they can buy Commodities, their own local economises are now big enough to take it. This will increase the global cost of capital
Lastly, they discussed global wealth inequality and redistribution. Jeff’s theory is that governments usually accomplish this by bringing the rich down, not as much by bringing the poor up. So how do we make the rich poorer - hit financial assets by increasing interest rates and discount rates.
2. On a similar theme, Gavekal Research had a great piece titled: The End of the Unipolar Era.
Key bits below, emphasis is mine:
Warfare is changing and the financial system has been weaponized like never before. However, the weaponization of the financial system has so far failed to deliver the intended results. At this point, investors can adopt one of two stances. The first might be described as “nothing to see here; move along.”
The second is to accept that the world is changing rapidly, and that these changes will have deep and lasting impacts on financial markets. For now, there are some clear takeaways.
A) The Ukraine war may be telling us that modern history’s unipolar age is now well and truly over. As big as the Russian army is, and as powerful as the US Treasury might be, the current crisis has demonstrated that neither is powerful enough to impose its will on its perceived enemies. This includes even relatively weak enemies; Ukraine’s army was hardly thought of as formidable, while Russia was supposed to be a financial pygmy.
B) This is a very important message. In an age of drones and parallel financial arrangements, there is no longer such a thing as absolute power—nor even the perception of absolute power. The pot has been called, each player has had to show his cards, and all are sitting with busted flushes! The fact that military and financial dominance may be harder to assert in the future opens the door to a much more multipolar world.
C) For 25 years, emerging market workers have subsidized consumption in developed markets, as emerging market policymakers kept their currencies undervalued and recycled their current account surpluses into “hard” currencies. If this arrangement now comes to an end, then the developed market consumer will struggle while the emerging market consumer will thrive.
D) Much consumption in emerging markets tends to occur at the “low end” of the product chain. This plays into a theme I have been harping on about for the last year: that investors should focus on companies that deliver products that consumers “need to have” rather than products that are “nice to have.”
E) Over the last two years, US treasuries and German bunds have failed in their job of providing the antifragile element in portfolios. There are few reasons to think that this failure is about to reverse any time soon. Today, investors need to look elsewhere for antifragile attributes. Precious metals, emerging market government bonds, high-yield energy assets and foodstuffs are all leading candidates.
F) High-end residential real estate in Western economies will lose the emerging market money-recycling bid and will struggle
The world’s unipolar era is over. Few portfolios reflect this reality—and definitely not the indexed portfolios that are today massively overweight an overvalued US and a desperately ill-omened Europe.
3. This was a great panel at Milken Global on Disruptive Technologies. My friend Jamie Montgomery at March Capital served as moderator, and asked a great question to the panelist: What’s the next BIG thing in technology.
They covered everything from Web3, Quantum, South East Asia, Fintech, Israel, ESG….
The panellist were real heavy weights: Blythe Masters Jamie Montgomery Brady Dougan Anton Levy Cameron Lester.
I think Blythe probably made the most interesting point on data, encryption and quantum.
4. Raoul Pal’s Macro Masterclass. Raoul sees the current environment similar to 1940’s not 1970’s. He thinks yields have peaked, inflation will slow, growth stocks will start to outperform. Thank you Andre K for flagging.
5. Some charts that surprised me:
How concerned should we be about Canadian Real Estate and Banks:
What will be the best performing Private Markets asset class in 2022?
Source: Burgiss
B. Asking Beautiful Questions
One of the life changing books I read a few years ago was “A More Beautiful Question” by Warren Berger.
The book is about asking more questions in our lives as a force for igniting change.
As the world becomes more complex and dynamic, knowledge becomes a commodity. Answers are available everywhere.
We cannot compete with technology in storing answers. But when it comes to questioning we have the edge. Computers do not know how to ask questions. We humans have curiosity, creativity, divergent thinking skills, imagination, and judgement.
To use this effectively we need to ask questions.
If we think of questions and answers as stocks, the value of questions are going up and answers are coming down.
An average four year old girl in Britain asks around 390 questions a day. But as we age we stop asking questions.
Our reading and writing skills go up but our questioning skills go down.
We stop questioning because in order to question we need to think. This requires some mental work. Our brain tries to find ways to reduce this work. One way to reduce the workload is to not question and accept everything around us and operate in an autopilot mode.
In order to question we need to accept our ignorance. But our society punishes ignorance by labelling the ignorant as an idiot. In order to question we need to remain curious.
Let’s start with one of my favourite questions to ask myself?
What Are You Compounding In Your Life? Is this what you want to compound?
What question should you be asking yourself?
C. The Psychology of Money
Given what’s happening in markets, I re-visited Morgan Housel’s Psychology of Money for some timeless wisdom.
The book asks a great question: How can we approach our life to optimise for wealth and happiness?
The core premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave.
Here are the key lessons from the book:
and a longer summary here.
I did a series of tweets on it a few months back:
D. The Tech and Crypto Section:
1. Ryan Selkis, the CEO and Founder of Messari was on Web3 Breakdowns. Ryan is a true crypto OG.
If you didn’t read it in January, you should definitely check out their Crypto Theses for 2022 report. It dives into key trends, people, companies, and projects to watch across the crypto landscape in 2022.
2. With what is going on across tech and crypto markets, there are a lot of great memes and video. The 1st one is a little dark.
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