April 13, 2024 Weekly Recap & Good Reads
Last week in Random Walk+Good Reads, all in one email
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Last week in Random Walk . . .
👇Here’s what Random Walk published last week 👇
Big Stories of the Week
The week ends poorly
Taking a dive. It feels like a broken record at this point, but this week included more big moves, in response to little wiggles. The inflation print came in “hot” (by what amounts to a rounding error) and suddenly expectations for imminent rate cuts were dashed. Investing is certainly a multi-agent game, where the anticipated reaction of your fellow investors (and the reaction to that reaction) is a substantial part of the calculus, but it’s still pretty amazing how much can change, without anything really changing.
. . . or maybe the “hot” print is just a post-hoc explanation for volatility caused by the combined effects of entirely unrelated reasons, which just so happened to coincide.
Analysis & Ideas
Macro & Markets
United Way helplines flashing a warning signal for low-income households. Stories about alternative leading signals are always interesting, whether it’s an uptick in google searches, or in this case, calls to United Way. Lower income folks are in a delicate dance. On the one hand, they’ve been the biggest wage beneficiaries of the worker shortage. On the other hand, they’re the most directly exposed to small changes in prices—often caused by their own rising wages—and the supply-demand of their labor.
Why have rate hikes not done anything? The always excellent
looks at the (non) relationship of credit expansion and consumption. More wages to more (foreign born) workers leads to higher consumption.How the finance pros bungled the rate increases. A long read that doesn’t really answer that question, but it’s a good rundown of all the “big mistakes” that have transpired over the last 3 years. One neat observation is that there was some “groupthink” spillover from the clubby, network-driven investing of VC and PE—where returns are generated by ‘in crowd’ access to the “best” deals—into the more lone wolf style of hedge funds—where returns are generating by being different and right. Tiger Cubs became VC bros, which led to a crowded trade. See also McKinsey advises a Texas bank to follow SVB’s path to success.
Jamie Dimon’s Investor Letter. Eight whole principles! When the most important person at the most important bank writes a thing, probably makes sense to read it.
Banks report strong earnings, but tepid forecasts in higher-for-longer world. Banks went all-in last quarter to drive lending and revenue, but rates stayed high, so their NIM compressed. Without a tailwind of cheaper capital, banks are managing expectations for what they can do going forward. Who could have foreseen this coming? This is more sophisticated, tree-level color, separating haves, from have-nots.
Capital Allocation & Investment Strategies
Why Cash App Pay is a big deal. A closer look at Block’s Cash App Pay product, and what it means for the company’s bottom line. Mostly, the piece helped me understand the various products in Block’s ecosystem, which seems relevant for an extremely fast-growing banking-payments product that specializes in lower-income customers in the South and Southeast.
10 Companies to Watch. Not an endorsement, except to Bloomberg’s design team. I suppose there were 1-2 interesting ideas in there.
Goldman says to take tech profits and seek out energy and Japan. OK, alright.
Highlights from The Information’s Private Capital Conference. Biggest takeaway is that when things are uncertain, everyone gets safe and boring. Name-brand, big funds raise money, not little ones. Name brand, big cos, raise money, not little ones. Execs say generic things, like “it’s bad, but also not bad, and while it could get better, it could also get worse.” Can’t get fired for going with the herd.
IMF on private credit. It’s big, it’s riskier, more opaque and more correlated (and more incestuous) than people think, but still it’s nothing to worry about. That’s a perfectly reasonable conclusion, too, btw. It is interesting to see the industry learn how to lend to predictable revenue, but otherwise asset-lite, businesses (i.e. PE-sponsored tech cos), trading high debt:asset ratios for high debt:earnings ratios, instead.
Real Estate & Migration
Movie theaters have weird real estate and its saving them. The form factor is an underappreciated real estate factor. Poke restaurants are great because they require basically nothing special in their buildouts. No cooking, no ventilation, no nothing. Movie theaters are the opposite of that. Single-purpose assets, with little use to anyone else. From the landlord’s perspective, better to cut rents than to try to repurpose the space. Cf. this repositioning.
Brooklyn’s super-tall ‘Sauron’ tower goes under auction. You could write an entire book around the various personalities involved in the deal-gone-bad, and the twists and turns, that it took to get it there. The funny thing is that ‘building a skyscraper in Brooklyn’ is such an (oddly) unique challenge, that it basically selects for this kind of stuff.
The Real Estate nightmare in St. Louis. Urban doom loop porn. Such pretty buildings though. It’s like a lost civilization.
Energy
The two lies that killed Nuclear. Basic argument is that probability of leakage is higher than the industry wants to claim, but also substantially less harmful. The fear of harm, led to onerous regulation, compliance with which has become the business of nuclear. In other words, the industry is currently being paid to meet an impossibly cautious standard to prevent a not-that-bad risk.
But see Samo Burja claiming that we’re not actually ready for nuclear because doing it safely and cost-effectively would generate far more energy than we actually use. Why can’t there be easy and obvious solutions?
Aged gynocrats in Europe unilaterally set industrial policy. 2,000 elderly Swiss women asked an unelected clique of lawyers (the “European Court of ‘Human Rights’”) to direct 32 European countries to “cut emissions.” The Court said “ok.”
DeMOcRaCy!
AI
Race for AI supremacy in the Middle East is measured in data centers. Lots of space, lots of energy. Makes sense. Cooling might be an issue. And I suppose getting people to actually work nearby, but if compute really is the bottleneck, then people will come.
Discover deploys Google Cloud to build AI customer service. Good. More use cases. Need more use cases. See also Insurtechs trying to make a comeback with AI underwriting.
ARM CEO says demand for energy is ‘insatiable.’ Is energy the bottleneck or not? Idk.
Tech & Venture
36 Hours in the new venture hub El Segundo. Talent clusters. Sums greater than their parts. Sounds fun.
Jack Altman launches venture accelerator for enterprise AI. Gotta love big tech enterprises arbing their lower cost of compute into VC investments (i.e. the investment is $350k of Azure credits and access to Microsoft’s GPU clusters). Another driver here (of this accelerator and others) is unit economics, i.e. more ownership for investors to compensate for fewer “venture scale” outcomes. Makes sense. Expect even more.
People & Culture
Japan’s population collapse gets worse. Ugh.
Trouble with old men. Previous civilizations have solved the problem of gerontocracy differently. Not an endorsement.
What happened when an employer offered childcare? Anecdotes, but at some level, it makes sense. The hard part about starting schools is convincing parents that the other kids are going to make good peers for their little one(s), which is why school-selection is really just neighbor-selection (where housing costs are the gatekeeper). But firms could also function as a gatekeeper/trust-maker, i.e. everyone who goes to this school has a parent that works at [IBM] ergo, this school must have good kids. I wonder why that doesn’t happen more.
Andy Jassy on how the FTC has nearly bankrupted iRobot, and given the keys (and data) to Chinese competitors instead because the FTC had a vague notion that Amazon would favor the Roomba over other brands and that that would be “unfair” because reasons. I mean, to be fair, you don’t have to take Jassy at his word, but the FTC is leaving more destruction in its wake than anyone can keep track of. It’s also extraordinary that the FTC “defends competition” by colluding with European regulators, so that there is no escape from their grasp. Competition for thee, but not for me. These people are the worst, and everyone knows it, including them.
Migrants staged a fake robbery to get U-Visas and the fake robber was killed by a Good Samaritan who thought the robbery was real. Only the fake robber’s accomplice has been charged, while the Good Samaritan’s case has gone to the grand jury. No word on what, if anything, happens to the migrants who entered the country illegally, and illegally paid for the fake robbery in order to illegally obtain visas. Who’s writing the script here? Is it Pynchon? Kafka? Gogol? Coen Brothers?
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