A Few Things: Why Putin Invaded Ukraine, Dirigiste Capitalism, Life's Possibilities, Venture's Minsky Moment, Making Anna
February 26, 2022
“We just never know when opportunity is going to come along, but it does come along from time to time. And sometimes in financial markets, it comes in a huge way. That will happen from time to time…. Things will happen, and then you have to be able to act—and that means both in terms of having the ability and also having the mental fortitude to jump in when most people are jumping out.”
- Warren Buffett, 2013
“I cannot forecast to you the action of Russia. It is a riddle wrapped in a mystery inside an enigma; but perhaps there is a key. That key is Russian national interest.”
- Winston Churchill,1939
“I will have to remember ‘I am here today to cross the swamp, not to fight all the alligators.’”
- From The Art of Possibility by Rosamund and Benjamin Zander
“All of our miseries are nothing but attachment.”
“Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things you only hoped for.”
A. A Few Things Worth Checking Out:
1. Two fascinating articles that help explain the big picture strategy behind the tactics we see in the news:
Firstly, Why Putin invaded Ukraine by Bruno Macaes at the NewStatesman.
Answer: The Russian president is trying to create a new geopolitical order, with him at the top.
The pandemic was the moment when Putin started to think that the conditions necessary for what Nietzsche called “great politics” were in place. In the domestic realm we call it constitutional politics, the politics of order. In foreign policy it is the attempt to create a new geopolitical order, a new balance between the great powers, including the arrangements by which they govern their relations.
Putin is particularly sensitive to the question of global hierarchy because he started at the bottom. Russia, a former superpower, began the new century diminished in status and subject to the whims of American power. For the first five or six years as president he played more or less duly by the rules, although it may well be that even then there was a covert plan to grow in strength without calling too much attention to the process.
Russia continued to grow but it was not until 2015 that Putin felt confident enough to trade in his role of the spoiler for the much more ambitious role of the policeman. The invasion of Syria was a watershed. For the first time a country other than the United States took for itself the role of setting and enforcing the rules of state organisation. It was a fateful moment in other ways as well. At that time, before the most recent stages in military modernisation
There was no quagmire. Having acquired power over the destiny of a country so strategically important for Iran, Israel, Turkey and Saudi Arabia, Russia was suddenly receiving special treatment in their capitals.
Imagine that over the weekend Russian troops enter the government quarter in Kyiv and Volodymyr Zelensky, the Ukrainian president, is replaced with a name concocted in the Kremlin. The city will be left in ruins, with the corpses of the innocent lining its avenues. But by succeeding in Ukraine, Putin will have realised his wildest dream, taking Russia from the bottom of the geopolitical pyramid to its pinnacle. He will have eliminated Ukraine as a state and, as he chillingly explained, as a people. In his mind Ukraine symbolises the nightmare of a Westernised Russia, the fear of disappearance, which he hopes to exorcise with a brutal invasion.
A country capable of replacing the ruling authorities in other countries is what we used to call an empire. Putin dreams of a world where nothing of great importance can be decided without asking Moscow for its opinion. In Europe this now looks frighteningly possible.
Secondly, Why Russia and China Build Up Iran? in the WSJ by Bryan Clark and Michael Doran at the Hudson Institute.
Answer: Tehran is the ideal Middle East partner in an alliance to destroy the U.S.-led order.
The Ukraine crisis exposes a flaw in President Biden’s Iran strategy. Washington engages with Beijing and Moscow as if they share core U.S. interests with respect to Iran, when instead they are working with Tehran to undermine the American-led global order.
That’s certainly what officials in Tehran are saying. Last Wednesday, Mahmoud Abbaszadeh-Meshkini,a spokesman for the Iranian Parliament’s National Security and Foreign Policy Committee, said: “In the new world order, a triangle consisting of three powers—Iran, Russia, and China—has formed.” He was clear about the goal: “This new arrangement heralds the end of the inequitable hegemony of the United States and the West.”
In sum, China and Russia are building up Iran. Both need a partner in the Middle East devoted to “Resistance”—to undermining U.S. power. Why is the Biden team going along for the ride? Washington’s approach should be more strategic. Among the members of the global alliance dedicated to destroying the American-led order, Iran is the most vulnerable. The job of the U.S. is to defang it.
2. The best synthesis of information out there on Russia and Ukraine, capturing all angles by Kyla Scanlan.
Stealing some of his best bits.
Marko discussed the move from laissez-faire capitalism to dirigiste capitalism:
How will states respond to this new threat environment? By doubling down on the ongoing phase shift in economic policy and statecraft. Investors should expect laissez-faire economics to be further suppressed by a dirigiste philosophy. The national security redundancy prerogative, emergent in the wake of the US-China trade war and the pandemic-induced recession, will be reinforced. We should expect more reshoring and onshoring and a greater scramble to locate, extract, and secure critical commodities so as to diversify away from traditional supply chains.
Over the long term, this return of geopolitics should be inflationary. It undermines the deflationary context of globalization, it incentivizes inefficient onshoring, and necessitates a capex-led buildout to accomplish it. Given that this return of Realpolitik is unlikely to be transitory, neither will be its inflationary tailwinds.
The second fascinating point Marko made was on Europe going integrating outside of NATO:
First, European military integration will strengthen outside of the NATO mechanism. After three presidents – Obama, Trump, and Biden – failed to get Europeans to boost their defense spending over the past two decades, President Putin has just accomplished the task (Chart 4). But Europe will look at how Washington negotiated the Ukraine crisis with Moscow and will not necessarily pursue an increase in defense spending for the benefit of American geostrategic goals.
Second, we should expect the EU Commission and key EU member states – France and Germany – to now all finally be on board with a dirigiste approach to geo-economics. As such, expect more coordinated action on everything from a carbon border tax – a “liberal” form of protectionism – to an industrial policy that aids industries where Europe has an advantage – autos, transportation, energy, green tech, etc. – state-aid rules be damned.
He also had some non-consensus things to say around both Putin and China, but I won’t steal all his thunder. The bigger idea was how he finished with what the markets might be implying for the US 10-year:
First, the 10-year Treasury yield has not fallen significantly. We are not surprised at all. The macro context is negative for bonds, as we have been writing for a year. In fact, the macro context is so overwhelmingly negative for bonds, that even a near World War Three incident can cause a rally.
This reminds us of the macro context in 2014. Russia, the world’s third largest oil producer at the time, invaded Ukraine and annexed a piece of its territory. Iraq, the world’s eighth largest oil producer at the time, descended down a path of a terrifying war against the Islamic State. And yet, oil prices absolutely collapsed (Chart 16). That is because the macro context was profoundly bearish for oil prices. When crude failed to lift off on the combination of Crimean annexation and the fall of Mosul to the Islamic State, investors should have gotten the message and gotten out.
Today, the greatest signal from the market in relation to the ongoing geopolitical conflict is that the one true geopolitical safe haven asset, the US 10-year Treasury, is not rallying. That is profound and should be noted. It may suggest that the one major market insight out of the Russia-Ukraine conflict is that we are being set up for a massive carnage in the long-dated bond market.
4. Did the equity market already bottom?
5. One of my favourite blog authors, Tim Urban of Waitbutwhy fame was on the Lex Fridman show. Waitbutwhy is a great place for the curious mind, where I’ve learnt a ton and Tim’s writing style makes it such fun to read.
Tim also had a great op-ed in the New York Times, titled: How Covid stole our time and how we can get it back.
We think a lot about those black lines: the roads not taken, the opportunities missed, the ones that got away. But most of us greatly underestimate the size of the lush green tree of possibilities that lie ahead of us.
We underestimate future possibilities for the same reason we overestimate the time we have left with those we love: our intuition is not very imaginative. It’s a human instinct to believe the life we’re used to is how things will always be, both the good parts and the bad.
Wallowing in regret carries an implicit assumption that we had agency in the past — that we could have had those other life paths if only we had made better decisions. When we think about the future, though, that feeling of agency often disappears, which can leave us feeling resigned and even hopeless.
But the life we’ll be living 10 years from now will largely be determined not by our past selves but by our present and future selves. If we imagine what we might regret down the road, it’s very much in our hands to do something about it now.
This is the good news about being a human. The time we have left with family and friends is not a law of nature like the weeks we have left to live. It’s a function of priorities and decisions.
Thank you to Hank and Bjorn for helping me think about priorities again.
6. This was fun to scroll through:
7. Credit Suisse is in a lot of hot water, great Guardian article.
8. What have you been buying in the market? I’ll share mine, if you tell me yours :-)
B. The Tech and Crypto Section:
1. Timely discussion on the the Minsky Moment arriving for Venture Capital.
This is the typical Minsky Cycle, named after Hyman Minsky.
In recent years, the VC investment cycle has looked like this, which looks a lot like a Minsky boom:
The article asks, what does it look like if the virtuous VC cycle reverses?
Here is in fact one well-known death spiral in startup land, and it’s the dreaded down round.
In a down round, a startup running out of cash is forced to raise capital at a lower valuation than its previous financing. This is bad news. Anti-dilution provisions mean that early investors and common shareholders are wiped out. Recent hires whose options are now underwater begin to leave. The startup is perceived as damaged goods, and has to pay above market comp to replace them, attracting mercenaries instead of missionaries. Customers, not knowing if the startup will survive, churn. Finances worsen, predatory investors circle, and further down rounds loom.
A valuation spiral is bad enough. It’s usually accompanied by a talent spiral, which is worse. In a tight labour market, good operators have their choice of where to work. The best startups are able to attract the best talent5. Meanwhile, flailing startups tend to fill up with mediocre employees — the ones who can’t find work elsewhere. This makes it even harder to recruit excellent people 6. The spiral continues.
Down rounds are widely considered the harbinger of doom for venture-backed startups. Understandably, founders and investors go to great lengths to avoid them7.
How do they do this? The most common approach is to wait it out. Cut costs, squeeze out short-term revenue, raise bridge loans from less-known investors at the best terms you can, and hope to eventually ‘grow into your valuation’. Sometimes it even works.
This is — not coincidentally — a perfect mirror image of the logic used by many investors today. “I don’t mind paying up; on the current trajectory, even a doubling in price is easily recouped via just a few months of growth.”
But if my hypothesis about time is true, this could be dangerous. If compressed timelines are the driver of Minsky inflows into venture, then anything that delays funding cycles could precipitate a painful reversal. First some startups delay fund-raising because they need to grow into their valuations; then the VCs who invested in those startups have to delay their own fund-raising with LPs because they don’t have the requisite markups; then the LPs reconsider their (hitherto ever-increasing) allocations to venture because the latest returns are uninspiring; and before you know it, there’s an exodus from the asset class. Minsky giveth, and Minsky taketh away.
Thank you Manoj and Plamen for sharing.
2. Super interview of Jack Mallers, founder / CEO of Strike, a Bitcoin payments business on “The What Bitcoin Did” podcast, discussing Jack’s talk with the IMF and how the Lightening network will change global payments. Thank you Yaser for sharing.
3. Deep thread on what’s happening in DeFi right now by a DeFi fund manager:
Disclaimer: I am invested in Sean Lippel’s fund.
4. Great huge thread on Uber and its business model (thank you Yaser)
C. Last Week’s Guilty Pleasure:
What a story!