September 15, 2024 Weekly Recap & Good Reads

Last week in Random Walk+Good Reads, all in one email

If you’re in Las Vegas this week, let me know. As the great Michael Jackson once sang, I’ll be there.

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Last week in Random Walk . . .

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👇Here’s what Random Walk published last week 👇

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Analysis & Ideas

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Macro & Markets

Why investors should prepare for a recession. Peter Berezin keeps beating the drum for the lagging effects of higher rates. What makes Berezin credible is that he was relatively bullish back in 2023 when everyone was very bearish.

China deflation risk grows, calls for more stimulus. Stimulus to be paid for by whom? The claim makes more sense, sociologically and culturally, if it was “China deflation risk grows, calls for more sacrifice.” As DFW famously quipped, “everyone worships.” See also Hong Kong retail sits empty as Chinese turn frugal.

PE/VC

Endowments face a PE liquidity squeeze see also At least one endowment CIO is skeptical of private credit. To be fair, neither article actually demonstrates that endowments are facing a liquidity squeeze, just that they *might* face one, as a result of their exposure to PE. As an aside, I never fully understood how PE touted its relative illiquidity as de-risking the asset class (and it’s possible that I still don’t). The claim is essentially that PE is low vol because it doesn’t trade that often and therefore it’s low risk (because big price moves is how you lose money) . . . but ‘low vol’ only means low risk when the asset does trade frequently (because the frequent price discovery is telling you that prices don’t swing that much). Without frequent price discovery, you have no meaningful view of vol one way or another. It’s kind of like saying there are no monsters in the room with me if I turn off the lights because now I can’t see them. This is so obviously true that I always assumed I just didn’t understand the claim . . . but apparently Cliff Asness has a similar critique that he refers to as volatility laundering. If you make vol go away because you choose not to look doesn’t mean it’s not there.

Are emerging VC managers DOA? The venture ecosystem is starting to feel the liquidity draught at the manager level, and people are searching for answers. See also Fintech isn’t dead. VC boosterism. It’s getting tough out there.

Industrial infrastructure the ‘next big thing’ If you subsidize it, they will come. Truthfully, there are reasons to be optimistic for big leaps forward in infrastructure and hard assets, and AI is a very healthy impetus for those leaps, but the I[N]RA is not.

Apollo and State Street join forces on public-private credit fund. An ETF of private credit offerings for retail. This is an AUM game, pure and simple.

Private Credit and Insurers square off with $15T retirement money at stake. Just another turn in something Random Walk has written about in the past. Retirement money is a good source of banking capital because it’s not duration mismatched (unlike deposits). This was Buffet’s and Rowan’s great insight. On the other hand, squeezing more yield out of those dollars means doing things a little differently (for better and for worse). Now the legacy insurers are trying to get regulators to intervene.

Fin Services

JPM says NIM expectations too high. Random Walk’s outlook for boring banking continues to hold together for now.

Insurers are charging more and covering less. Minnesota Fed offers some data and anecdotes on shrinkflation in insurance. Cost of capital and labor—the two main inputs in insurance—are way up. There is no other way. Anything heavily indexed to labor is just worse than before.

Real Estate & Migration

$557B drop in office values eclipses city revivals. More data and anecdotes around the long-running story of the collapse of central business districts. It’s not just a “wfh” phenomenon, although ~60% occupancy does seem to be the new normal (and has been for a while). These are unpleasant places. Partially they were designed that way, and partly through neglect. See also Facing billions in budget shortfalls, cities scramble for solutions.

Tech

How local governments got hooked on one company’s janky software. I don’t remember who recently made the observation (although it’s not a novel one), but sticky tech is often bad tech because it’s so sticky it doesn’t have to be good. Sometimes that’s because the tech is the system of record, e.g. property management software, but other times it’s sticky because the buyer is unsophisticated and inefficient, with very little incentive to be discerning (i.e. government).

Energy

AI and the energy transition are changing Real Estate. Nice long read from Navitas Capital courtesy of Thesis Driven on the potential impact of AI’s energy demands on real estate. Recall, again, that energy consumption has been flat for decades, until very recently.

AI

Giving credit cards to AI. Cool. AI does need to be able to buy things. In general, APIs are going to be re-architected to be “AI native” (i.e. designed to be read, called, etc. by other AI). I assume this is already happening, but I haven’t heard anyone talk about it that way.

AI spending spree in charts. AI capex is real and it’s amazing.

Llama leads AI innovation. Meta released some data around model usage.

Labor markets

Inflation usually hits harder for poor families, but not recently. Right, because inflation driven by a worker shortage starts out as higher wages before it becomes a wider inflation.

Childcare usage and spending by income levels. Chicago Fed data on changes to childcare use and spending by income levels. It’s kind of an interesting problem because paying for childcare “makes sense” from an opportunity cost standpoint for higher income earners, but since childcare is a lower-income service, it got more expensive, and therefore the opportunity costs for lower income people to not be in the business of childcare went up, which in turn created more demand for childcare, although not necessarily the paid kind. I still genuinely believe that teens and seniors should be in the childcare business.

Consumer

Bad loans pile up at Nubank, the new No.1 bank in LatAm. Rapidly growing populations that are rapidly coming online is an amazing double tailwind. The LatAm neobank has an extraordinary ~60% of Brazil on its app. Apparently there are some bad loans in the book. Idk.

Only Fans financials. I didn’t even know that private companies in the UK had to report financials. Like gambling, demand for prostitution (or prostitution-lite) was never in question. Are there tradeoffs? There are always tradeoffs.

Regulators

Whatever it takes to boost EU competitiveness and Draghi’s full report. Random Walk already pilloried this one earlier in the week, but if you want someone else’s more forgiving take, here it is.

People & Culture

Fangraphs needs support. If you like baseball, data, and rigorous, high quality analysis, then grab yourself a fangraphs membership. These folks have been putting out extraordinarily high quality work for over 15 years, and more importantly, ‘learning in public’ i.e. demonstrating rigor, intellectual honesty, and curiosity. As an aside, it’s deeply radicalizing when one first begins to appreciate that nerds with spreadsheets publishing on the internet were vastly better at talent spotting and roster construction than the highest paid and best credentialed experts.

Impact of online dating on marriage. St. Louis Fed observing what, if any, changes to assorting mating are attributable to online dating (following the well-known “where you meet your mate” chart, that shows a rising share of “online.”) There’s a lot in there, and I may dig in more another time, but the short version is “birds of a feather flock together, but even more so, without intermediating institutions to diminish the relentless factor analysis that people might otherwise indulge if left to pick their mates from an online store.” If there’s no soft variables to choose from, then people will triple down on the hard stuff. And yes, when presented with endless options (and exceedingly low costs of discovery), it’s unsurprising that people (men, especially) struggle to commit. Once again, we can give the people what we want, but what we want isn’t always good for us.

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