Category: Media

John Street Capital’s fire analysis of bitcoin, stocks, and macroeconomics

I really enjoyed reading several of John Street Capital’s essays and wanted to save / share some excerpts from them. The two that stood out the most during my reading binge were Bitcoin & The Macro Environment, and FinTech: The 2020’s.

Excerpts:

We said QE turned your checking account into cash, your savings account into your checking account, the bond market into your savings account, the equity market into the bond market, the venture market into the equity market, and gave birth to the crypto market as a replacement for venture market risk.

The Fed established a number of novel facilities including the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, the Money Market Mutual Fund Liquidity Facility, The Primary Market Corporate Credit Facility, The Secondary Market Corporate Credit Facility, and The Term Asset-Backed Securities Loan Facility

If we look at Gold the Gold ETF’s raised $10.0bn in their first 3 years; and given the electronification of fund distribution coupled with the headline buzz around BTC we would envision a BTC ETF if approved outpacing that over a comparable time period

If we look over history some researchers will point to an average life expectancy of fiat currency of 27 years, while others will note an average lifetime of 40 years with a median lifespan of 25 years. Either way Bitcoin has crossed the 10-year market while the Euro has now been around for ~18 years.

Another way to think about BTC is “un-confiscatable wealth.” Offshore banking is a strong proxy for this market demand and it is estimated that $13-$20 trillion is held in offshore accounts. Using these numbers is how you can approach ~$1.0mn/BTC, although this market won’t gain much market share unless and until we see a sovereign nation attempt to confiscate wealth held in BTC and fail

The Diamond industry is a $90bn/year market that’s illiquid, opaque, with high friction, a high requirement of trust, and surprisingly limited “financialization” to date.

In our view you will continue to see Growth outperform Value as investors are discounting future cash flows at lower interest rates, while going out the risk curve even within the equity asset class itself chasing returns. We think tech stocks particularly those with high recurring revenue will continue to do well

One of the most attractive parts of Seed-Series A venture is regardless of macro environment they can only be bid up so much; and if a company goes on to IPO or sell in a meaningful way those differences are negligible

Random Notes 4: Our multiverse, Robert Greer’s asset class framework, Warren Buffett’s timeless advice, Michael Saylor, Cory Doctorow, and great tweets

More random notes from all the media I’ve consumed over the past week.

Here are notes from week 3, week 2, and week 1.

A few posts I published recently:

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Top thing I learned this week is a framework on asset classes from the “godfather of commodity investing”, Robert J Greer. He divides all assets into 3 buckets:

1. Store of Value
2. Commodity / Transformable
3. Capital producing

For example, gold is both a commodity asset (for certain industrial purposes, and jewelry) and a store of value. Real estate is a capital producing asset (eg, rent payments) and a store of value. Stocks are a capital producing asset. Cash is a store of value. Oil is a commodity and used to be a store of value. etc.

The reason this interests me is that there is talk now about ethereum’s potential as an asset class that belongs in all 3 buckets: ETH as a store of value, ETH as a commodity to rent blockspace on the ethereum blockchain, and ETH as a productive asset to stake and lend to generate a return.

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Onto the notes! There are a lot this week…

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Brian Greene tells the story of the multiverse, TED talk

  • Hubble proved our universe was expanding
  • Everyone thought the expansion was slowing down, but it is actually speeding up!
  • What force causes this? GRAVITY. Gravity can push things apart too – repulsive gravity, Einstein explained it, now called “dark energy”
  • String theory – approach to a unified theory of physics, little tiny vibrating filaments of energy, “cosmic symphony”
  • To make string theory work, must allow for extra dimensions of space
  • Many universes each with a different shape, amount of dark energy is different
  • Why our universe has a specific amount of dark energy? Only one possible to allow our form of life
  • Quantum fuel generates many big bangs, big cosmic bubble bath of universes
  • Began 13.72B years ago

If you like TED talks, I watched a lot in the past and took notes on them here.

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Warren Buffett, speech at the University of George

As usual he drops wisdom bombs on the audience, I usually try to do other stuff when I listen to these kinds of materials but when Buffett’s talking it’s very hard to not pay attention.

  • In people he looks for the 3 i’s: Intelligence, Initiative, Integrity
  • “Work for someone or a company you admire”
  • “Chains of habit are too light to be felt until they’re too heavy to be broken”
  • Defining your circle of competence is most important
  • Cars, TVs, airplanes — all transformative industries, but very difficult to make winning investments, there were 2K auto cos but only 3 alive today (!)
  • Buying Berkshire was a mistake, terrible business but it was very cheap
  • Feels like he’s an airline-holic, made big mistake investing in them and needs to be told not to
  • Imagine a punch card limited to only 20 investments in your lifetime, you’d do better with this strict limit, because it would force you to think really hard and focus
  • Generally feels it’s not good to dabble, either go big or don’t do it
  • What do you look for in a partner? Is it beauty, brains, etc? “You look for low expectations” because you want it to last
  • Discusses Bill Gates on philanthropy: he spends $1B a year, metric is lives saved, very rational and very informed (mentions Gates reads 15 books a month)
  • Re: his foundation / trustees for his funds, he do not want eye dropper approach to philanthropy; use judgment to look at important problems that do not have an actual funding constituency
  • When he was born, odds were 50:1 born in US, just luck
  • Fed: “its brakes are better than its gas pedal”
  • Volcker put on brakes, right thing to do, but enormously unpopular
  • Sam Walton had disadvantage in buying, borrowing, and in real estate, but he still killed Sears
  • “Take care of the customer and you’ll win”

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Joey Krug on the Bankless podcast

  • Improvements in Augur v2: bet in DAI instead of ETH, integrate with 0x: p2p trading platform, faster frontend
  • Fastest resolution will be like 30 minutes, but faster and it won’t have the same economic guarantees
  • His biggest concern for Augur is ETH fees, and frontend is still a trading frontend instead of a betting frontend
  • Volume in peer-2-contract model has exploded, p2p growth is slower
  • When Augur v1 launched, did a few $m in volume but it was too slow, hard to use
  • How to fix fees in Augur v3? He likes optimistic rollups, REP will use Matic Plasma sidechain
  • AMPL – Evan, “Hayek money”, Pantera invested, feels weird / truly new, investing in a meme, premine (VCs, team, foundation that slowly gives supply away)
  • More bullish on Ether, BTC dominance will continue to slide
  • People who use Defi are crypto natives right now, those who stuck around after bear market
  • One Pantera LP is an endowment and specifically wanted Defi exposure
  • “Ether as proxy for Defi price appreciation”
  • CFTC deemed Ether a commodity
  • Joey: Institutions will buy some BTC, some ETH, and invest in a few funds – that’s steady state
  • Best way to audit is be live for long time with a lot of money in it, like BTC and ETH – live bug bounty
  • One attack vector is hacking price oracles, another is Solidity bugs–

Morgan Housel on The Reader’s Journey podcast

  • Buffett – made 500 investments, but majority of returns come from 10 including a huge % from his recent Apple investment
  • Buffett – 90% of net worth came after his 60th bday
  • For Ben Graham, Geico’s been by far his biggest hit and he broke his rules to buy it
  • Of all the products Amazon has released, AWS and Prime account for almost all their profits and growth
  • Odds of making money in stocks after 5 years is only 60% — must think very long term!
  • “Volatility is the fee you pay the market”
  • Bernie Madoff was legit successful before his Ponzi – estimates of $50-100M, he had “no concept of enough”
  • “Luck and risk are same thing”
  • Munger: “the first rule of compounding is to never interrupt it unnecessarily”
  • Housel – Fed’s explicit goal is to prop up asset prices
  • In middle of pandemic / recession, retail sales are highest they’ve ever been
  • Housel’s own investment strategy: DCA into Vanguard index funds, pay off mortgage

Hidden Forces podcast with 2 WSJ reporters about Mohammad Bin Salman (MBS) and Saudi Arabia

  • WSJ culture is “no surprises” (for the subjects, give them a chance to react and comment)
  • For MBS, there’s BK “Before Khashoggi” and AK “After Khashoggi”, he’s much more cautious and guarded now
  • Khashoggi was lifelong royal servant instead of a journalist
  • Even after Khashoggi fled Saudi, he still wanted to support the country and start a pro Saudi think tank
  • But Saudi royals saw him as dissident organizer and foreign agent, a traitor
  • Guests believe if MBS becomes king, he would be open to complete rapprochement with Israel – risky card he knows he can play
  • They’re not sure what his vision is for role of religion in Saudi future, but has locked up most extreme Wahhabis

More Michael Saylor on Saifedean’s podcast

  • “A bank is a fiat miner” – Saifedean
  • Saylor says main reason to position bitcoin as SoV / asset like an Apple or Google stock or gold is bc it won’t threaten govts, but if you market as privacy and better currency then you’re inviting regulation or a ban
  • “Destiny of money is to be encrypted” – Saylor

George Friedman, forecast for the 21st century, YT talk

  • Views world as one of constraints and cause-effect (eg, Obama policies are a result of Bush policies are a result of Clinton policies)
  • Thinks Turkey is great power, no European army can defeat it except the UK, it’s larger than Saudi Arabia and also the biggest Muslim economy
  • Japan is a great power. Question isn’t if China can surpass US but surpass Japan (this talk was given in 2013)
  • Bullish on Poland: bulwark against Russia, compares it to SKorea which grew rapidly under US sponsorship
  • 20th century was one of ideology, but he believes geopolitical necessity now overwhelms ideology
  • Climate change – mitigation is slowing population growth, doesn’t believe consumption cuts will work, must remove dependence on hydrocarbons
  • Not a believer in nuclear power, it’s an economic problem because it takes 15-20 years for a plant to come online, impossible to project demand and market conditions
  • Favors solar as better solution
  • Doesn’t believe in Asia century, remember when we were afraid of Japan domination?
  • Only US and UK built a nuclear weapon de novo, everyone else bot or stole
  • Australia’s biggest risk is structure of its trade regime, doesn’t control waterways and is reliant on different international powers like US UK China

Matt Mezinskis on Peter McCormack’s What Bitcoin Did

  • Money is by definition a monopolized industry, because it has special license from the government
  • calls himself a “lazy anarchist”
  • In 1930s US had 30% of worlds gold, after ww2 it had 70% because Europe was trying to hide gold away from Hitler; If gold was decentralized before ww2, not after
  • When Hitler went to Austria, Czech Republic, first thing he did was take gold, that’s how he built up such a strong army
  • Believes it’s important to let anyone validate bitcoin, keep it decentralized
  • Central Banks create base money as a liability, usually matched with a treasury / bond
  • Gold, silver, btc are natural assets – no debt, no counterparty risk
  • Monetary base is 3.3T, debt is 22T
  • Govt debt in 1970s was only $60-70B
  • Current fiat regime could continue another 20 years! We left gold standard in 70s and it’s still alive today
  • In general more currencies have become floating, and the top currencies represent growing share of int’l trade and finance; believes Chinese RMB is next one up to become a truly floating currency
  • Global monetary base is ~$20T, bitcoin base still too small to matter ($150-200B)

Dave Asprey interviews Matthew Walker about sleep

  • the more sleep the better, stats show some increase in mortality after 9 hours but MW believes this includes confounding data from sick people
  • data shows modern societies are getting less and less sleep
  • REM and deep sleep are not the same thing, REM more important, ideal is 25% of sleep time is REM
  • humans have 2x more REM sleep than any other animal (mammal?)

Corey Hoffstein discusses violent reflexivity with Nathaniel Whittemore

  • “Everyone being pushed up the risk curve”
  • 20 years ago, a fund could hit target returns with just bonds; now it’s predominantly equities, junk bonds
  • “Amplification of narrative” eg Fed statements, Internet memes
  • General move from active funds to passive, from 10% to 50% of market now, especially index funds
  • Passive is more momentum driven, moving from convergent to divergent trading
  • Fewer and fewer investment managers acting at individual security level
  • Process began in late 90s, accelerated in 2008, initially led by Fed policy changes
  • “Tightly wound loop where everyone is levered”

Bond king Jeffrey Gundlach on Danielle DiMartino’s show, YouTube

  • You can’t downgrade a country that can pay back debts in its own currency
  • US has $150T of claims / liabilities
  • You can make Social Security solvent immediately by just raising min age to, for example, 80 years old
  • There could be confiscation and debasement both, you have to barbell (as an investment strategy)
  • If Biden elected, potential tax cut is coming

The Economist podcast interviews Daniel Yergin

  • Last 10 years, US shale production doubled and natural gas grew 50%, now US is biggest producer of both
  • US energy industry is 12M jobs
  • Post covid, 30-50% cuts in global oil production
  • No longer just “OPEC”, now it’s “OPEC Plus”, which is mostly Russia-Saudi detente
  • 20th century was petrostate, China leading way to 21c electrostate
  • China now leading producer of renewable energy while also world’s biggest polluter eg, China accounts for 30% of world’s coal use

Cory Doctorow on Epicenter podcast

  • “Rubber hose cryptanalysis”; if you can be tied and beat with a rubber hose, then you’re always vulnerable
  • His thing is regulatory capture eg all top telecom execs rotating door with regulatory bodies and with competing firms
  • We (US) killed our neutral tech assessment / regulatory body, Gingrich believed lobbyists were enough to educate members
  • He’s not a fan of financial secrecy, major corrupting influence to democracy and human rights
  • Believes PoW intensely energy inefficient

Some random little factoids I learned this week:

NINJA = acronym for someone with “No Income, No Job or Assets”

The Joe Rogan Experience podcast is named after Jimi Hendrix who named one of his albums The Jimi Hendrix experience.

A “baculum” is the penis bone, many mammals have it but humans do not.

Microsoft acquired DOS in 1981 for 75K (!)

Harberger taxes are a rent system where the renter values an item and pays a tax on the self-assessed value. At any point in time, a person can come and buy said item at the amount a renter has valued it.

Some powerful tweets and quotes I saw this week:

“Ultimately, man should not ask what the meaning of his life is, but rather must recognize that it is he who is asked.” – Viktor Frankl

“In the future, we will have more and more of whatever’s holding our attention right now.” – Octavia Butler

And a few final very interesting excerpts from articles I read:

From Slate
One prominent TikTok earworm even seems to originated in the depths of alt-TikTok: The sound known mostly as “Mi Pan Su Su Sum” was originally a Russian cereal commercial, sang acoustically by user @chernaya.princessa, seemingly sped up in a version uploaded by user @isterrrrika, which went viral, appearing in 5.7 million videos and counting. This song is both a prominent case of TikTok’s functionality obscuring the original creator and the absolute earwormiest of all of its viral earworms

Lots of powerful and counterintuitive insights about our environment

  • In the United States since about 1800, the production of a good or service has required 1 percent less energy on average than it did the previous year. Nevertheless, embracing the full chain from the primary energy generator to the final user of light or heat, the ratio of theoretical minimum energy consumption to actual energy consumption for essentially the same mix of goods and services is still probably less than 5 percent. No limit to increasing efficiency is near.
  • A shift away from eating meat to a vegetarian diet could roughly halve our need for land.
  • In fact, careful records of human time budgets show that not only New Yorkers and Indians but also Californians, reputed nature enthusiasts, average only about one-and-a-half hours per day outside. Fewer than 5 percent of the population of industrialized nations work outdoors. In developing countries, the number is plummeting and should be below 20 percent globally by 2050.

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That’s it folks. All typos and misrepresentations are 100% mine!

If you want more, here are the last three random notes:

Til the next one!

A few takeaways from the 2020 Cambridge cryptoasset study: 101M users, 39% renewable energy, and the rise of stablecoins

Here’s the full report.

Below are some of my takeaways, along with excerpts and charts.

Anything in bold is my writing, and everything else is copied verbatim from the PDF.

1. There are approximately 101M “cryptoasset users”

An updated estimate of the number of cryptoasset users indicates a total of up to 101 million unique users across 191 million accounts opened at service providers in Q3 2020.

Service providers operating from North America and Europe generally report higher user activity, with the median firm indicating that 40% of total users are considered active.

2. Two trends in mining are a) renewable energy and b) financialization of hashpower

Only 23% of the surveyed hashers report receiving support from governments. This aid primarily takes the form of locally-focused support, such as electricity price subsidy for users within a region. 38% of surveyed hashers who receive government support operate in China, followed by Kazakh (19%) and Canadian (12%) hashers.

Hydropower is listed as the number one source of energy, with 62% of surveyed hashers indicating that their mining operations are powered by hydroelectric energy. Other types of clean energies (e.g. wind and solar) rank further down, behind coal and natural gas, which respectively account for 38% and 36% of respondents’ power sources.

Faced with increased competition and tight profit margins, miners with access to sophisticated financial products, such as hashrate or cryptoasset derivatives, have begun using them to hedge their risks (between 12% to 14% of all miners). This is paving the way for the financialisation of mining.

3. Institutional involvement is growing, and is more common in North America and Europe

A deeper analysis of the type of business and institutional clients reveals that, globally, cryptoasset service providers primarily serve cryptoasset hedge funds (37%), online merchants (30%), and miners (27%)

A considerable share of APAC companies serves miners (41%), in part explained by the high level of mining activities in the region, especially in China. Miners use their services to liquidate their coin inventory for national fiat currencies and cover fiat-based expenditures. Evidence from the study of miners’ hedging strategies also reveal that a growing number of miners rely on service providers to collateralise their coins (i.e. through loans) and unlock additional funds.

4. The industry is increasingly regulated, and increasingly resembles tradfi

The share of cryptoasset-only companies that did not conduct any KYC checks at all dropped from 48% to 13% between 2018 and 2020, most likely resulting from the progressive harmonisation of KYC/AML standards across jurisdictions

A decoupling of duties, such as between custody, clearing and settlement responsibilities, appears to be underway and may lead to greater resemblance with traditional financial market infrastructure.

…of surveyed entities, 22% have been incorporated in a country different from where their operational headquarters are based, and up to 15% in a different region. For these companies, top countries for incorporation include Switzerland, British Virgin Islands, the UK, and the Republic of Seychelles.

5. And some miscellany

Unsurprisingly, the older the company, the more likely it is to be profitable. 80% of firms aged 7 years old or older report having earned profits in 2019, compared to 60% for the 3-4 years old age group and 64% for firms that are 5-6 years old.

Stablecoins, both asset-backed and algorithmic, are also becoming more available, with Tether support growing from 4% to 32% of service providers and all non-Tether stablecoins growing from 11% to 55%. […] Among exchanges alone, the number of exchanges offering at least one stablecoin increased from 11% to almost half (48%) of the same. In June 2020 more value was transacted using stablecoins than Bitcoin for the first time.

APAC exchanges offer considerably greater leverage to users allowing for the chance of greater gain (or loss) for speculative investors. In our survey, 55% of surveyed exchanges offering leverage to users are headquartered in APAC, followed by 30% out of Europe.

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Postscript

Here are my notes from a great episode of The New Money Review, featuring the Cambridge survey team research lead Apolline Blandin:

  • there were 250 survey responses, including more Chinese companies this time
  • still lacking data from MidEast and Africa
  • Coinshares reports miners’ renewables share at 70%, but this is due to discrepancies in measurement, eg, Coinshares report weights Sichuan hashrate much higher than Cambridge
  • Chinese miners still have significant advantage in hardware prices (50-100% lower), factors include tariffs and shipping costs
  • Miner subsidies in China are local government subsidies and not from Beijing / central govt; the 3 countries with most government subsidies of crypto mining are China, Kazakhstan, and Canada
  • In 2017, Cambridge estimated ~35m users, this probably undershot at the time because they only report KYC users, and there were fewer exchanges KYC-ing users in 2017
  • OTC volume is probably 2-3x on-exchange trade volume

End postscript.

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The Cambridge survey is just amazing work, and I look forward to the 4th edition!

Random notes 3: One Billion Americans, the price of gold, Ray Dalio on macroeconomics, Michael Saylor on bitcoin, and a lot more

Lots of random notes from all the media I’ve consumed over the past week. And here are notes from week 2 and week 1.

First, I recently shared some highlights from an intense book on currency crises, here’s a favorite excerpt:

Although many now-advanced economies have graduated from a history of serial default on sovereign debt or very high inflation, so far graduation from banking crises has proven elusive. In effect, for the advanced economies during 1800–2008, the picture that emerges is one of serial banking crises.

Next, here are some interesting charts I saw on Twitter, starting with a chart on why gold is likely to appreciate (source):

Personally surprised by how little of the US debt is actually owned by Japan and China, despite how much msm talks about it (source):

Onto the random notes!

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Lily Wu, The Crisis of China’s Investment Environment (source)

  • China cos are less profitable than those in US, but more worryingly, gross margins have shrunkg (for example, even as Alibaba has gotten much bigger, its gross margins have declined; one reason is Alibaba entering less and less profitable markets)
  • Another example: GM’s profit in China is $300 USD per car, versus $1K in the US
  • In semiconductors, TSMC has arguably widened its lead over China’s state backed SMIC
  • Chinese companies do well in new / emerging industries, but are most challenged when late to the game, and there are strong global competitors
  • The gov’t recognizes private entrepreneurs and private companies generally perform better
  • There are increasing localization requirements for foreign cos on things like IP transfer, localizing tech and content
  • McDonalds sold its China ops to PE
  • China has world class IP laws, but problem is enforcement, not transparent, and penalties not punitive enough
  • Some similarities to Japan in 80s, but China is 10x larger population, much more unpredictable than Japan
  • Today 75% of HK stock exchange by weighting is China cos! Main reason intl capital goes to HKEX is because denominated in HKD, which is an open currency system and pegged to USD

Some highlights from Matt Iglesias’s new book, One Billion Americans (Kindle)

  • But the United States is not “full.” Many of its iconic cities—including not just famous cases of collapse like Detroit but also Philadelphia and Chicago and dozens of smaller cities like Rochester and Erie—actually have fewer residents than they had decades ago. And virtually all of our thriving cities easily have room to grow and accommodate more people.
  • Right now the United States has about 93 people per square mile. If the aggregate population tripled, then density would too. Many, many countries are far denser than this, including not just city-states like Singapore (more than 20,000 per square mile) or small island nations like Malta (3,913 per square mile) but also poor and arguably “overpopulated” countries like Burundi (1,127 per square mile). Successful developed countries that include a healthy mix of cities, suburbs, and countryside manage to far exceed tripling America’s population density. South Korea has 1,337 people per square mile and Belgium has 976.

And here’s Tyler Cowen podcast chat with Matt. The idea is kinda out there but it’s well reasoned, and inspires me to think bigger.

Ark recently put out an amazing whitepaper on bitcoin. I covered part 1 in the last random notes, and here’s part 2:

Bitcoin As An Investment, Ark whitepaper (source)

  • With little more than a 10-year price history, bitcoin has been the best performing asset of the 21st century. Five years ago, a $10,000 investment in bitcoin would have delivered a 119% compound annual rate of return and would be worth roughly $500,000 today. In fact, during any yearly holding period since inception through September 1, 2020, bitcoin’s return has been positive, significantly so in most cases
  • With daily trading volume of $3 billion, bitcoin’s spot markets are di minimis compared to U.S. equity markets, U.S. bond markets, and global foreign exchange markets. In other words, bitcoin trading is comparable in size to a large cap stock rather than an entire asset class. […] Compared to the “FANG” stocks, bitcoin’s trading volume is higher than that of Netflix and Google but lower than that of Amazon and Facebook, as shown below.
  • We believe that historical growth rates, bitcoin’s daily volume would exceed the volume of the US equity market in fewer than 4 years, and the volume of the US bond market in fewer than 5 years, as shown below.
  • Liquidity as measured by bitcoin-US dollar bid-ask spreads is illuminating. Today, at the largest trading venues globally, spreads can be di minimis at the top exchanges, as low as 0.0001%, as shown below. For comparison, the average US equity bid-ask spread is roughly 0.035%, suggesting that bitcoin often is more liquid than the average publicly traded equity.
  • With hindsight, to construct a portfolio with bitcoin while maximizing the Sharpe Ratio or minimizing volatility at the efficient frontier, an investor would allocate between 0.27% and 6.55% to bitcoin.

Gold expert Marin Katusa on TIP

  • Big fan of Equinox Gold, it’s profitable even at $1100 gold (per oz)
  • 17 rare earths, US used to be big producer, China biggest now, but very hard to buy from China, have it shipped, and have it be good quality
  • Massive stimulus coming after November election
  • Will see $2K+ gold prices soon
  • Gold miners staying disciplined this cycle unlike 2007-2012
  • Japan is MMT case study; covid was excuse for govts do MMT, and it will continue even after covid is gone
  • Barricks (GOLD) is a leader in preaching discipline; it wasn’t Buffett but one of managers that did the research
  • Marin believes people are underpricing geopolitical risk big time re gold miners

Ray Dalio on Bloomberg — among all the financial pundits, Dalio offers perhaps the clearest – yet nuanced – understanding of what’s going on in today’s crazy financial world. But not when it comes to bitcoin. I think he just hasn’t learned enough about it…it’s probably not big enough for him to care (yet).

  • 1. End of the long term debt cycle which started in 1940s
  • 2. Most divided political and wealth inequality
  • 3. Rising global power in China
  • Central Bankers control capital markets now, coordinated with central government. “They’re the market makers”
  • Central Bank balance sheets will explode. They’ll go as far as they need to in order to keep system functioning
  • History shows a perfect track record of doing this
  • Risk premium is driven by amount of liquidity injected, PE ratios going to 40, 50 is no more implausible than zero interest rates
  • Capital markets drive the PE and risk premiums more than the real economy drives the capital markets
  • “You don’t want cash and you don’t want bonds”
  • What is the storehold of wealth? “It’s the reciprocal of the value of money”: Equities, Gold, an alternative currency (eg, mentions China digital currency), “reflation assets”
  • Most analogous period to today is war period of 1930 to 1945 (me: this is similar to Lyn Alden’s writings)
  • US can’t let interest rates rise, because interest payments will rise and asset prices will fall
  • “We’re in a fiat monetary system”
  • Thucydides Trap – in the last 500 years, 16 times a rising power challenged a dominant power, and 12 times there were shooting wars
  • Compared to China, question for US is “how well are we playing the game?”; they’re on other side of chess board, smart, have historical perspective

Why Tokyo, despite significant population growth, has seen far lower increases in housing prices compared to the US:

As FT’s Tokyo bureau chief Robin Harding wrote in the article, the city had 142,417 housing starts in 2014, which was “more than the 83,657 housing permits issued in the state of California (population 38.7m), or the 137,010 houses started in the entire country of England (population 54.3m).” Compare this, also, with the roughly 20,000 new residential units approved annually in New York City, the 23,500 units started in Los Angeles County, and the measly 5,000 homes constructed in 2015 throughout the entire Bay Area

Fascinating book excerpt on how Genghis Khan was able amass so much gold and silver and issue his own paper money:

Let me tell you further that several times a year a fiat goes forth through the towns that all those who have gems and pearls and gold and silver must bring them to the Great Khan’s mint. This they do, and in such abundance that it is past all reckoning; and they are all paid in paper money

Lyn Alden with another clearly argued essay on why fiscal policy will likely drive inflation:

  • So, historically, the difference between a normal short-term deleveraging event and a long-term deleveraging event, is that the long-term version usually includes a significant component of currency devaluation
  • Even an example from 2600 years ago captures today’s situation in an eerily accurate way:
    • In the Athens of 594 B.C., according to Plutarch, ‘the disparity of fortune between the rich and the poor had reached its height, so that the city seemed to be in a dangerous condition, and no other means for freeing it from disturbances seemed possible but despotic power.’ The poor, finding their status worsened with each year- the government in the hands of their masters, and the corrupt courts deciding every issue against them- began to talk of violent revolt. The rich, angry at the challenge to their property, prepared to defend themselves by force. Good sense prevailed; moderate elements secured the election of Solon, a businessman of aristocratic lineage, to the supreme archonship. He devalued the currency, thereby easing the burden of all debtors (although he himself was a creditor); he reduced all personal debts, and ended imprisonment for debt; he cancelled arrears for taxes and mortgage interest, he established a graduated income tax that made the rich pay at a rate twelve times that required of the poor; he reorganized the courts on a more popular basis; he arranged that the sons of those who had died in war for Athens should be brought up and educated at the government’s expense. The rich protested that his measures were outright confiscation; the radicals complained that he had not redivided the land; but within a generation almost all agreed that his reforms had saved Athens from revolution
  • Japan, as the largest creditor nation in the world currently, is the one example out of 52 that has avoided that outcome vs the other 51 examples. Japan didn’t fix their problem; with record debt-to-GDP, they likely just delayed and mitigated it far better than most. Their sovereign debt as a percentage of GDP has continued to increase, pushing the previously-known boundaries on how much debt a sovereign entity can hold
  • It’s like the Titanic hitting an iceberg; once struck, the outcome of sinking became almost inevitable, and yet the ship persisted in a state of being afloat and slowly sinking for quite a while. It became a question of timing, and most importantly, acquiring lifeboats.
  • The economy superficially recovered from those 2009 lows, especially in terms of asset prices, but GDP growth was slow by historical standards throughout the cycle, the labor participation rate among prime age workers never fully recovered to pre-crisis highs.
  • Instead, whether QE is inflationary or not, largely depends on whether it is accompanied by high fiscal spending, since QE’s role in that environment is merely to recapitalize the banking system and monetize those fiscal deficits
  • The long-term structural trend is towards lower inflation or outright deflation, and normally, that would be a good thing. As humanity’s technology progresses and productivity improves, it would be natural for your money to buy more goods and services than it could 5 or 10 years ago, rather than less. However, because we structured our economy around a debt-based system, deflation is viewed by policymakers as the biggest enemy; something to be fought off wherever it shows up, so they seek to counter that inherently deflationary trend with inflationary monetary and fiscal policy
  • If fiscal policymakers realize that the economy is stagnant and banks aren’t lending, they can pass fiscal bills to go around the banks (or through the banks by backstopping loans for them) and get money directly to consumers and businesses, aka “helicopter money”. This could take the form of higher spending, or could take the form of unfunded tax cuts, or both

Michael Saylor goes on the Pomp podcast to explain his decision to invest almost the entirety of Microstrategy’s corporate treasury in bitcoin:

  • Microstrategy (MS) stock went from $330 to 42c after dotcom bubble (!)
  • Would never buy 30yr bond at 2%
  • One of the longest tenured public company CEOs
  • Risk free rate used to be 5%!
  • Asset inflation ~7% but this year it’s more like 25-30%
  • MS business model got better thru covid, reduced cost structure (no travel, no conferences) and customers stuck around (govts, big biz)
  • Limit to how much stock buyback you can do without moving price, would take MS 4 years
  • Hated remote work, but adjusted now
  • Went thru all asset options for investing the $500M:
    • Commercial RE isn’t fairly priced right now, impaired asset
    • FANG tech stocks overpriced now
    • Considered precious metals but bitcoin better
    • Wants something that can be cut in half but also go up 10x
  • All winning cos were tech cos in their time from Nestle to Boeing
  • Looked at defi and other coins but thinks bitcoin’s focus on PoW and SoV and all this energy invested means it’s got best chance
  • “It’s already won”; Believes $100B is this threshold after which you win, if you have a network and a dominant position
  • Vetted bitcoin institutional exchanges, custodians, got to know teams well, then did 1000s or more transactions every day over period of time
  • Confident he didn’t materially move the market, “let the market come to you”
  • “Every CEO had a lot of assumptions shaken this year” from TikTok to remote work to macroeconomy
  • Putting bitcoin in corporate treasury “It’s like the 4 minute mile”. Didn’t think it could be done, now someone has done it and next year dozens will do it
  • A nimble public co takes 6 mos to do what MS did, a rational big public co takes 9-12 mos, expects more to follow late this year and into next
  • “It’s not 10x better than gold, 100-1000x better”
  • 3500 publicly traded cos, $5T in their treasuries
  • “There’s a negative real yield on anything else I can buy”
  • $200T or more of negative real yield on treasuries, precious metals, etc,
    • bitcoin’s upside is not just gold mcap
  • Wonders why Dorsey with $10B between Square and Twitter doesn’t buy $500M?
  • Pomp believes Dorsey has more pressing problems eg dealing with activist investors
  • Amazed at the community ethos

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” – Mises

I learned from Wondery’s Business Wars podcast that when Dominos and Pizza Hut began to offer delivery, there was a legal battle and protracted fight between HQ and franchisees, because franchisees thought it would lower quality of product and cannibalize store sales!

Niall Ferguson and Michael Casey on Laura Shin’s Unchained podcast:

  • Niall Ferguson notes:
    • Son first got him into it, if he had bought bitcoin at that time he’d be retired
    • In developed countries inflation not a problem, only in first decade of existence, problem is actually the opposite (deflation)
    • Monetary policy was often set by merchants in eg Western Europe. State has not always been driving force
    • Bitcoin = option on digital gold for now, eventually will be digital gold
    • US no longer at edge of financial and monetary innovation; leaders have pathology that rejects new innovations like digital currency and ignores China wechat / Alipay
    • KEY: “Present situation is not a steady state”
    • Expectations of US stability and dominance will undergo a step change, and the alternatives are not obvious
    • We are in early stages of pandemic, usually pandemics are 2 year affairs in history
    • Next phase will be how China does with digital currency and digital payment platforms
  • Michael Casey notes:
    • He got into bitcoin because of Argentina, lived there, saw firsthand their history of dysfunction in public finances
    • For him it’s not about scarcity but rather about trust of governance, of transparency

On the importance of focus and presence for productivity and flow:

  • To get things done, you have to do. That’s it. You need sitzfleisch (ZITS–flysh), or “chair glue,” which—as Quartz’s Anne Quito notes—is a German word for the ability to sit through a boring or complex task for a considerable amount of time, however long it takes.
  • Peter Seishin Wohl of the Treetop Zen Center in Oakland, Maine tells a story about watching Soto Zen monks in Japan—who dedicate their lives to cultivating philosophical focus through meditation—cleaning a monastery. They work speedily, practically running as they dust. This demonstrates that slowness isn’t the goal of focus. “Zen has nothing to do with the speed at which we do things and everything to do with the intimacy with which we do things. And by intimacy I mean, not forming a separation between ourselves, our minds, and the activities we’re involved in,” Wohl explains.

Finally, Cass Sunstein on the power of nudge:

A simple intervention is to alter the institution’s default printer setting from “print on a single page” to “print on front and back”. A number of years ago, Rutgers University, in the US state of New Jersey, adopted such a double-sided printing default. In the first three years of the new default, paper consumption was reportedly reduced by well over 55 million sheets, or 44%, the equivalent of 4,650 trees. Similarly impressive results were found at a large university in Sweden.

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That’s it folks. All typos and misrepresentations are 100% mine!

If you want more, here are the last two weeks:
Week 2
Week 1

Til the next one!

Random notes 2: bitcoin as pure money; inequality between countries is decreasing; “a corporation is like a rogue AI”

I’ll try to share a post like this every week, it’s an opportunity for me to organize and review my notes from what I’ve watched/read/listened to over the past week. Here is the first installment from last week.

My favorite information mediums right now are podcasts and online articles (queued in Pocket), followed by ebooks (Kindle) and YouTube.

First, some art:

Sunshine by Hiroshi Nagai

The piece is called Sunshine, by Hiroshi Nagai.

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Ark’s new paper on “Bitcoin as novel economic institution” [download here]

  • During the last 10 to 15 years, countries have been increasing capital controls rather than decreasing them. Since 2007, the share of countries increasing capital controls has soared 300% to 15%, while the share of countries reducing them has dropped 60% to 5%,
  • In the last century, three monetary policy changes cascaded, cutting the purchasing power of almost half of the world’s currencies by 50%: the creation of the Federal Reserve in 1913 and Europe’s decision to abandon the gold standard in 1918, the US shift from the gold standard to the gold-exchange standard in 1933, and US abandonment of the gold exchange standard in 1971.,
  • Moreover, in the US today the minimum reserve requirement for deposit institutions is zero. Indeed, since 1995 the average bank reserve requirement globally has dropped by nearly 80%,
  • Lowercase ‘b’ bitcoin, the asset, is a standardized unit of value embedded in the network. Its value acts as the signaling mechanism that aligns network stakeholders. In some ways, we believe it is the purest form of money ever created:
  • Since its creation, Bitcoin has settled more than $2.5 trillion in transactions, as shown in Figure 8, the average size of which has been $2,000.

…eagerly awaiting Ark’s part 2.

If you want a better understanding of the global economy and how it relates to your own investment decisions, you can’t do better than Lyn Alden. I’ve been binging her newsletter and writings and podcast appearances. Here are some excerpts:

  • here is how the Bank of England defines QE on their website, in case we want to hear what the Brits would call it: “Money is either physical, like banknotes, or digital, like the money in your bank account. Quantitative easing involves us creating digital money. We then use it to buy things like government debt in the form of bonds. You may also hear it called ‘QE’ or ‘asset purchase’ – these are the same thing.”
  • Currently, the U.S. has about $1.8 trillion in currency in circulation and $16 trillion in broad money supply (which also includes checking accounts, savings accounts, CDs, all sorts of digital cash and cash-like assets).
  • Russia, for example, is buying massive amounts of gold year after year, including buying straight through their 2015/2016 recession. They’ve increased their gold reserves by 5x over the past decade, from 400 tons to 2,000 tons
  • Historically, the bond market has been the “smart money” because it is largely driven by institutional investors rather than retail investors. It tends to be more focused on near-term math than on emotion or long-term projections, and as such tends to front-run the equity market, at least in terms of major transitions.
  • There was a nearly four-decade period from the mid-1930’s to the mid-1970’s where buying and holding Treasuries was a fool’s errand, because they mostly lost purchasing power by failing to keep up with inflation. This was during a period of major long-term debt deleveraging and currency devaluation.

The Foreign Affairs has a very striking article on how global inequality is falling between countries:

  • People in the middle of the global income distribution, whose incomes grew substantially, overwhelmingly lived in Asia, many of them in China. People farther to the right, who were richer than the Asians but experienced much lower income growth rates, mainly lived in the advanced economies of Japan, the United States, and the countries of western Europe. Finally, people at the far right end of the graph, the richest one percent, enjoyed high income growth rates much like those in the middle of the global income distribution.
  • As measured by the Gini coefficient, which ranges from zero (a hypothetical situation in which every person has the same income) to one (a hypothetical situation in which one person receives all income), global inequality fell from 0.70 in 1988 to 0.67 in 2008 and then further to 0.62 in 2013
  • High growth in China, in global terms, is ceasing to be an equalizing force. Soon, it will contribute to rising global inequality. But India, with a population that may soon surpass China’s and is still relatively poor, now plays an important role in making the world more equal. In the last 20 years, China and India have driven the reduction in global inequality. From now on, only Indian growth will perform that same function
  • If China’s growth continues to exceed Western countries’ growth by two to three percentage points annually, within the next decade many middle-class Chinese will become wealthier than their middle-class counterparts in the West. For the first time in two centuries, Westerners with middling incomes within their own nations will no longer be part of the global elite—that is, in the top quintile (20 percent) of global incomes. This will be a truly remarkable development. From the 1820s onward—when national economic data of this kind were first collected—the West has consistently been wealthier than any other part of the world

Thought provoking tweet from Brian Roemmele (his account drops similar thought-provokers on a daily basis):

Apparently, negative emotions can be useful if we believe they’re useful:
The team found that the link between negative mental states and poor emotional and physical health was weaker in individuals who considered negative moods as useful. Indeed, negative moods correlated with low life satisfaction only in people who did not perceive adverse feelings as helpful or pleasant.

Some of my own notes from TechCrunch’s Alex Wilhelm on the Indie Hackers podcast:

  • Their best performing pieces are explainer-y pieces eg how to structure a cap table; insane shelf life but also a lot of planning and work
  • Really important to write about current events because that’s what gets attention and gets shared.
  • If you have a broader point, connect it to a news story that’s happening right now
  • It’s about the “newshook” – the key news event that happened (eg, Tesla shares soared 20% after stock split; father of three killed in 4-way crash)

Are we presently in a fourth turning?
Howe and Strauss observe that American history shows a new era, or “turning” about every 20 years. In simplest terms, the “First Turning” is an upbeat era of strengthening institutions. The “Second Turning” is an awakening, a passionate era of spiritual upheaval, when the old order comes under attack. The “Third Turning” is an unraveling — a time when individualism is strengthened and institutions are weakened. The “Fourth Turning” is a crisis, a decisive era of secular upheaval — the old order is toppled and a new one put in its place.

For me, the concept has echoes of Sovereign Individual.

On the rise and rise of US disability benefits recipients:

  • The federal government spends more money each year on cash payments for disabled former workers than it spends on food stamps and welfare combined
  • “That’s a kind of ugly secret of the American labor market,” David Autor, an economist at MIT, told me. “Part of the reason our unemployment rates have been low, until recently, is that a lot of people who would have trouble finding jobs are on a different program.”

Real estate investor with large YouTube following believes a housing crash is coming in 2021. Here are my notes on his reasons why:
1. There was a temporary supply decline during the pandemic, but a lot of supply is coming back now
2. Interest rates can’t get lower
3. There are millions with no or reduced jobs
Lastly, he believes property taxes will increase in most metros

Luke Gromen on Erik Townsend’s Macro Voices podcast

  • Biggest surplus nations: EU then China then Japan
  • Biggest deficit nations: US then UK
  • Eurodollar market is 60-100T, and Luke believes Fed willing to bail out whole thing if necessary to prevent system collapse
  • Global banks have stopped buying US Treasuries for first time in 70 years…this already started in 2014
  • US true interest payments already more than 100% of tax receipts
  • Luke quoting Marc Faber: when things get really bad, the price of everything goes up
  • Dutch National Bank: If whole thing collapses, we own gold because gold will be used to rebuild the whole thing
  • It’ll be gold at 22K – 10x from here, not 10-20% moves
  • If that happens there will be a debt jubilee. Bond holders and creditors would get burned

Enjoyed this NYT profile of mathematician Eugenia Cheung

  • Deep nonfiction takes longer to absorb, and math books take years. I love the act of turning pages when I’m reading a novel; when I’m studying a math book I might need to spend several weeks on one paragraph.
  • It’s easier to “bridge” science and art when you don’t really think there’s a gap between them in the first place, as I don’t. The boundaries between subjects are really artificial constructs by humans, like the boundaries between colors in a rainbow.

Improve your posture, improve your teeth? from the NYT
If you’re wondering why a dentist cares about ergonomics, the simple truth is that nerves in your neck and shoulder muscles lead into the temporomandibular joint, or TMJ, which connects the jawbone to the skull. Poor posture during the day can translate into a grinding problem at night

From The Confessions of an Economic Hit Man, which I am enjoying in spite of its depressing revelations:
Creating an easy-to-learn language had been President Sukarno’s highest priority after Indonesia won its independence from the Netherlands. More than 350 languages and dialects are spoken throughout the archipelago, and Sukarno realized that his country needed a common vocabulary in order to unite people from the many islands and cultures. He recruited an international team of linguists, and Bahasa Indonesia was the highly successful result. Based on Malay, it avoids many of the tense changes, irregular verbs, and other complications that characterize most languages.

Darius Kazemi’s AI and Art talk on YouTube had me scratching my head in a good way.

  • “A pun is a context switch”
  • “Corporation is like a rogue AI”
  • “Capital is teleological, it has goals, and it’s goal is to increase capital”
  • Humans are really good at enslaving others, which is why we also fear AI will enslave us (in other words, we are projecting)

After watching, I immediately queued several of his YT talks.

Reed Hastings interviewed on The Economist podcast:

  • Netflix key metric is the ratio of total-time-watched-to-cost
  • Has $15B in debts
  • Added 30M subscribers in 1H2020
  • Question he likes to ask: Is the internet going to grow or shrink in next 20 years?
  • Admire and fear Disney, it’s streaming service grew to 60M subscribers in first year, it took Netflix 12 years

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That’s it folks. All typos and misrepresentations are 100% mine! Here’s the first random notes post if you like informational potpourri. Til the next one!