Atoms vs Bits, Blackstone, What China Wants, How Crypto Really Works....

August 9 2021

I have been enjoying the great English Summer so far, but am luckily escaping at the end of week to Orange County.

How has your summer been?

A. A Few Things Worth Checking Out

1. There are probably only three macro thinkers in the world that also understand markets. Marko Papic at The Clocktower Group is one of them.

He recently published a great piece for clients, discussing the future of both US monetary & fiscal policy, and China.

He’s firmly in the reflation camp and hence wants to be long atoms over bits, and hence long Commodities vs S&P.

A great chart on why US policy will continue to be reflationary.

He was on the Market Huddle podcast discussing his framework and current views, which is definitely the most interesting thing I listened to all week.

2. Renaissance Technologies is well known as one of the best hedge funds in history. Greg Zuckerman wrote the seminal book on the fund and Jim Simons - The Man Who Solved The Market.

We covered it in Dec 2019 here.

This recent tweetstorm is a good summary of what makes RenTech unique and TrungPhan is a must-follow.

3. Karen Karniol-Tambour (Co-CIO for Sustainability at Bridgewater Associates) was on the Invest Like The Best podcast discussing all things Macro.

A bunch of useful stuff around Inflation, how to think about valuation given the retail investment landscape, how ESG can / will impact returns.

If you want to dive deeper, here is Bridgewater’s Macro Approach to Sustainable Investing:

4. Blackstone is the 800-pound gorilla in Private Equity.

Marc Rubinstein discussed Blackstone with Zack Fuss on the Business Breakdowns podcast and if you are a reader, this is Marc’s primer on the firm.

This is what he thinks is the firm’s secret sauce:

Blackstone highlights its ‘virtuous circle’ as a cycle consisting of three elements: investment performance, investor confidence and the power to innovate. The problem with such cycles in the asset management industry is that time lags can inject friction into them. Investment performance cannot be evaluated overnight – it can take three to five years to evaluate it; longer in the case of a fixed term private equity fund.

But Blackstone has been around for a long time now and has delivered robust performance across its strategies through different market environments (with the advantage that it has discretion to time its exits). Underlying its performance are three factors: process, scale and integration. 

  • As an outsider it can be hard to assess any firm’s process, but at Blackstone there’s a clue in the investment style Schwarzman articulated when recalling his first real estate deal. Price is important, but what you do with the asset after you’ve bought it is more important. This was demonstrated when the firm bought Hilton Hotels at cyclically the worst possible time, just before the financial crisis, at a price that several months later looked too high; yet the deal performed well and ultimately made $14 billion for investors. 

  • “Scale is our niche,” declares Blackstone. There are certainly very few firms able to execute deals on the scale of Blackstone. Scale allows the firm to own and invest in assets and businesses that have greater surface area for improvement. In several cases, Blackstone has used scale to create new business platforms. For example, in spring 2012, it began buying single family residential homes – it bought its first in Phoenix for $100,000. Within a few months it was buying $125 million per week and eventually it rolled its properties into a platform, Invitation Homes, which made $7 billion for investors.

  • Integration is possible in part because of the firm’s scale: Blackstone sees almost everything and has a pool of capital somewhere in the group to exploit it. It also practices a thematic style of investing which lends itself well to integration. Blackstone identifies macro themes and executes them across its various strategies. In life sciences, it has a dedicated fund but it also invests in specialised property in its real estate unit. Current themes it is exploring across the group are: sustainability, logistics, digital infrastructure, housing and the post-COVID travel recovery.

“Information is the most important asset in business. The more you know, the more perspectives you have, and the more likely you are to spot patterns and anomalies before your competition. So always be open to new inputs, whether they are people, experiences, or knowledge.”

5. Learnt something new from Tomas Pueyo’s: What China Wants and Why.

These three chart are a good place to start:

6. Thoughtful Atlantic article by David Brooks on “How The Bobos Broke America”. It’s a discussion on how the creative class - (aka bobos - elite bourgeois bohemians) was supposed to foster progressive values and economic growth, but instead we have gotten resentment, alienation, and endless political dysfunction. Thank you Philipp P for sharing.

This section outlines the big ideas:

Biden is the first president since Ronald Reagan without a degree from an Ivy League university. His sensibility was formed not in the meritocracy but in the working-class neighborhoods of his youth. Condescension is alien to his nature. He has little interest in the culture-war issues that drive those at the top of the hierarchies, and spent his 2020 campaign studiously avoiding them. Biden gets prickly when he is surrounded by intellectual preening; he’s most comfortable hanging around with union guys who don’t pull that crap.

Biden’s working-class version of progressivism is a relic from the pre-bobo era. His programs—his COVID-relief law, his infrastructure bill, his family-support proposal—represent efforts to funnel resources to those who have not graduated from college and who have been left behind by the creative-class economy. As Biden boasted in an April speech to a Joint Session of Congress, “Nearly 90 percent of the infrastructure jobs created in the American Jobs Plan do not require a college degree; 75 percent don’t require an associate’s degree.” Those are his people.

If there is an economic solution to the class chasms that have opened up in America, the Biden legislative package is surely it. It would narrow the income gaps that breed much of today’s class animosity.

But economic redistribution only gets you so far. The real problem is the sorting mechanism itself. It determines who gets included in the upper echelons of society and who gets excluded; who gets an escalator ride to premier status and worldly success and who faces a wall.

The modern meritocracy is a resentment-generating machine. But even leaving that aside, as a sorting device, it is batshit crazy. The ability to perform academic tasks during adolescence is nice to have, but organizing your society around it is absurd. That ability is not as important as the ability to work in teams; to sacrifice for the common good; to be honest, kind, and trustworthy; to be creative and self-motivated. A sensible society would reward such traits by conferring status on them. A sensible society would not celebrate the skills of a corporate consultant while slighting the skills of a home nurse.

Some 60 years after its birth, the meritocracy seems more and more morally vacuous. Does the ability to take tests when you’re young make you a better person than others? Does a society built on that ability become more just and caring?

This situation produces a world in which the populist right can afford to be intellectually bankrupt. Right-leaning parties don’t need to have a policy agenda. They just need to stoke and harvest the resentment toward the creative class.

7. Why Books Don't Work: Why do we remember so little from the books we read?

Books carry certain assumptions about the way we learn. Like a lecture, they assume that if you just give a student enough information, they'll learn something. But information is like food. You can't just consume it. You have to digest it.

When it comes to knowledge, that digestion happens in activities such as writing, Socratic dialogue, and working on difficult projects. Without active implementation, the vast majority of what we read will never be stored in our long-term memory. 

In this detailed essay and this podcast, the author Andy Matuschak explores the problem and presents a solution rooted in spaced repetition.

B. The Crypto and Tech Section

1. If you are new to gaming, NFTs and the Metaverse, then this tweetstorm is a great place to start:

2. Former Amazon Studios chief Matthew Ball on investing in the Metaverse on CNBC.

3. Great and revealing Odd Lots Podcast with Sam Bankman-Fried (founder and CEO of FTX) and Matt Levine on How the Crypto Market Really Works. They discuss leverage in crypto, Tether, regulation, the future of crypto…..

Definitely pair that podcast with this two part overview at The Generalist.

4. In a new report, the team at RethinkX paints the pathway to a 90% emissions  reduction scenario by 2035.

“At the heart of humanity’s climate change challenge is a mindset problem that overlooks the nonlinear nature, speed, and dynamics of change in both earth systems and human systems. As a result, we often examine both problems and solutions through a linear, reductive lens that fails to recognize the complex systems dynamics driving change”

Their thesis:

Technology disruptions already underway in the energy, transportation, and food sectors have extraordinary implications for climate change.

These three disruptions alone, driven by just eight technologies, can directly eliminate over 90% of net greenhouse gas (GHG) emissions worldwide within 15 years.

The same technologies will also make the cost of carbon withdrawal affordable, meaning that moonshot breakthrough technologies are not required to solve the ‘Last Carbon Problem’ and go beyond net zero from 2035 onwards. 

These three sectors and eight technologies properly deployed can help reduce 90% of our emissions:

The Energy Sector:

The Transportation Sector:

The Food Sector:

This is because technology can have virtuous feedback loops:

Where small changes can lead to big surprises, for example in Iron and Steel:

Which according to them has the following implications:

“I love you without knowing how, or when, or from where. I love you simply, without problems or pride: I love you in this way because I do not know any other way of loving but this, in which there is no I or you, so intimate that your hand upon my chest is my hand, so intimate that when I fall asleep your eyes close.”

Pablo Neruda, 100 Love Sonnets

“Insecurity is the worst sense that lovers feel; sometimes the most humdrum desireless marriage seems better. Insecurity twists meanings and poisons trust.”

- Graham Greene, The End of the Affair

“Man has places in his heart which do not yet exist, and into them enters suffering, in order that they may have existence.”

- Léon Bloy

“We’re all a little weird. And life is a little weird. And when we find someone whose weirdness is compatible with ours, we join up with them and fall into mutually satisfying weirdness—and call it love—true love.”

- Robert Fulghum, True Love