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 Opposites (#life)
2. Short Harvests (#stocks)
3. Long Beatings (# policy)
4. Short Aging (#tech)
5. Short Reason (#history)
Long Opposites
JM: I would like to ask everyone the question I posed to Sean in our latest salon.
When we look at the world, it’s easy to identify what is wrong with it. The pandemic is still with us, there’s war, risk of famine, climate disasters, and divisiveness all around. It’s easy to feel gloomy.
What’s right with the world?
SG: The reason we point to what is wrong with the world is because it’s easier to enumerate than what is good or improving (because it's much larger).
List of things that are getting better, in no particular order:
- Real wage growth at the bottom end of the spectrum in DM is increasing
- Psychological illnesses being talked about openly and we are opening talk treatment to the masses
- The younger generations are more engaged with social issues than previous generations, soon to convert into political actions imho
- Younger generations globally have far greater access to knowledge than prior generations
- Big state investments seem to be making a comeback after 40 years of being absent
- Violent crime is still on a century and decade long downtrend (even if uptick post COVID)
- We are talking and debating much more and in many more venues than previous generations
- Academic access is being reinvented
The list goes on. One can counter on the above obviously, and that is fair, these are just things I’ve jotted down over the years when reading books.
CT: I am so bullish on the younger generation. So much optimism and energy, even if it seems misguided by our current standards. Very optimistic that they will create interesting positive change in the way we connect, govern, and live over the next century.
It’s easy to compare a digital life to an analog life and see the faults, but I’ve learned that without the analog lens the digital world is simply a playground that has limitless options. The enthusiasm is boundless, even if traditional metrics point to declining trends in important areas (work, relationship, mental health). I will always bet on the youth.
DS: On a meta-cultural level, I do feel like issues are being brought into the forefront. For example, regarding energy, it feels like the debate today is more based on underlying nuances than before. As structures crumble, they reveal the truth. What looks like escalation is a gasping last breath of control. Long nuance / balance that comes from the polarities.
MR: +1 on DS sentiment that crumbling structures reveal the truth. The notion of a pristine US history—America the Beautiful, Manifest Destiny—has crumbled, and in its place we’re grappling on much more honest terms with how to become a “more perfect Union.”
Divisiveness and hate crimes get the headlines, but underneath I see a very positive storyline of the US getting honest about all kinds of areas of society where we need to address injustices of the past and do better: racial injustice, systemic white privilege, LGBTQ rights, #metoo abuses of power and so on. Thanks to open communication provided by the internet, social media, and video cameras in everyone’s pocket, we’re seeing the light of truth shining on all aspects of injustice and oppression throughout society.
Call me overly optimistic but I see us heading toward a more just society. It’s the whole MLK arc of history bending toward justice—it’s still slow but that arc is bending a few more degrees in recent years, and I don’t see that letting up. Look at the world’s response to Putin, essentially a global shunning of Russia. The world is waking up.
JB1: From my American perspective, the degree to which I see younger people being color blind. People are just people to them. They don’t say, ‘I met a black guy for instance.’ It’s just, ‘I met a guy.’ That seems fundamentally important to me.
Also scientific advancement, in particular CRISPR, mRNA advancements and NASA’s James Webb Telescope (shoutout to the engineers as well).
JB2: I’ll go super narrow here. I have young children, and what I see in them and their friends is a passion for people and the environment. There is a general curiosity of learning about the externalities of our consumption and how to abate it or change it in a thoughtful manner.
SG: One more I’d like to add. It seems to me the willingness of policymakers to inflict pain on the population to protect private interests has diminished immensely. I sincerely think they want to inflict less pain than before and are becoming more pragmatic than ideological (maybe to serve their own political careers, but I don’t care if it avoids hardship on people).
JM: These are great responses. Thank you for sharing. Reading this, I don’t know why I was struggling to think of an answer for myself. I’m optimistic and hopeful by nature so I found that strange.
Feeling a lot the quote MR shared from Etty Hillesum: “Everywhere things are both very good and very bad at the same time. The two are in balance, everywhere and always.”
Short Harvests
JM: The S&P 500 stood at 109 in December 1968. By July 1970, the index had declined 35 percent to 71. From there, the S&P 500 rose by 70 percent to 121 in January 1973, which exceed the previous high by 11 percent.
The index declined again, by 50 percent this time, to 61 by October 1974. The S&P 500 rose over the next five years and closed at 109 in August 1979, the exact same level as in 1968.
Even though nominal earnings grew over the period, the price paid for those earnings just dropped. The trailing price- to-earnings ratio (PE) was over 18 in 1968 and fell below 10 by the end.
SG: Yeah, I think this is a good template. Volatile / sideways while economic volatility is high leaving extremely low valuation 5-10y from now.
CT: A trader’s market.
DS: Lesson seems to be buy the dips and then scale out.
CT: I think about governments and institutions having a primary goal of harvesting volatility from the system. As long as they control the vol levers, everything works well (up only). Now we have vol levers that cannot be controlled (food, supply chain, inflation) which I translate as a more up, down, and sideways market.
DS: Great point, the “growth” lever of lowering interest rates is limited in its movement (can only move up/down so much).
SG: That’s an interesting frame. I need to think about this government primary goal of harvesting volatility. Do you think it’s a constant of governments or a feature of the current period/demographic pyramid?
CT: I think it’s a constant but often it is used outside of markets. Propaganda, strict laws, cultural rules (as a few examples) can all be used to control behavior which could contain unrest/volatility.
I think a lot changed after the Nixon administration (fiat standard) and then after 1981 interest rate peaks for the US once they realized how well Keynesian models can work if they are one direction and not mean reverting.
Combine this with the speed of technological deflation and there has been a perfect storm for the bond/equity risk parity trade golden era. Power tends to be the final boss for societies and the people in those societies. It will be defended at any cost.
Removing uncertainty and creating a more pleasant environment is the best way to maintain power until, of course, those uncertainties can no longer be contained.
Long Beatings
JM: DC love your team’s latest note.
“Put differently, whereas central bank policy was meant to be a stabilizer (calm things down when they get too hot, nudge activity up when the economy is down), it may now be doing the reverse: easing into a recovery (as has been the case over the past decade, and especially the past year), while potentially tightening into a slowdown.
In short, solving issues in the nominal economy is easy. Bank run? Print more money; Short on working capital? Print more money. Collateral issues? Print more money, swap for collateral. Problem solved.
In contrast, in the real economy, it’s a different story. Shortage of copper? Sure, start prospecting a new mine, spend 5-10 years of capex and hopefully revenues come in 10-15 years. Shortage of grain? Well, we missed planting season, nothing we can do there. Can’t print money to wind back time.
This takes us to the second level of thinking: that money can’t buy time, but time burns money. Almost every financial invention operates on the principle of drawing the future into the present (or vice-versa), circumventing the linear flow of time (at a cost of some discount rate) with respect to returns.
Optimized systems naturally don’t have redundancy, but redundancy is flexibility. It turns out we have none, and this lack of flexibility is causing tightness in the physical markets for everything, translating back into tightness in financial markets. Together, time and physical markets are already causing a tightness that is unrelated to monetary policy, with consequences that monetary policy is unable to fully control.”
And this part was just classic:
“The textbook definition of inflation involves a situation with ‘too much money chasing too few goods.’ This is the situation in which we are told we find ourselves, the solution to which is some degree of tightening, and it’ll all go away.
But while we feel a set of effects that correspond to this textbook definition (higher and rising price levels), it is clear that the drivers of this increased price level have nothing to do with ‘too much money.’ Ask the average household if they have ‘too much money’ and you’d risk getting a slap on the face.”
Short Aging
JM: Found this interesting from Tim O’Reilly.
“The inventions we most urgently need will take us in a very different direction than the consumer internet and social media revolution that is coming to an unsightly end.” This is because:
1. Consumer internet entrepreneurs lack many of the skills needed for the life sciences revolution.
2. Internet regulation is upon us.
3. Climate response is capital intensive, and inherently local.
4. The end of the betting economy.
DS: Very interesting points. A bit tied to Thiel’s stagnation thesis. I wonder if we lack the life science talent or if they simply struggle to commercialize, with regulation, lack of capital, etc.
CT: Something I’ve done over the past 10 years is track emerging markets (as measured by business opportunities) and capitalize early. Things like online content/SEO, FB ads, app store, amazon sellers, crypto. They all had similar profiles.
I’m starting to see the same for anti-aging, personalized health care, longevity. It seems we have passed the tipping point where that technology is available to be packaged by entrepreneurs versus health care professionals. I only expect this to accelerate.
In 3 to 5 years, I think you will see people offering custom gene expression modification for $997 on YouTube which will then lead to some sort of regulation. As an investor, this is where I would focus almost all my time if I wasn’t in crypto.
I think personal health, both physical and mental, will begin to attract an unbelievable amount of money in the next decade.
DS: can give this a strong +1 anecdotally. Started with fringes “aging is a disease” but what feels like it’s changing is the products that are available. Totally agree.
CT: I think that’s most interesting in the context of this group is how it is much more investable now. It’s very similar to startup investing versus health care investing.
DS: Totally, as it looks like CPG.
NH: Tony Robbins has published a new book on this subject, Life Force.
Short Reason
This excerpt from Stefan Zweig from his book The World of Yesterday was posted in the #history channel.
War does not permit itself to be coordinated with reason and righteousness. It needs stimulated emotions, enthusiasm for its own cause and hatred for the adversary. It lies in human nature that deep emotion cannot be prolonged indefinitely, either in the individual or in a people, a fact that is known to all military organizations. Therefore, it requires an artificial stimulation, a constant “doping” of excitement; and this whipping up was to be performed by the intellectuals, the poets, the writers and the journalists, scrupulously or otherwise, honestly or as a matter of professional routine. They were to beat the drums of hatred and beat them they did, until the ears of the unprejudiced hummed and their hearts quaked. In Germany, in France, in Italy, in Russia, and in Belgium, they all obediently served the war propaganda and thus the mass delusion and mass hatred, instead of fighting against it. The results were disastrous. There was no city, no group that had not fallen prey to this dreadful hysteria of hatred. Shakespeare was banned from the German stage, Mozart and Wagner from the French and English concert halls, German professors declared that Dante had been Germanic, the French that Beethoven had been a Belgian, intellectual culture was requisitioned without scruple from the enemy countries like grain and ore. It was not enough that thousands of peace-loving citizens were killing each other daily at the front. In the hinterland there was mutual berating and slandering of the great dead of the enemy countries, who had been slumbering in their graves for centuries. The mental confusion increased in absurdity. It soon became impossible to converse reasonably with anybody in the first war weeks of 1914.
