Putting our heads together is what Stray Reflections does best. All of us are smarter than any of us. Here’s a summary of the most helpful insights gained from the community in our members-only Slack group last month.
1. Long Surfing
BD (Los Angeles): Here’s a reflection I had after listening to Steve Cohen’s interview.
I’ve often considered the ocean to be a fitting analogy for the markets. For some context, I grew up surfing and spent eight summers as a Laguna Beach lifeguard.
The more time I spend in the water, the more I understand how powerful it is. Countless painful lessons have provided me a healthy fear and respect for the ocean, or as Steve put it, perspective.
I realize now when I enter the water, I must play by its rules. I don’t decide which way the current moves, I must move with it. I cannot fight and struggle when a wave pins me down; I must surrender to the turbulence as it passes by.
Tourists, by lack of awareness and understanding, do not respect the ocean. They are unaware of the forces at hand and the risks they inherit when they enter the water.
Over the years I have noticed a pattern amongst tourists, at least the ones who need to be rescued. They seem to have an arrogant naivete; they claim that they regularly swim at their local pool or lake, so they will be just fine in the ocean.
They can lie about their capabilities on the sand, but once they hit the water the tourist’s swimming ability does not lie. An investor can tell compelling narratives and provide stunning charts to fit their narratives, but at the end of the day, their P&L does not lie.
The main difference between the surfer and the tourist is time in the water. Time in the water develops an understanding of the forces at work and an ability to interact with those forces. Intuition develops over time, and the ability to navigate turbulent conditions eventually becomes second nature.
The surfer, unlike the tourist, also prepares. They check the swell, wind, tide, and water temperature. They know what mood the ocean is in and which board to bring for those conditions. Surfers develop an awareness of their limits; they know the conditions they are suitable for and the ones they are not. They respect and understand the ocean’s power.
Essentially, they are in tune with reality; they see things for how they really are and not how they want them to be.
Steve Cohen is to markets what Laird Hamilton and Kelly Slater are to surfing. They are masters at navigating through powerful and unforgiving forces. They glide through chaos and make it seem effortless. Their decades of experience in these environments have developed skill, intuition, and self-awareness.
TE (New York): Been surfing for 42 of my 49 years. Been trading for not much less than that. Might seem like a joke, but best trading/surfing parallel I’ve come across is this clip.
Ability to do nothing is massively under-rated. And, more importantly, first hurricane swell of the season today in New York ... giddy up!!
HA (Hong Kong): Echo comments above. Being a surfer teaches so much. The book that has some of the best descriptions of waves, the intuition involved with the act, and the lessons that surfing offers as well as some great stories generally (and some near-death experiences) is Bill Finnegan’s Barbarian Days: A Surfing Life. Someone described it akin to reading Hemingway on bullfighting.
2. Short Dreams
JM (Toronto): I’m so reviled by this whole space hullabaloo. How does everyone feel?
AG (Mumbai): In India, we use a word called tamasha. Meaning a great fuss... mostly about nothing much. That’s how I feel.
SG (London): Sixty years old technology being passed as groundbreaking—which took them ten years to replicate.
CT (Austin): I was surprised at how little video footage there was of the internal cabin during the flight. Without seeing the human side of it, it felt like a PR stunt to me. I was way more inspired when I watched Felix Baumgartner (Red Bull sky diving from space) and David Blaine (sky diving from upper atmosphere hot air balloon). I guess the content value is what turns a meme into a memory for me.
CJ (San Francisco): I found it to be amazing because unlike the Baumgartner and Blaine stunts, I have a chance of following in their footsteps. The possibility of seeing the Earth from space was never more than a fantasy. Yet here we are with two of the greatest entrepreneurs of our lives making it a reality.
JM (Toronto): So Branson went to 86.1 kilometers of altitude and Bezos went to 107 kilometres. This reminds me of the late 1920’s race to build the tallest building in Manhattan.
Walter Chrysler planned an 808-feet tall monument embellished with gargoyles based on radiator ornaments from Chrysler’s cars. But once a rival publicized a slightly higher structure, Chrysler had his architect secretly build a 185-foot spire which would bring the height of the Chrysler Building to 1,046 feet.
The spire, called “Vertex,” was hoisted into place on October 23, 1929. That same day, Yale economist Irving Fisher declared, “Stocks have reached what looks like a permanently high plateau.”
We all know how that ended.
In the latest issue, we wrote about why the billionaire space race is more important thank you think. Go deeper.
3. Long WTF!
China’s economic and investment landscape is undergoing dramatic change. There’s a big disconnect between what’s happening on the ground and what we read in the financial press.
We dug into the real story behind China’s tech crackdown and the latest policy moves with Trivium partner Andrew Polk. Be sure to catch the full conversation here.
SB (Amsterdam): What were your most important conclusions regarding Chinese tech? Upside is reduced and needs some time to become clear how measures will impact profitability?
JM (Toronto): Perhaps. But also, that perception of risk is way more negative than reality. I find it amazing that BABA has been consolidating at lows for two months despite headlines getting worse, still trading above 200 dma on weekly charts and above 2018 highs.
I suspect this is a great buying opportunity (and you know the risk levels). Enough negativity is priced in that the stock recovers as perception adjusts, without needing to form a view on future profitability.
VS (Hong Kong): There are too many things happening here. BABA was partly personal (Jack Ma insulting the PBOC) plus being super monopolistic. Didi was in violation of a bunch of laws. Education is happening because Chinese want to bring down cost of having a kid quickly. Next target probably is real estate because that’s another reason people don’t have kids.
AF (Hong Kong): In our privates space the mood has turned ice cold as you basically could be forced to not list or fundraise at any stage now. A US SPAC or ADR exit is off the table, which makes it harder to exit private tech investments. A HK listing exit is less attractive valuation and participation wise. This is a long-term negative for private markets.
We are also involved in private biotech in China and fear that the regulations will spread here, especially when the companies finish and release their mRNA vaccine by this fall.
The crypto community is also under high surveillance as they try to figure out how to incorporate the infrastructure onto their own digital RMB initiatives.
So, it’s turning relatively full on communist in terms of actions and regulations, and the tycoons are starting to come to this realization. It’s better for the country in the long term in terms of being more stable and reducing wealth inequality, but market multiples suffer as a result.
The last nine months has seen insane amount of wealth come to HK. High-end property has taken out all imaginable highs as the mainland insiders shift their wealth to HK given the closing of the US channels. A telltale sign would be if they start moving on the HK tycoons after next year’s elections. So far there’s a lot of expectations, but light on action.
JM (Toronto): Given the obscene levels of inequality, it seems to me this battle will last years.
What’s obvious is that this crackdown is harmful for business confidence and the elite. There’s a lot of fear and loathing. What’s unappreciated is that it’s “popular” with the people. This makes Xi look good.
That’s what I gather from conversations. There’s a scathing resentment for the wealthy elite, a sense of unjust or ill-gotten gains.
AF (Hong Kong): Absolutely. The nationalistic pride and party popularity is at an all-time high. The biggest praise that the masses sing about is the crackdown on party corruption which Xi is given a lot of credit for. All this market stuff is “Wall Street” first-world problems that have no impact on the average folks.
4. Short Achilles Heel
SG (London): Fascinating when you think about the current state of the US economy.
a) low wage worker doesn’t need to work for subsistence wage and gets $8-10 an hour
b) corporation wants to pay worker $8-10 an hour and no more because otherwise margins and RoE goes down
c) worker tells him to ““take this job and shove it”
d) top line growth of corporate goes negative leaving the corporation with only two choices to maintain RoE = reduce cost faster or increase leverage
One of the most mispriced risk is compression between IG and HY accompanied by curve steepening in credit. This is exactly what you would see in an end of cycle M&A/LBO/Corp action binge.
As it relates to employment, you have to split between the following categories:
a) ageing population (upper strata / intellectual professions) that were working for leisure aren’t coming back and it’s relatively big (map out labor force > 65 years old). They typically have high income / low consumption patterns. If anything, it’s a bullish thing for wages overall that they are dropping out.
b) women: I think this is a big unknown, compared to other recessions the drop off is massive. If Biden can get his childcare plan in order, there could be a large pickup in employment here. UK same boat.
c) youth-part timers: they are coming back in September
d) low wage workers waiting for better opportunity while they have the checks: I don’t know what to make of this but I don’t think there will be a large pickup. Add to that the geographical mismatch which has happened with people moving back closer to families.
JM (Toronto): I feel this is America’s Achilles heel. Despite strong pent-up demand and underlying economic conditions, labor supply is slow to respond which caps growth, keeps Fed looser for longer, worsens the fiscal deficit, and it all works to make America less exceptional.
AS (Singapore): Any idea on why 10-year bond yields continue to collapse? Doesn’t seem to give a very confident picture of things. Wonder how soon analysts start moving target level from 2% to 1.5? :)
JM (Toronto): Fundamentally makes sense if you think in terms of transitory inflation, lower neutral rates, and slower structural GDP growth (anemic workforce growth this decade and persistent labor shortages). 1.8 percent on 10 year was attractive, especially for some foreign sources of capital. We talked about it here. We are still living in a yield starved world.
AS (Singapore): Umm ... never say never ... but are we saying that rates have peaked so early in a cycle with Fed hiking still far away if at all? Only way that could be possible is if we believe US is already in European and Japan camp.
5. Short Complexity
CT (Austin): Be careful with mental models around tokenomics when comparing different products and networks. TCP/IP is very different than ETH which is very different than Facebook. They all have different incentives, different mechanisms of value capture.
More specifically, value can accrue in different ways than simple capital gains. When I first learned about wrapped BTC (BTC on Ethereum), I concluded that over the long term the killer app from most Layer1s will be yield, not capital gains. The application layer will attract those cap gains.
In other words, the more important question with ETH is not “Will it go to 100K?”; rather, “At what price with ETH stabilize and at what yield?” This is true for almost all proof of stake networks and is the biggest reason people write off Defi and crypto yields all together.
It’s a different way to value assets, one that simply has no place in the macro environment we built. A comparable example would be to imagine Coinbase, upon direct listing, locking up 20 percent of the float which would be market sold each month for the next thirty years.
People who buy COIN stock and agree to lock that stock into a smart contract, which would secure COIN’s network security in some way, get rewarded with the dollars that were created from the monthly market sales from the stocks. COIN would continue to operate as normal; cash would flow through the company and the stockholders would continue to balance a slow capital gain with liquidity or lock up their shares in exchange for a percent of the monthly yield.
This would most likely result in a wild mispricing in the stock because there are zero macro models to account for this. You can’t run basic PE ratios on it. You can’t compare it to pure networks. You can’t compare it to a dividend ETF. It’s just new and different.
The application layer in crypto will mirror equities and offer returns like early-stage VC. That’s neither better nor worse than the long-term prospects of ETH, just different. The market cannot figure this out and large buckets of capital chasing yield are not ready to commit to long term lock ups. That’s why the market is doing what it’s doing in terms of price.
JM (Toronto): You know, I keep reminding myself that email is a set of application layer protocols (SMTP for sending and IMAP and POP3 for receiving) that run on TCP/UDP; the transport layer of the internet used for data delivery. But we all just know it as “email” and it’s so simple and ubiquitous.
At some point, we should see the same happen in the cryptoverse. All these protocols and layers are daunting and can be very confusing. I look forward to the day the language and functionality is simple, easy, and ubiquitous.
6. Long Dirtbags
This came in response to our note on contentment.
JB (London): And the American thinks, “Canadians, of course it’s easier to be content when you’re not massively short an option on healthcare and educating your children will not impoverish your family for two generations...”
One of the curiosities of modern life—our modern life—is that everyone is trying to out-busy one another. Keynes was so dead wrong in his claim at the beginning of the last century that the biggest problem of the future will be choosing leisure.
I often think the dirtbags in Camp 4 at Yosemite are perhaps the most privileged class on the planet. The foreign ones—mostly Europeans—who have health care. They’ve chosen a simple life. But they have a floor under their feet.
America is anti-simple. And by default, anti-free. And they have no idea because most cannot afford to travel to see anything else.
They might go to Yosemite and see a bunch of dirtbag kids with smiles on their faces in Camp 4. It will likely not occur to them that there are loads of Europeans, Canadians, Japanese among them.
They’ll go back to their plush camper vans and watch their Disney films and feel good that they were born free. And then they’ll go back to their lives of indentured servitude.
7. Long Mystery
JM (Toronto): Received from a friend who read it in Jack Kornfield this morning...
Don Juan, in his teachings to Carlos Castaneda, put it this way:
“Look at every path closely and deliberately. Try it as many times as you think necessary. Then ask yourself and yourself alone one question. This question is one that only a very old man asks. My benefactor told me about it once when I was young, and my blood was too vigorous for me to understand it. Now I do understand it. I will tell you what it is: Does this path have a heart? If it does, the path is good. If it doesn’t, it is of no use.”
When we ask, “Am I following a path with heart?” we discover that no one can define for us exactly what our path should be. Instead, we must allow the mystery and beauty of this question to resonate within our being.
Then somewhere within us an answer will come, and understanding will arise. If we are still and listen deeply, even for a moment, we will know if we are following a path with heart.
It is possible to speak with our heart directly. Most ancient cultures know this. We can actually converse with our heart as if it were a good friend. In modern life we have become so busy with our daily affairs and thoughts that we have forgotten this essential art.