What We’re Reading (Week Ending 08 January 2023) - 08 Jan 2023
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 08 January 2023):
1. Base editing: Revolutionary therapy clears girl’s incurable cancer – James Gallagher
All other treatments for Alyssa’s leukaemia had failed.
So doctors at Great Ormond Street Hospital used “base editing” to perform a feat of biological engineering to build her a new living drug.
Six months later the cancer is undetectable, but Alyssa is still being monitored in case it comes back.
Alyssa, who is 13 and from Leicester, was diagnosed with T-cell acute lymphoblastic leukaemia in May last year.
T-cells are supposed to be the body’s guardians – seeking out and destroying threats – but for Alyssa they had become the danger and were growing out of control.
Her cancer was aggressive. Chemotherapy, and then a bone-marrow transplant, were unable to rid it from her body.
Without the experimental medicine, the only option left would have been merely to make Alyssa as comfortable as possible…
…The team at Great Ormond Street used a technology called base editing, which was invented only six years ago.
Bases are the language of life. The four types of base – adenine (A), cytosine (C), guanine (G) and thymine (T) – are the building blocks of our genetic code. Just as letters in the alphabet spell out words that carry meaning, the billions of bases in our DNA spell out the instruction manual for our body.
Base editing allows scientists to zoom to a precise part of the genetic code and then alter the molecular structure of just one base, converting it into another and changing the genetic instructions.
The large team of doctors and scientists used this tool to engineer a new type of T-cell that was capable of hunting down and killing Alyssa’s cancerous T-cells.
They started with healthy T-cells that came from a donor and set about modifying them.
- The first base edit disabled the T-cells targeting mechanism so they would not assault Alyssa’s body
- The second removed a chemical marking, called CD7, which is on all T-cells
- The third edit was an invisibility cloak that prevented the cells being killed by a chemotherapy drug
The final stage of genetic modification instructed the T-cells to go hunting for anything with the CD7 marking on it so that it would destroy every T-cell in her body – including the cancerous ones. That’s why this marking has to be removed from the therapy – otherwise it would just destroy itself.
If the therapy works, Alyssa’s immune system – including T-cells – will be rebuilt with the second bone-marrow transplant…
…”She’s the first patient to be treated with this technology,” said Prof Waseem Qasim, from UCL and Great Ormond Street.
He said this genetic manipulation was a “very fast-moving area of science” with “enormous potential” across a range of diseases…
…Dr Liu said the “therapeutic applications of base editing are just beginning” and it was “humbling to be part of this era of therapeutic human gene editing”, as science was now taking “key steps towards taking control of our genomes”.
2. Battered by Covid, China Hits Pause on Giant Chip Spending Aimed at Rivaling US – Bloomberg News
China is pausing massive investments aimed at building a chip industry to compete with the US, as a nationwide Covid resurgence strains the world’s No. 2 economy and Beijing’s finances.
Top officials are discussing ways to move away from costly subsidies that have so far borne little fruit and encouraged both graft and American sanctions, people familiar with the matter said. While some continue to push for incentives of as much as 1 trillion yuan ($145 billion), other policymakers have lost their taste for an investment-led approach that’s not yielded the results anticipated, the people said.
Instead, they’re seeking alternative ways to assist homegrown chipmakers, such as lowering the cost of semiconductor materials, the people said, asking not to be identified revealing sensitive negotiations.
That would mark a shift in Beijing’s approach toward an industry regarded as crucial to challenging American dominance and safeguarding Chinese economic and military competitiveness. It underscores how the country’s economic ructions are taxing Beijing’s resources and hobbling its chip ambitions — one of President Xi Jinping’s top priorities. That could have ramifications for spending in other critical areas, from the environment to defense…
…But the discussions now underway are in stark contrast to Beijing’s prior efforts of pouring colossal resources into the chip industry, including setting up the National Integrated Circuit Industry Investment Fund in 2014.
That vehicle lies at the heart of Xi’s unhappiness with Beijing’s prior philosophy. Known within the industry as the Big Fund, it drew about $45 billion in capital and backed scores of companies, including China’s chipmaking champions Semiconductor Manufacturing International Corp. and Yangtze Memory Technologies Co.
Xi’s administration grew frustrated that tens of billions of dollars funneled into the industry over the past decade haven’t produced breakthroughs that allow China to compete with the US on a more equal footing. In fact, SMIC and Yangtze, arguably the two most advanced Chinese semiconductor players, were crippled by US sanctions.
3. Mirror, Mirror on the Wall, Who Knew That Stocks Would Fall? – Jason Zweig
Countless hunches and gut feelings flicker through our consciousness over the course of a year. We naturally remember the ones that turn out to be right. The multitude of other hunches that turn out to be wrong go into our mental garbage can.
Looking back at yourself a year ago, what you know now has indelibly altered your perception of what you knew then.
This pattern, which psychologists call hindsight bias, makes us feel that we foresaw the future all along, what happened was inevitable and anybody who didn’t see it coming is a dope. It’s close to irresistible—and it’s an illusion.
That’s why I recommend an annual exercise I call the Hindsight Bias Buster.
Almost exactly a year ago, in the email newsletter I write for The Wall Street Journal, I asked subscribers to forecast, as of Dec. 31, 2022:
- the closing value of the Dow Jones Industrial Average;
- the total return of the S&P 500;
- the yield on the 10-year U.S. Treasury note;
- the annual rate of inflation;
- the price of bitcoin;
- the price of gold;
- the price of crude oil;
- and the best-performing major financial asset.
Earlier this month, I asked subscribers to recall their predictions from one year ago—or what they would have forecast.
Readers attempting to reconstruct their past projections said, on average, that they would have called for the Dow to close out 2022 at 34269 and that the S&P 500 would fall 1%. (The day before I sent out this year’s survey, the Dow had closed at 33947, and the S&P 500 was down 14.8% for the year to date.)
Readers estimated, on average, that they would have predicted bond yields to hit 3% and bitcoin to hit about $30,850. (The 10-year Treasury yielded 3.6% the day before, up from 1.4% at the time of my original survey. Bitcoin was at $16,970—down from just under $46,900 a year earlier.)
In real time, at the end of 2021, readers predicted that the Dow would finish 2022 at 36853, on average, and that the S&P 500 would gain 6%—much higher than they now recall. They forecast that interest rates would hit 2% and expected the price of bitcoin to top $53,900. Only a single reader predicted that energy, which is up almost 60% so far in 2022, would be the top performer…
…“Wow, wow,” said Mr. Jones when I read him his original responses.
“Obviously my assessment of the stock market at the time was largely influenced by what it had been doing up to that point,” he said. “And now I’m fitting my past projections to the current set of data! It’s so interesting to see how my thinking is influenced by what has happened since then.”
The meaning of the present is almost always hidden until it becomes the past—at which point you can’t reconstruct your earlier state of ignorance.
That makes it all too easy to fool yourself into thinking you knew what would happen all along—which, in turn, can delude you into thinking now that you know what will happen next.
4. What the Fed Gets Wrong – Barry Ritholtz
There seems to be a lot of confusion going on today with respect to inflation, interest rates, and ongoing Federal Reserve policy. A framework for exploring this has many parts: What the Fed (obviously) knows, how it express those views through police like FOMC rates, ZIRP, QE, QT, etc.
There remains the question of what the Fed is actually wrong about…
…What are the major errors that are currently driving Fed policy?
• Tardy: We all understand that Central Bank policy operates on a lag. History suggests that the Fed’s recognition of key market and economic indicators also is on an excessive lag. The result is Fed is always late to the party.
Consider: In the 2010s, the Fed remained on emergency footing from 2008, when they took rates to 0 (zero) until December 2015 (this created lots of distortions). Then again in the 2020s, they remained on emergency footing post-Covid, despite broad evidence of economic recovery.
The Fed was late to act on rising inflation, waiting a full year from the time CPI ran through their 2% target to raise rates (See chart at top). Today, it appears they are repeating that same error, late to recognize inflation peaked in June and goods’ prices have fallen dramatically.
• Services Inflation: What is the impact of the fastest increase in rates in history? High Fed Funds Rates are causing high mortgage rates which is in turn pricing many people out of buying residential real estate. The net result: Potential buyers become renters, which drives apartment prices higher. Owners Equivalent Rent is the largest portion of the CPI Services sector.
The perverse outcome is the Fed is making the CPI model show both higher and stickier inflation.
• The Wealth Effect: Jay Powell seems to be targeting assets prices, despite equities not being part of the dual mandate.
The reason for this is that the Fed has institutionally been “all in” on the Wealth Effect theory. The thinking here is that a rising stock market makes Americans feel wealthier, leading to more spending and higher inflation.
There are many problems with this claim, but let’s just give you the biggest two: Most Americans do not own equities; many of those who do have modest holdings in IRAs and 401ks that they won’t touch for years. Its hardly driving spending for 70-80% of consumers.
The second is simply confusing correlation with causation. The same underlying factors that drive higher stock prices – rising GDP, employment and wages – also drive consumer spending and inflation. Hence the Fed believes a rising stock market is what leads to inflation. If you stop to think about for even a moment, you will see they are utterly wrong about this.
5. China has started to sweet talk private sector again but actions speak louder than words – Wang Xiangwei
Over the past few years, China’s business tycoons have been a bundle of nerves. The country’s once soaring private sector have fallen down hard in the wake of unprecedented regulatory crackdowns on Big Techs and amid calls for common prosperity. Businesses ranging from e-commerce to education to real estate have seen their stock prices pummeled and their operations under increasing scrutiny. Their already gloomy prospects have been further dimmed by China’s three-year-old draconian Covid controls which have seriously disrupted production and supply chains. Above all, political uncertainty and concerns for their own personal wellbeing have made them jumpier.
As a result, many of China’s business elites slipped away and sought temporary shelter in foreign countries. An interesting pattern has emerged as to where they have their self-imposed unusually long “holidays” or “study tours”…
..No doubt, all of them are keeping a close watch on signals from the Chinese government on which way the wind is blowing in the wake of the Chinese Communist Party’s 20th congress in October when President Xi Jinping secured his third term as the party leader and packed the new leadership lineup with his allies with surprising ease…
…What is unexpected, however, is that the official readout signaled a remarkable change of tone towards the embattled private sector.
Compared to last year’s statement which focused on regulating wealth and preventing “barbaric” growth of capital when it came to private sector, the tone of this year’s statement is surprisingly friendly.
The readout urged strong support for private economy and private enterprises both in terms of policies and media publicity. It said that legal and institutional arrangements must be made to ensure the equal treatment of private firms and state-owned enterprises. Property rights of private firms and interests of entrepreneurs must be protected according to law, and officials at all levels should help private firms to solve their problems and do more practical work for their benefits.
More importantly, it said that greater efforts should be made to develop digital economy and support “platform enterprises” which usually refer to Big Techs such as Alibaba and Tencent Holdings, enabling them to “fully display their capabilities” in leading development, job creation and international competition…
…The change of tone is a good start but to regain the confidence of private sector, the Chinese leaders have much more to do.
Over the past decade, the government has consistently and publicly vowed to uphold the policy of working unswervingly to support and develop both the public sector and the non-public sector and giving them equal treatment.
The truth of the matter is that China’s overall private sector have taken one beating after another.
China’s regulatory clampdown on irrational growth in tech sector and its common prosperity campaign may have good intentions but the way those policies were implemented have spooked investors and raised fears about China’s future direction at home and abroad.
The consensus view is that China has shot itself in the foot by cracking down on its biggest tech companies. Despite repeated official clarifications, the common prosperity campaign has been widely interpreted as “robbing the rich to help the poor”.
The leaders may have signaled a change of tune towards private sector but the local authorities have not received the message. Over the past few days, this writer has heard complaints of mistreatment from several private businessmen and fund managers who have direct investments in the country.
One businessman who recently came to Hong Kong on way to a third country said that his businesses in multiple cities have received visits from the tax collectors who demanded them to pay back tax breaks and other subsidies the local authorities have previously given. The reason? The local authorities have run out of money because funding was diverted to mass testing and building makeshift hospitals over the past three years. The zero-Covid policy may have been dropped but their coffers have turned empty. The tax collectors were said to be polite but very firm that if the businesses did not pay promptly, they would soon launch very detailed tax audits.
This telling anecdote is just one of many challenges with which the private businessmen are grappling on a daily basis.
Broadly, to regain the confidence of private sector, Beijing must take concrete actions to honor its commitment to provide law-based protection to the property rights of private firms and interests of entrepreneurs. So far, there has been a lot of talk but little action..
6. Justifying Optimism – Morgan Housel
The constant human desire to one-up past successes, and the generational knowledge transfer, is a pure example of compounding in action.
Skateboarder Tony Hawk landed a 900 – two and a half spins – at the 1999 X Games. It was the biggest achievement the sport had ever seen, the equivalent of the four-minute mile.
It catapulted Hawk into legend status. His video game came out a year later and sold 30 million copies. Six Flags named a rollercoaster after him.
But here’s the craziest part of this story: fifteen years later, an eight-year-old landed a 900.
Hawk was also the first person to land a 720 (two spins) – a feat later accomplished by a second-grader.
A lot of sports work like that…
…Does the same hold true for technology, science, and business? Of course. A first-year med student today likely has more medical knowledge than an experienced senior doctor did 50 years ago. The average eight-year-old today knows things about technology that a computer science professor 30 years ago would find bewildering.
Innovation and advancement tend to compound. One person raises the bar over the previous limit, and that becomes the baseline for a new generation to aim for and build upon.
Part of that is a simple generational knowledge transfer. It’s pure compounding: People spend years or decades discovering a new truth, then the next generation begins their careers with those new truths.
Another part is driven by the need to one-up the current leader of a field. Charlie Munger says, “The world is not driven by greed; it’s driven by envy.” You see someone accomplish a new feat and think, “I should be able to do that too – and even better.”…
…As crazy as the world is, the core drivers of economic growth are still in place.
In his book The Birth of Plenty, investor William Bernstein writes that four things are necessary for long-term economic growth:
- Secure property rights.
- A scientific view of the world.
- Widely available and open sources of funding.
- Rapid communication and cheap transport of goods.
There is a long global history backing this up: When just one of those four is missing, progress stops. And as long as all four are in place, progress tends to take care of itself because of my first two points – stress-induced problem-solving and the compounding of knowledge.
As wild as things are – between Covid and political nonsense and inflation and market crashes – all four points are still in place. (The cost of transporting goods surged in 2021, but is already back to pre-Covid levels.)
7. 2022 Was One of the Worst Years Ever For Markets – Ben Carlson
This past year’s 18.1% loss was the 7th worst loss since the 1920s.
The bond market also had one of its worst years in history.
It was easily the worst year ever for the Bloomberg Aggregate Bond Market Index, which dates back to 1976.
In the 40+ years of calendar year returns there were only four down years before 2022:
- 1994 -2.9%
- 2013 -2.0%
- 2021 -1.5%
- 1999 -0.8%
The total return of -13% in 2022 was far and away the worst loss ever for this total bond market index.
There has only been one double-digit calendar year loss for 10 year U.S. treasuries since the 1920s. That was an 11.1% loss in 2009. Now we have two.
The benchmark U.S. government bond was down more than 15% in 2022, making it the worse year ever for bonds.
Add it all up and a 60/40 portfolio of U.S. stocks and bonds was down more than 16% in 2022. With both stocks and bonds down big this ended up being the third worst year ever for a diversified portfolio…
…I try to look at losses like this as sunk costs. They already happened. You can’t go back and change things now.
All that matters is what happens from here, not what happened in the past.
The beatings could continue until morale improves. There’s nothing that says markets will all of the sudden get better just because it’s a new year.
If you’re the type of person that likes to look for a silver lining in these things, there is some good news for investors going forward. The losses from 2022 have added yield to your portfolio…
…Expected returns are now higher.
I don’t have the ability to predict the timing or magnitude of those higher expected returns but there is now a much bigger cushion for investors than there has been in years as far as yields are concerned.
The other good news is every time we’ve ever had bad times in the past they turned out to be wonderful opportunities for long-term investors.
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. We currently have a vested interest in Tencent. Holdings are subject to change at any time.
