A Few Things: The FED put, Orwell vs Huxley, How Innovation Works, Surviving Crypto, The Future of Fintech
January 16, 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.
Thank you for reading and I look forward to seeing you this year.
“Man is born broken. He lives by mending. The grace of God is glue!”
- Eugene O’Neill
“Know, my son, with how little wisdom the world is governed.”
- Count Axel Oxenstierna (he must have been thinking about Boris….)
“What makes equality such a difficult business is we only want it with our superiors.”
- French dramatist Henry Becque
A. A Few Things Worth Checking Out:
1. We recently held our 1st 2022 Family Office CIO Round Table discussing everything from Weimar 2.0, consensus trades and valuations.
The one question that got me thinking was where is the FED put now? Given inflation raging, will the FED step in if the market starts selling off? Or are we on our own?
This chart from Marko Papic at the Clocktower Group is a good illustration of the narrowness of recent corrections.
2. Enjoyed this comparison of George Orwell vs Aldous Huxley and what their books have to say about the present.
Are we living in a Orwellian or Huxleyan world?
3. Howard Marks’s latest memo considers one of investing’s most fundamental questions: when to sell?
Marks explains that it’s foolish to sell because prices are up and because they’re down – and why, most of the time, staying invested is ultimately “the most important thing.”
Here’s a tweet storm summarising the memo, since I firmly believe most books should be blog posts and most blog posts should be tweets.
4. Legendary investor Bill Miller was WealthTrack recently discussing Bitcoin and Cryptocurrencies. He’s one of my favourite investors and was early on a number of big ideas including Amazon and Bitcoin. His personal portfolio is now 50% BTC and 50% Amazon, with some margin debt thrown in to own other stocks.
This is a good listen for the bears and the bulls since Bill has been investing institutional money for 40 years.
5. Harald Malmgren is a geopolitical strategist, negotiator and former aide to US Presidents John F. Kennedy, Lyndon B. Johnson, Richard Nixon, and Gerald Ford.
He wrote an interesting piece on Russian president, Vlaidimir Putin. It called “What the West gets wrong about Putin” and it is really excellent. In it, Malmgren tells the story of his first encounter with Putin many years before he came to power.
We spoke on several occasions between meetings, and he arranged to sit next to me at a dinner, accompanied by his interpreter. At that dinner, he asked me: “What is the single most important obstacle between your Western businessmen and my fellow Russians in starting up business connections?”
Off the top of my head, I responded: “The absence of legally defined property rights — without those there is no basis for resolving disputes.”
“Ah yes,” he said, “in your system a dispute between businesses is resolved by attorneys paid by the hour representing each side, sometimes taking the dispute to the courts which normally takes months and accumulation of hourly attorney fees.”
“In Russia,” he continued, “disputes are usually resolved by common sense. If a dispute is about very significant money or property, then the two sides would typically send representatives to a dinner. Everyone attending arriving would be armed. Facing the possibility of a bloody, fatal outcome both sides always find a mutually agreeable solution. Fear provides the catalyst for common sense.”
In the context of the current Russia/Ukraine situation it pays to remember that Putin is a genius tactician. To think of the outcome with Western eyes is only one side of the story.
B. How Innovation Works
I have been thinking a lot more about Matthew Ridley’s book: How Innovation Works.
Ridley is the author of many great books including: Genome, The Rational Optimist, The Red Queen, Viral, but this might be his best.
It’s actually two different books.
The 1st part discusses the many many key innovations of the human species. Including Newcomen’s steam engine, Salk’s Polio vaccine, the Haber-Bosch Process, Marconi’s work on electromagnetic waves and even our ancestors learning to cook with fire.
It’s a beautiful history lesson of all the innovations we take for granted and the sheer number of innovations we use daily without even thinking about the. I really enjoyed diving into videos like this:
The 2nd part of the book is a discussion on the essentials, the economics and resistance to innovation.
There are a couple of big ideas I walked away with:
Innovation happens slowly, gradually by tinkering and learning by doing. If you keep plugging away, luck, opportunity strikes - mistakes happen that are actually eureka moments.
Most inventions could have happened anyway regardless of who actually found it - when an ideas time has come, it will be done by someone.
Innovation usually leads to fewer resources being used and therefore increasing returns on resources. This is good for our species.
Innovation can’t be regulated, controlled or created top down. It's bottom up people speaking, working together and learning from each other. Govt's can’t create innovation since innovation required serendipity, open ended work. Freedom.
Consumers buy into innovation when they are ready - not all innovations catch on. Not all innovation comes from science or application of science. Sometimes it's just put old ideas together - wheels on suitcases.
Innovation creates interdependency- we all specialise and do specific narrow work - we are all deep knowledge workers. This creates more knowledge and supply of goods at our finger tips.
Here’s a great discussion Matt Ridley had with the Hoover Institute on Innovation in May 2020:
C. The Tech and Crypto Section:
1. A great tweet storm on how to think about the decision to allocate to crypto, how to position size, and most importantly how to stay in the game and survive. Thank you Nicolas F for sharing.
2. I interviewed my friend Ben Savage, Partner at Clocktower Technology Ventures, on behalf of Pi Capital on all things Fintech and how it’s changing the world.
I always learn a ton from Ben, and one of the big ideas we discussed this time was the size of the B2B payments market vs the B2C market which most people spend time on since it includes companies like Mastercard, Visa, Adyen, Stripe…
For perspective, the B2C payments market is $20trn a year vs the B2B payments market is over $120trn.
We chatted about how to define Fintech, how it’s changing businesses, and why they haven’t been fans of crypto and blockchains….and how that might change.
Disclosure: I am an LP in the CTV Latin America Fund.
3. Bitcoin is changing. The Lightning Network, a Layer-2 scaling solution built on the Bitcoin network, saw impressive growth in 2021. This will continue into 2022 with important implications for Bitcoin’s evolution as money, continued network adoption and new use cases.
What is the Lightning Network?
The Lightning Network is a peer-to-peer network of payment channels, powered by smart contracts, built on top of Bitcoin that enables fast and cheap transactions at scale. A payment channel is a contract between two nodes, represented by two connected circles in the below diagram, where a certain amount of bitcoin is committed into a multi-signature wallet using a single on-chain transaction.
Of course, a global payments network would not be viable if every person needed a separate payment channel with every other person. Instead, the Lightning Network uses a cryptographic technique called Hash Time-Locked Contracts (HTLCs) to produce conditional payments that are transmitted down a path of payment channels without being intercepted or stolen by intermediary parties.
Growth in the Lightning Network should be constructive for Bitcoin adoption, usage and ultimately price. The more payment channels that are opened, the more liquidity accrues to the secondary layer. This in turn should spur further adoption, creating even more payment channels and attracting new liquidity.
Could the Lightning network turn Bitcoin into a global remittance system?
Have a great week ahead. Hit like so I know you got this far!