What We’re Reading (Week Ending 01 August 2021) - 01 Aug 2021
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” We (the co-founders of Compounder Fund) read widely across a range of topics, including investing, business, technology, and the world in general. We want to regularly share the best articles we’ve come across recently. Here they are (for the week ending 01 August 2021):
1. China Discovers the Limits of Its Power – Michael Schuman
The dispute between Australia and China has been brewing for years. Like the U.S. and other democracies, Australia embraced engagement with China, and the two economies became entwined in a highly profitable symbiotic relationship: Australia’s treasure trove of natural wealth became indispensable to China’s rapidly expanding industrial machine. The countries even entered into a free-trade agreement in 2015.
The ink had barely dried, however, when Canberra began to grow nervous about Chinese President Xi Jinping’s bellicose foreign policy. Turnbull, who as prime minister from 2015 to 2018 was instrumental in forging Australia’s response, wrote in his book A Bigger Picture that China “became more assertive, more confident and more prepared to not just reach out to the world … or to command respect as a responsible international actor … but to demand compliance.”
Australia more openly criticized China’s encroachments on the South China Sea—vital for Australian shipping—where Beijing built military installations on man-made islands to solidify its contested claim to nearly the entire waterway. Turnbull also grew alarmed by the sums of Chinese money sloshing around Australian politics, spent to sway government policy in China’s favor. That led to new legislation designed to curtail foreign influence. Then in 2018, Turnbull’s government banned Chinese telecom giant Huawei from supplying equipment for Australia’s 5G networks, considering it too much of a security risk to essential infrastructure. Relations really fell off a cliff in April 2020, when current Prime Minister Scott Morrison’s government called for an independent investigation into the origins of the coronavirus outbreak—a prickly issue in Beijing, where such demands are perceived as politically motivated efforts to tarnish China.
Beijing duly went ballistic. (Hu’s chewing-gum comment was part of the angry response.) To force Canberra to back down, the Chinese government unsheathed what has become its weapon of choice against recalcitrant nations: economic coercion. Among other measures, Chinese authorities suspended the export licenses of major Australian beef producers; imposed punitive tariffs on barley and wine; and instructed some power plants and steel mills to stop buying Australian coal. In all, Wilson, of the Perth USAsia Centre, figures that Australia lost $7.3 billion in exports over a 12-month period. Some industries have been hit especially hard: The rock-lobster industry, almost totally dependent on Chinese diners, was decimated after Beijing effectively banned the delicacy.
Canberra wouldn’t budge, though. “We have to simply stand our ground. If you give into bullies, you’ll only be invited to give in more,” Turnbull told me. “There is a lot to be said for nuance and artful diplomacy, but you can’t compromise on your core values and your core interests.”
So far at least, the Australians haven’t had to. Beijing hasn’t been able to inflict sufficient pain to compel Canberra to concede. Wilson notes that the sacrificed exports amount to a mere 0.5 percent of Australia’s national output—not pocket change, but hardly a crisis, either. A few industries have adapted by diversifying their customer bases. Some coal blocked by China was redirected to buyers in India. And there was a limit to how hard Beijing could squeeze: Australian iron ore is the lifeblood of China’s construction industry, and Australian lithium underpins the Chinese electric-vehicle industry.
2. ‘The Ledger and the Chain’ Review: Human Cost – Harold Holzer
Isaac Franklin, already an experienced slave-driver, joined forces in the 1820s with his nephew John Armfield to create a human-trafficking juggernaut. The trans-Atlantic slave trade had been illegal since 1808, but no laws prevented cash-strapped owners from separating families and designating “surplus” men, women and children for deportation to places in the country where demand for forced labor far outstripped supply. The result was a “federally protected internal market for human beings.” By the mid-1830s, Franklin and Armfield’s “slave factory,” as one abolitionist called it, was trafficking up to 1,200 enslaved people each year—with much profit and no regrets. Originally headquartered at an innocuous-looking Alexandria, Va. town house—its high walls concealed outdoor slave pens and a “black hole” dungeon in the cellar—the enterprise grew exponentially as prices soared. Eventually a third colleague, Richmond-based Rice Ballard, helped widen the firm’s reach.
The trio specialized in driving enslaved people into Mississippi and New Orleans, where planters looking to expand their rice, sugar and cotton crops lined up to offer hundreds of dollars each for field hands, house servants and, as Mr. Rothman reminds us, sex slaves. The traders took turns driving coffles of heavily shackled, ill-clad, barely fed chattel as many as 1,000 miles on foot to be sold publicly at outdoor auctions or hotel lobbies. The firm became the first to acquire ships of its own, so that they could transport thousands more from the Chesapeake in stultifying confinement below decks. Those people who took ill in sweltering holding pens, at sea, or on forced marches received only enough attention to preserve their market value. Those who succumbed to death from measles, cholera, smallpox, starvation or exhaustion were left behind like scrap. Along the way, guards intimidated adult males with whips and rifles and routinely dragged women into the woods to rape them.
Mr. Rothman has done an astounding amount of research into period narratives testifying to the brutality endured by trafficking victims. He also uncovered many gruesome period advertisements for “Likely Slaves” and “Fancy” women (translation: candidates for forced sex). The author acknowledges that he often grieved over the material he uncovered, and “The Ledger and the Chain” can be equally painful to read.
The “ledger” part of the narrative presents mind-numbing data on the business side of slave-trading and its reliance on a colluding network of Southern and Northern banks, insurance companies, cotton brokers, judges and sheriffs. One cannot help but be reminded of the compulsive Nazi record-keeping of a century later. Then there are the parallel, tragic stories of the “chain”—the physical and psychological terror that involuntary relocation exacted on defenseless families and individuals. What Mr. Rothman calls “the desperation, and the rage of the enslaved . . . subjected to white whims” still tear at the heart.
Though antislavery newspapers periodically singled out Franklin and Armfield as “Cannibals” who “trade in blood,” the partners survived the period not only unmolested but ultimately in splendor. By the time some Southern states finally began banning domestic slave imports, the three had bought lavish town homes and bucolic plantations, acquired (and mistreated) their own slaves, and in semi-retirement gained community respect equal to their economic power. Seldom mentioned within white society was that, as younger men, each also had used enslaved women for their pleasure, boasting lasciviously to each other about the “hard work” required of their “one eyed men.” When Franklin and Armfield married white women, they simply got rid of their non-consensual sex partners along with the sons and daughters they had produced. How was it possible, asked one anguished rape victim as Rice Ballard arranged for her banishment, “for the father of my children to sell his own offspring?” Such appeals fell on deaf ears.
3. Engineers of the Soul: Ideology in Xi Jinping’s China by John Garnaut – Bill Bishop
In Xi’s view, shared by many in his Red Princeling cohort, the cost of straying too far from the Maoist and Stalinist path is dynastic decay and eventually collapse.
Everything Xi Jinping says as leader, and everything I can piece together from his background, tells me that he is deadly serious about this totalising project.
In retrospect we might have anticipated this from the Maoist and Stalinist references that Xi sprinkled through his opening remarks as president, in November 2012.
It was made clearer during Xi Jinping’s first Southern Tour as General Secretary, in December 2012, when he laid a wreath at Deng’s shrine in Shenzhen but inverted Deng’s message. He blamed the collapse of the Soviet Union on nobody being “man enough” to stand up to Gorbachev and this, in turn, was because party members had neglected ideology. This is when he gave his warning that we must not forget Mao, Lenin or Stalin.
In April 2013 the General Office of the Central Committee, run by Xi’s princeling right hand man, Li Zhanshu, sent this now infamous political instruction down to all high level party organisations.
This Document No. 9, “Communique on the Current State of the Ideological Sphere”, set “disseminating thought on the cultural front as the most important political task.” It required cadres to arouse “mass fervour” and wage “intense struggle” against the following “false trends”:
- Western constitutional democracy – “an attempt to undermine the current leadership”;
- Universal values of human rights – an attempt to weaken the theoretical foundations of party leadership.
- Civil Society – a “political tool” of the “Western anti-China forces” dismantle the ruling party’s social foundation.
- Neoliberalism – US-led efforts to “change China’s basic economic system”.
- The West’s idea of journalism – attacking the Marxist view of news, attempting to “gouge an opening through which to infiltrate our ideology”.
- Historical nihilism – trying to undermine party history, “denying the inevitability” of Chinese socialism.
- Questioning Reform and Opening – No more arguing about whether reform needs to go further.
There is no ambiguity in this document. The Western conspiracy to infiltrate, subvert and overthrow the People’s Party is not contingent on what any particular Western country thinks or does. It is an equation, a mathematical identity: the CCP exists and therefore it is under attack. No amount of accommodation and reassurance can ever be enough – it can only ever be a tactic, a ruse.
Without the conspiracy of Western liberalism the CCP loses its reason for existence. There would be no need to maintain a vanguard party. Mr Xi might as well let his party peacefully evolve.
We know this document is authentic because the Chinese journalist who publicised it on the internet, Gao Yu, was arrested and her child was threatened with unimaginable things. The threats to her son led her to make the first Cultural Revolution-style confession of the television era.
In November 2013 Xi appointed himself head of a new Central State Security Commission in part to counter “extremist forces and ideological challenges to culture posed by Western nations”.
Today, however, the Internet is the primary battle domain. It’s all about cyber sovereignty.
4. DeepMind’s AI has finally shown how useful it can be – Grace Browne
Marcelo Sousa, a biochemist at the University of Colorado Boulder, had spent ten years trying to crack a particularly tricky puzzle. Sousa and his team had collected reams of experimental data on a single bacterial protein linked to antibiotic resistance. Working out its structure, they hoped, would help to find inhibitors that could stop that resistance from building. But, year after year, the puzzle remained unsolved. Then along came AlphaFold. Within 15 minutes, DeepMind’s machine learning system had solved the structure.
It’s the kind of result that could soon be repeated in labs across the world. In a paper published in the journal Nature, DeepMind has released over 350,000 predicted protein structures. Included in that is almost the entirety of the human proteome, the proteins that make up the human body. Within these predicted structures could lie key insights into diseases such as cancer and Alzheimer’s, the possibility of new drugs and even better ways to recycle plastic.
To put that number into context, the Universal Protein database, a collection of all the proteins that science has uncovered thus far, contains over 180 million protein sequences. These protein sequences tell us how the amino acids in a protein are ordered, but that’s only the beginning of the puzzle. To really understand how proteins function in the body, we need to know how that sequence determines the 3D structure of the protein – and that is a much more difficult task than simply knowing the right order of amino acids.
Of those 180 million protein sequences, scientists have so far worked out the structure of just 180,000 proteins. DeepMind’s new database provides predictions for more than double the number of known protein structures to date. Now biologists will be able to work on understanding how proteins interact and function – and beyond that, designing new proteins, enabling quicker drug discovery, deciphering disease-causing gene variations and more. “There’s much more to proteins than structure, and so we need to bring it together,” says Janet Thornton, a director emeritus of EMBL’s European Bioinformatics Institute. “It’s one component in that broader understanding of how life works.”
In the coming months, the AlphaFold team plans to release 100 million protein structures. “We’ll go from protein structures being a very precious resource to [them] dropping at every street corner,” says John Jumper, AlphaFold lead researcher.
AlphaFold cracked the protein folding problem back in December 2020, when the DeepMind team won at CASP, the Critical Assessment of Protein Structure Prediction. At the time, the company promised it would make the data and code openly available. Less than eight months later, in July 2021, DeepMind published AlphaFold 2’s full code and methodology in Nature, and now it has announced that it will all be free to use through a partnership with the European Molecular Biology Laboratory (EMBL) in order to share this massive resource, which will be called the AlphaFold Protein Structure Database. “We believe that this represents the most significant contribution AI has made to advancing the status of scientific knowledge to date,” DeepMind’s CEO and co-founder Demis Hassabis said at a press briefing.
5. Twitter thread on how Robinhood’s insiders are enriched during its IPO – Christopher Bloomstran
For those that haven’t read Robinhood’s 360-page S-1 and subsequent registration amendment, some brief observations follow on some of the most egregious aspects of one of the most one-sided, enrich the insider casino offerings I’ve ever seen, and there have been some doozies. 1/…
…Robinhood, who in December paid a $65 million fine (without admitting or denying guilt, wink) for best execution and payment for order flow alleged violations, will raise on the order of $2.3 billion from new shareholders in its upcoming IPO. What does The IPO investor get? 3/
The expected $2.3B brought to the party by new shareholders represents almost 30% of all of capital raised since 2013, including proceeds raised in the offering. For their money these new “investors” will only own 7% of the company and far less voting rights. Dilution, baby. 4/…
…New shareholders will bring $2.3B to the party, over 29% of all of the capital raised since 2103. For their money they will own 7% of the company. Did I already mention dilution? Wait until you see the dilution in book value and evisceration of per share book value. 20/
Cash in the firm will total about $7 billion with the addition of proceeds from the IPO. So how do you get to a ~$34B valuation? On fundamentals, 2020 REVENUES totaled $959m. 3/31 quarterly revs were $522m & 6/30 are estimated by the company at a range of $546 and $574m. 21/
At the midpoint, sequential revenues were up 7.3%, growing fast but decelerating in a hurry…In fact, monthly revenues in March of this year actually declined from February. The company reports $81 billion in assets under custody at March 31 and 18 million accounts. 22/
That works out to a whopping $4,444 per account (the median must be even WAY lower). The company further reports annual revenue per user of $137. No doubt some averaging is involved, but what they don’t report is that $137 in revenues from a $4,444 account is 3% per year. 23/
On those 18 million $4,444 accounts, total assets under custody break down as: $65 billion in equities (AMC, GME & TSLA for sure) $2B options $11.6B crypto (up from $3.5B at 12/31 & $481m a year ago) $7.6B cash ($5.4B) margin Total assets under custody total $81B. 24/
14% of customer assets are crypto! You don’t see any bonds. You don’t see any mutual funds. Half of transaction revenue, which are 81% of firm revenues, come from OPTION rebates, while options at market value account for only $2B of customer assets. Tell me its not a casino. 25/
Option trading should definitely be allowed for the inexperienced, small, retail “investor.” This is how you get experience, and initiated. On assets held as crypto, these “assets” can neither be transferred in our ACAT’d out. They must be transacted while in the hood. 26/…
…17% of firm revenues were earned in Q1 from crypto transaction “rebates,” up from 4% in the prior quarter. Wile $HOOD supports 7 cryptos for trading, no less than 34% of crypto revenues were from DOGECOIN! Hilarious reading this. I’m probably wrong about this being a casino. 28/
In the first quarter alone, “customers” traded $88B of crypto against $11.6B held at 3/31 and $3.5B at year-end 2020. Definitely not a casino, but a platform encouraging the long-term ownership of investments. You think new “customers” learn all about the coffee can approach? 29/
6. Thinking About Macro – Howard Marks
In January’s memo Something of Value, I described the way my genetic makeup, early experiences, and success in blowing the whistle on some unsustainable financial innovations and market excesses had turned me into something of a knee-jerk skeptic. My son Andrew called this to my attention while our families lived together last year, and what he said struck a responsive chord.
The old me likely would have latched onto today’s high valuations and instances of risky behavior to warn of a bubble and the subsequent correction. But looking through a new lens, I’ve concluded that while those things are there, it makes little sense to significantly reduce market exposure:
- on the basis of inflation predictions that may or may not come true,
- in the face of some very positive counterarguments, and
- when the most important rule in investing is that we should commit for the long run, remaining fully invested unless the evidence to the contrary is absolutely compelling.
Finally, I want to briefly touch on the level of today’s markets. Over the four or five years leading up to 2020, I was often asked whether we were in a high yield bond bubble. “No,” I answered, “we’re in a bond bubble.” High yield bonds were priced fairly relative to other bonds, but all bonds were priced high because interest rates were low.
Today, we hear people say everything’s in a bubble. Again, I consider the prices of most assets to be fair relative to each other. But given the powerful role of interest rates in determining those prices, and the fact that interest rates are the lowest we’ve ever seen, isn’t it reasonable that many asset prices are the highest we’ve ever seen? For example, with the p/e ratio of the S&P 500 in the low 20s, the “earnings yield” (the inverse of the p/e ratio) is between 4% and 5%. To me, that seems fair relative to the yield of roughly 1.25% on the 10-year Treasury note. If the p/e ratio were at the post-World War II average of 16, that would imply an earnings yield of 6.7%, which would appear too high relative to the 10-year. That tells me asset prices are reasonable relative to interest rates.
Of course, it’s one thing to say asset prices are fair relative to interest rates, but something very different to say rates will stay low, meaning prices will stay high (or rise). And that leads us back to inflation. It isn’t hard to imagine rates increasing from here, either because the Fed lifts them to keep the economy from overheating or because rising inflation requires higher rates in order for real returns to be positive (or both). While the possibility of rising rates (and thus lower asset prices) troubles us all, I don’t think it can be said that today’s asset prices are irrational relative to rates.
7. MUM: A new AI milestone for understanding information – Pandu Nayak
When I tell people I work on Google Search, I’m sometimes asked, “Is there any work left to be done?” The short answer is an emphatic “Yes!” There are countless challenges we’re trying to solve so Google Search works better for you. Today, we’re sharing how we’re addressing one many of us can identify with: having to type out many queries and perform many searches to get the answer you need.
Take this scenario: You’ve hiked Mt. Adams. Now you want to hike Mt. Fuji next fall, and you want to know what to do differently to prepare. Today, Google could help you with this, but it would take many thoughtfully considered searches — you’d have to search for the elevation of each mountain, the average temperature in the fall, difficulty of the hiking trails, the right gear to use, and more. After a number of searches, you’d eventually be able to get the answer you need.
But if you were talking to a hiking expert; you could ask one question — “what should I do differently to prepare?” You’d get a thoughtful answer that takes into account the nuances of your task at hand and guides you through the many things to consider.
This example is not unique — many of us tackle all sorts of tasks that require multiple steps with Google every day. In fact, we find that people issue eight queries on average for complex tasks like this one.
Today’s search engines aren’t quite sophisticated enough to answer the way an expert would. But with a new technology called Multitask Unified Model, or MUM, we’re getting closer to helping you with these types of complex needs. So in the future, you’ll need fewer searches to get things done…
…Language can be a significant barrier to accessing information. MUM has the potential to break down these boundaries by transferring knowledge across languages. It can learn from sources that aren’t written in the language you wrote your search in, and help bring that information to you.
Say there’s really helpful information about Mt. Fuji written in Japanese; today, you probably won’t find it if you don’t search in Japanese. But MUM could transfer knowledge from sources across languages, and use those insights to find the most relevant results in your preferred language. So in the future, when you’re searching for information about visiting Mt. Fuji, you might see results like where to enjoy the best views of the mountain, onsen in the area and popular souvenir shops — all information more commonly found when searching in Japanese.
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. Of all the companies mentioned, we currently have a vested interest in Alphabet (parent of Google). Holdings are subject to change at any time.
