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A Few Things: What's Next For The Economy & Markets, What To Expect in Russia, CIA Director on The Future, Ken Griffin on Hedge Funds, News & Charts You Might Have Missed...
July 5 2023
I am sharing this weekly email with you because I count you in the group of people I learn from and enjoy being around.
You can check out last week’s edition here: What's Next In Chip War, Marko Papic on Russia, How To Be A Great Analyst, Engines That Move Markets, Calling BS, Is Bigger Better in AI?, Jensen Huang with Nicolai Tangen, Sam Altman...
This one’s a little early since there was a lot to share this week and I’m on the road.
Quotes I Am Thinking About:
“It is easier to perceive the error than to find the truth, for the former lies on the surface and it is easily seen, while the latter lies in the depth, where few are willing to search for it.”
- Johann Wolfgang von Goethe
"If you steal from one author, it's plagiarism: if you steal from many, it's research.”
- Wilson Mizner (American playwright & entrepreneur)
“Fortune knocks but once, but misfortune has much more patience.”
- Laurence J. Peter (Canadian author & teacher)
A. A Few Things Worth Checking Out:
1. The Economist recently had “The Trouble with Sticky Inflation” as its front cover.
I wonder if this indicates that the narrative is peaking, and soon we will see a sharp decline of inflation data (a lot has already happened) relative to expectations.
Is the Fed in danger of compounding its policy errors, tightening too much when the Covid government stimulus is finally running out?
2. Is Andy Haldane’s (he worked at the Bank of England for 30 years and was the chief Economist) article in the FT the beginning of central banks officially changing their inflation target from 2% to 3-4%?
The headline: The Bank of England must avoid overdosing the economy and tolerate above-target inflation for a little longer.
Key bits (emphasis mine):
The chorus of consensus on UK inflation and interest rates has risen several decibels recently. Economists, financial markets, commentators and politicians have been clear in their conviction that UK interest rates need to continue marching north to curb price pressures. With its 50 basis point rate rise last week, and accompanying messaging, the Bank of England is whipping this herd forward.
There are good grounds for healthy scepticism about this herd mentality. Indeed, other policy choices are not just possible but desirable. Of course, many of these same people completely failed to foresee the rise in inflation in the first place. Those who, 18 months ago, saw all inflation misses as temporary hiccups now interpret them as persistent heart attacks. This risks overreaction and overcorrection, the zealousness of the late convert.
Higher and stickier inflation most likely reflects the UK’s more acute supply shortages than in other countries, notably in the labour market. These constraints are raising the level of prices, probably on a persistent basis. On this diagnosis, the textbook role of monetary policy is to tolerate, not offset, these temporary inflation misses provided inflation expectations remain anchored. Not to do so inflicts unnecessary further damage on growth.
But there is another way. Despite the headline inflation rise, inflation expectations remain anchored. Cost and price pressures are, or are about, to abate in the second half of the year. A year from now, a reasonable view would see inflation at 3-4 per cent without any further tightening. At those levels, it is highly questionable whether those last inflationary drops need to be squeezed out at greater speed. At 3-4 per cent, inflation no longer enters the public consciousness. That is why there is essentially no evidence it would impose costs that are any greater than at 2 per cent.
But the costs of lowering inflation those extra few percentage points, measured in lost incomes and jobs, are larger at these levels of inflation. In the jargon, the Phillips curve flattens. Squeezing the last drops, at speed, would mean sacrificing many thousands of jobs for negligible benefit. It could be argued that tolerating above-target inflation for a little longer than usual is to ignore the inflation target mandate. It is no such thing. That framework and its open letter system gives the BoE and the chancellor all the latitude they need to extend the horizon over which inflation is returned to target. Indeed, this flex was built in precisely for these circumstances. The oddity is it is not being used.
3. My favourite strategist, Marko Papic had something similar to say in his latest:
4. The mutiny in Russia continues to play out.
Lots of great content on what it means and what the implications are for the future, and the best thing I heard was the Hoover Institute’s podcast with Dmitri Alperovitch, (previously co-founder and CTO of CrowdStrike and now founder of the Washington, DC–based think tank Silverado Policy Accelerator), Niall Ferguson (historian and author), H.R. McMaster (former National Security Advisor) to discuss the reasons behind the Wagner Group mutiny, Vladimir Putin’s job security, and the impact the insurrection will have on the prosecution of the now 16-month war in Ukraine.
Increased volatility and instability in Russia, does Putin go the way of Yeltsin (his predecessor). Is the mutiny really over or is regime changing coming?
What does it say about the Russian armed forces beyond their nuclear weapons. Probably nothing good.
Is what comes after Putin better or worse for Russia, what about for the world? What can we learn from other countries that have fractured.
You can click on time stamps below:
0:00 Introduction 2:13 Vladimir Putin and the stability of the regime 7:20 Implications for military + Russian population 9:49 Tipping point + what prompted the march 19:21 Putin’s grip on power + Threats 25:08 Are his forces willing to fight? (Russian Military) 31:16 Ukrainian Aid 33:14 Xi Jinping’s perspective 36:04 Conspiracy theories + affect on Putin 45:46 What are the western nations doing? + Predictions
4. The Economist had a good discussion on what many developing economies are dealing with today - the choice between a poorer today and a hotter tomorrow.
Key bits (emphasis mine):
Suppose, for a minute, that you are a finance minister in the developing world. At the end of a year in which your tax take has disappointed, you are just about out of money. You could plough what little remains into your health-care system: dollars spent by clinics help control infectious diseases, and there is not much that development experts believe to be a better use of cash. But you could also spend the money constructing an electrical grid that is able to handle a switch to clean energy. In the long run this will mean less pollution, more productive farmland and fewer floods. Which is a wiser use of the marginal dollar: alleviating acute poverty straight away or doing your country’s bit to stop baking the planet?
A huge amount of money is needed to help poor countries go green. In 2000 the developing world, excluding China, accounted for less than 30% of annual carbon emissions. By 2030 it will account for the majority. The Grantham Institute, a think-tank at the London School of Economics, estimates that at this point poor countries will need to spend $2.8trn a year in order to reduce emissions and protect their economies against climate change. The institute thinks these countries will also need to spend $3trn a year on sectors like health care and education to keep tackling poverty. This figure could rise.
The world is spending nowhere near such amounts at present. In 2019, the latest year for which reliable data are available, just $2.4trn went on climate and development combined. According to the Grantham Institute, rich countries and development banks will have to stump up at least $1trn of the annual shortfall (the rest should come directly from the private sector, and from developing countries themselves). In 2009 rich countries agreed to provide $100bn a year in fresh finance by 2020. They have missed the target every year since, reaching just $83bn in 2020—with much of the money coming from development banks. Excluding climate finance and spending on internal refugees, aid from oecd countries has been flat over the past decade.
Thus there is no way round the missing finance. And as the meagre progress in Paris demonstrates, an enormous increase in aid spending is unlikely.
This produces two bleak trade-offs. The first concerns priorities for national governments. Given their lack of preparation and sweltering temperatures, developing countries are among the most vulnerable to climate change. In the next couple of decades, pollution and extreme heat will worsen people’s health. Natural disasters will wreak havoc and impose vast reconstruction costs. But in the short run, governments are unsure how to grow without fossil fuels. Their economies are held back by dodgy electrical grids and insufficient energy, meaning officials are on the hunt for power. Oil, gas and other raw commodities are valuable sources of foreign exchange for exporting countries. Without fossil-fuel revenues, at least a dozen poor countries, including Ecuador and Ghana, would face unmanageable debt burdens, according to reports by the IMF. Governments are not always responsible with their fossil-fuel bounties—but pollutants have nonetheless paid for billions of dollars in African social spending and pension contributions in recent years.
That brings international financiers to the next trade-off. If the aim is to cut emissions as fast as possible, or to “mitigate” climate change, then the best way to spend is to pump cheap loans and grants into big, middle-income countries. Last year Indonesia’s coal-powered energy industry released more carbon dioxide than sub-Saharan Africa minus South Africa. The country’s coal plants will be profitable until 2050, unless the government is coaxed to retire them early through cheap loans and grants. According to researchers at the IMF, some $357bn will need to flow to three big middle-income countries (India, Indonesia and South Africa) each year until 2030 in order to phase out their coal-power plants by 2050. Mia Mottley, the prime minister of Barbados, who served as Mr Macron’s co-host for the conference in Paris, is pushing the World Bank to offer middle-income countries the cheap loans it usually reserves for the poorest.
With a limited amount to go around, the concern is that low-income countries, which have come to rely on cheap financing, are going to miss out. Ministers in such countries are worried about a lack of finance for their energy transition. Without support, they will be left with stranded assets from investment in fossil-fuel facilities, for which there will be little demand. But they are more worried about having to whittle down spending on health and education. Ultimately they may have little choice. In 2021 less than a quarter of grants and cheap loans from development outfits went to the poorest countries, down from almost a third a decade earlier. Eighty poor countries, including Nigeria and Pakistan, together received just $22bn in mitigation and adaptation aid in 2021. Last year bilateral aid to sub-Saharan Africa fell by 8%.
5. George Mack always shares fun stuff on twitter and this one the Midwit Meme is funny.
These two on Nihilism and Networking were particularly on point.
6. Two super Invest Like The Best podcasts, both somewhat about Credit, but really a lot more than that.
First one with Kieran Goodwin, he was a partner and Head of Trading at King Street Capital, which grew from $4 billion to $20 billion when he was there. He then left to start his own credit hedge fund, Panning Capital Management.
Key ideas in this one:
The notion of vol washing in private markets and why it’s important to understand and what the worst case domino effects of vol washing could be.
Things people misunderstand about the power of volatility and incorporating long volatility into his portfolio and life.
The role of imagination in investing and ways he’s managed to stretch his own imagination effectively. Reminded me of the Josh Wolfe quote: “Failure comes from a failure to imagine failure”
The next one with Scott Goodwin, Co-Founder and Managing Partner of Diameter Capital Partners, and previously at Anchorage and Citi.
Key ideas in this one:
How he thinks about the evolution of sourcing alpha in credit markets and the role imagination plays in credit investing.
The new variables that have his attention in the current markets, including the impact of AI on businesses.
7. Great interview with Ken Griffin of Citadel on how the best hedge fund businesses are evolving with a look under the hood.
8. CIA Director William Burns gave the 59th Annual Ditchley lecture this Saturday. Thank you Bobby Vedral for the invite.
My key take aways:
The US is becoming more Machiavellian, not in the sense that it is evil, but in the sense it is far more focused on its own success. It care about the safety of its own supply chains. Don’t want to be held hostage by others. It’s about de-risking relationships. Know we are heading into multi polar world, there will be alliances between others. All countries focused on strategic autonomy.
Climate change is a real risk - given its impact on food, energy and people.
Technology supremacy is critical for US safety, most worried about risks from biotech being used for evil by just a few individuals. CIA is using AI and social media to win wars, particularly in Russia. Even hired their 1st Chief Technology Officer.
We know we need to win hearts and minds out there, especially versus China as they are playing a global game.
Upgrading their spy tradecraft for the 21st century. Harnessing more data and AI to crunch through it to gather more intelligence.
B. The Technology Section:
1. Hedge fund Coatue dropped a great new deck, “Coatue View on the State of the Markets”, with lots of good slides on current markets, tech & late stage venture.
LIQUIDITY is the name of the game. This is the key chart. The funding needs are huge and one can wonder if the value of the businesses at a $2.5 trillion MTM still reflects the desperation of sellers.
VC Secondaries will become a huge thing.
2. Thoughtful piece on: “How to Use AI for Investment Research”. Packed with how to’s and case studies.
AI grants investors three core superpowers:
Information compression. You can use AI to condense articles, SEC filings, and other digital information into easier to accelerate acquiring knowledge about an investment.
Idea generation. You can use AI to find companies as well as emerging trends and consumer behaviours.
Stock picking. You can use AI to select stocks it thinks are worthy of investment.
We like to debate whether AI will replace human jobs or enhance us. As with so many debates about technology, time scale matters. For the next decade plus, maybe several decades, AI will be an augmentation tool. Humans who learn to embrace it and learn how to use it will have effective superpowers. Those who don’t will fall behind.
C. News and Charts You Might Have Missed:
1. Visa, the world’s biggest card-payment network, shared hourly data on spending on entertainment, food and drink, retail goods and transport, but excluding online transactions. The numbers covered 22 cities on six continents in November 2019 and November 2022. They tracked shifts in the timing of purchases, but not changes in total spending levels.
The big change: Sunday brunch is the new Friday night.
2. This week had the hottest day on Earth since we started recording global temps (1979).
3. Millennials' net worths are decreasing. The average millennial's net worth dropped from $111k to $64k between 2020 and 2022.
Millennials and Gen Z in the US are finding it hard to break away from their parents. More than half of US millennials and Gen Z are still financially dependent on their parents, survey data shows. However, many millennials also said their parents were bad financial role models...
4. Fewer young women are carrying hand bags. More than 60% of women ages 35 and older report that they always carry a handbag, compared to only 39% of women ages 18 to 34, affecting the $8.8 billion handbag market in the US. When younger women do buy bags, they’re more apt to purchase tote bags; shoppers; fanny, waist, and chest packs; backpacks, and small crossbody styles, the survey found.
5. Wonder what this means long term?
6. Interesting analysis of income share for the top 1% across countries and time.
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