What We’re Reading (Week Ending 14 March 2021) - 14 Mar 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 14 March 2021):
1. The Fed Isn’t Printing As Much Money As You Think – Morgan Housel
The risk of rising inflation over the next few years is probably the highest it’s been in decades. Inflation happens when too much money chases too few goods, and Covid-19 closed a lot of businesses and gave people an unprecedented amount of money. The stars align.
That out of the way, let me cool things down: The Fed is printing a lot of money, but not nearly as much as it looks…
…Money supply has increased from $4 trillion a year ago to $18 trillion today.
A 450% increase!
That’s something you might see in a third-world country with hyperinflation.
But before you dump life savings into gold and build a bunker, here’s the punchline: The huge majority of the increase you’re seeing in this chart is not money printing or new money creation.
It’s an accounting rule change.
Here’s what happened.
The supply of money is measured a few different ways. M1, which this chart shows, measures money that’s readily available – mostly paper cash, coins, and checking accounts.
Another measure called M2 is a little broader. It includes money in savings accounts and retail money market accounts.
The difference between a checking and savings account is how often you can access your money. That might seem trivial but it explains most of what happened in this chart.
If you put money in a checking account, regulators make banks set aside a cushion as reserves in case they get into trouble. But if you put money into a savings account, regulators tell banks they don’t have to reserve anything. The catch is that it’s only considered a savings account if the consumer is allowed to make no more than six withdrawals per month.
It’s worked that way for years.
But then Covid hit, and regulators realized that having trillions of dollars in savings accounts with limited withdrawals was a burden as 22 million people lost their jobs.
So last April the Fed changed the rules and eliminated the six-withdrawal limit on savings accounts…
…But it changed the relationship between M1 and M2.
Savings accounts are measured in M2 and left out of M1. But once the six-withdrawal rule was removed, every savings account suddenly became, in the eyes of regulators and people who make these charts, a checking account.
So M1 exploded higher. Not because the Fed printed a bunch of money, but because trillions of dollars in savings accounts were reclassified as checking accounts.
2. Twitter thread on how the great physicist Richard Feynman developed deep understanding of a given topic – Sahil Bloom
Richard Feynman observed that complexity and jargon are often used to mask a lack of deep understanding. The Feynman Technique is a learning framework that forces you to strip away needless complexity and develop a deep, elegant understanding of a given topic. The Feynman Technique involves four key steps:
(1) Identify (2) ELI5 (“Explain It To Me Like I’m 5”) (3) Reflect & Study (4) Organize, Convey & Review
Let’s cover each step and how you can make this powerful framework work for you…
Step 1: Identify What is the topic you want to learn more about? Identify the topic and write down everything you know about it. Read and research the topic and write down all of your new learnings (and the sources of each). This first step sets the stage for what is to come.
Step 2: ELI5 Attempt to explain the topic to a child. Once again, write down everything you know about your topic, but this time, pretend you are explaining it to a child. Use simple language and terms. Focus on brevity.
Step 3: Reflect & Study Reflect on your performance in Step 2. How well were you able to explain the topic to a child? Where did you get frustrated? Where did you resort to jargon or get stuck? These are the gaps in your understanding. Read and study to fill them.
Step 4: Organize, Convey & Review Organize your elegant, simple language into a compelling story or narrative. Convey it to others. Test-and-learn. Iterate and refine your story or narrative accordingly. Review (and respect) your new, deeper understanding of the topic.
3. Write Simply – Paul Graham
There’s an Italian dish called saltimbocca, which means “leap into the mouth.” My goal when writing might be called saltintesta: the ideas leap into your head and you barely notice the words that got them there.
It’s too much to hope that writing could ever be pure ideas. You might not even want it to be. But for most writers, most of the time, that’s the goal to aim for. The gap between most writing and pure ideas is not filled with poetry.
Plus it’s more considerate to write simply. When you write in a fancy way to impress people, you’re making them do extra work just so you can seem cool. It’s like trailing a long train behind you that readers have to carry.
And remember, if you’re writing in English, that a lot of your readers won’t be native English speakers. Their understanding of ideas may be way ahead of their understanding of English. So you can’t assume that writing about a difficult topic means you can use difficult words.
Of course, fancy writing doesn’t just conceal ideas. It can also conceal the lack of them. That’s why some people write that way, to conceal the fact that they have nothing to say. Whereas writing simply keeps you honest. If you say nothing simply, it will be obvious to everyone, including you.
Simple writing also lasts better. People reading your stuff in the future will be in much the same position as people from other countries reading it today. The culture and the language will have changed. It’s not vain to care about that, any more than it’s vain for a woodworker to build a chair to last.
Indeed, lasting is not merely an accidental quality of chairs, or writing. It’s a sign you did a good job.
4. State of the Cloud 2021 – Bessemer Venture Partners
Top takeaways
1. Cloud companies have not just reset in the New Normal, but have thrived with a record-breaking market capitalization of more than $2 trillion. 2.There’s been a changing of the guard afoot: MT SAAS has overtaken FAANG. 3. Cloud multiples are rising to new heights, with both public and private cloud trading over 20x. 4. Cloud growth rates and access to capital are at all-time highs, with the average Cloud 100 company growing 80% YoY and $186 billion going into private cloud companies in 2020 alone. 5. Good-better-best of growth endurance is 70%-75%-80%. 6. GTM strategies have adapted in the New Normal; best practices include product-led growth, usage-based pricing, and the adoption of cloud marketplaces.
5. Interview: Patrick Collison, co-founder and CEO of Stripe – Noah Smith
N.S.: So, what are the three things that excite you most about the 2020s?
It’s hard to restrict to three! But here are the first that jump to mind:
First, the explosive expansion in access to opportunity facilitated by the internet. Sounds prosaic but I think still underestimated. Several billion people recently immigrated to the world’s most vibrant city and the system hasn’t yet equilibrated. When you think about how YouTube is accelerating the dissemination of tacit knowledge, or the number of creative outsiders who can now deploy their talents productively, or the number of brilliant 18 year-olds who can now start companies from their bedrooms, or all the instances of improbable scenius that are springing up… in the landscape of the global commons, the internet is nitrogen fertilizer, and we still have a long way to go — economically, culturally, scientifically, technologically, socially, and everything in between. I challenge anyone to watch this video and not feel optimistic.
Second, progress in biology. I think the 2020s are when we’ll finally start to understand what’s going on with RNA and neurons. Basically, the prevailing idea has been that connections between neurons are how cognition works. (And that’s what neural networks and deep learning are modeled after.) But it looks increasingly likely that stuff that happens inside the neurons — and inside the connections — is an important part of the story. One suggestion is that RNA is actually part of how neurons think and not just an incidental intermediate thing between the genome and proteins. Elsewhere, we’re starting to spend more time investigating how the microbiome and the immune system interact with things like cancer and neurodegenerative conditions, and I’m optimistic about how that might yield significantly improved treatments. With Alzheimer’s, say, we were stuck for a long time on variants of plaque hypotheses (“this bad stuff accumulates and we have to stop it accumulating”)… it’s now getting hard to ignore the fact that the immune system clearly plays a major — and maybe dominant — role. Elsewhere, we’re plausibly on the cusp of effective dengue, AIDS, and malaria vaccines. That’s pretty huge.
Last, energy technology. Batteries (88% cost decline in a decade) and renewables are well-told stories and the second-order effects will be important. (As we banish the internal combustion engine, for example, we’ll reap a significant dividend as a result of the reduction in air pollution.) Electric aircraft will probably happen, at least for shorter distances. Solar electricity is asymptoting to near-free, which in turn unlocks other interesting possibilities. (Could we synthesize hydrocarbons via solar powered atmospheric CO2 concentration — that is, make oil out of air — and thereby render remaining fossil fuel use-cases carbon neutral?) There are a lot of good ideas for making nuclear energy safer and cheaper. France today gets three quarters of its electricity from nuclear power… getting other countries to follow suit would be transformatively helpful in averting climate change.
There’s lots more! New semiconductor technology. Improved ML and everything that that enables. Starlink — cheap and fast internet everywhere! Earth-to-earth travel via space plus flying cars. The idea of urbanism that doesn’t suck seems to be gaining traction. There’s a lot of good stuff on the horizon.
6. The Biggest Economic Experiment in History – Ben Carlson
The Great Depression left an indelible mark on household finances because there was no government backstop. No unemployment insurance. No Social Security. No checks in the mail.
So a generation of frugal misers was born.
I don’t think we have to worry about that happening this time around. If anything, people are worried about the opposite — a nation of risk-takers and speculators.
It’s way too early to draw any concrete conclusions just yet but the total amount of money that’s helped get people through the pandemic is staggering…
…But the Post notes the total tab is $2.2 trillion to workers and families in total from each of these bills. That’s more than the government spends on Social Security, Medicare and Medicaid combined in a given year.
There are, of course, people who are worried about this level of spending. Who is going to pay for all of this government debt? What happens if this overheats the economy and we get inflation?
These concerns are valid. There are risks here.
It should be noted that government debt doesn’t ever truly get paid back. It’s not a mortgage. One of the ways you “pay” it back is through higher economic growth and inflation.
It’s understandable why people are nervous about the prospect of inflation from all this spending. The first thing people think about when they hear the word ‘inflation’ is higher prices. Why would anyone want to pay higher prices for goods and services?
But inflation does not exist in a vacuum and it’s not all bad.
The entire reason the Fed is willing to let inflation run a little hot is because they’re trying to get to full employment.1 If that happens companies will either have to become more productive and efficient or pay more to attract talent.
This is one of the things most people miss when thinking about the ramifications of inflation. Yes, prices rise and your standard of living becomes more expensive but the only way we get sustained inflation is through wage increases. And that higher inflation could come with higher economic growth as well. The whole pie could get bigger.
You can have both at the same time…
…Listen, I have no idea what’s going to come from all of this spending. No one does. This is unprecedented. I’m trying to see both sides of the potential outcomes.
We could see the roaring 20s. GDP growth of 4-5% over the next 3-4 years is on the table.
We could see inflation get out of control, which causes the Fed to raise rates or the government to raise taxes or both, leading to a recession.Financial assets could take off from a booming economy or struggle because of inflation.
All I know is this is an economic experiment on a massive scale the likes of which this country has never seen before.
And for once, the lower and middle class appear to be the main beneficiaries.
7. The day the growth trade topped – Josh Brown
One of the myriad ways you can spot a veteran investor amid a crowd of new or inexperienced investors – the veteran doesn’t need a reason to explain everything that’s happened. Veterans, after ten or twenty years, come to accept the randomness inherent in the game. Until you can accept that there isn’t always a reason for everything, it’s hard to move forward in this business.
Sometimes psychology just changes and sellers become in the mood to buy, or buyers get in the mood to sell. The media takes note of this shift in behavior and attitudes, and it sets out to find a reason for it afterwards. They do this because it satisfies the audience’s very human need for cause and effect. We all want linearly plotted story lines that have a beginning, a middle and an end. We want to know what force caused this or that reaction, because – our minds reason – if we see that force abate, then so too will we see the reaction subside.
This week it’s rising rates. Treasury bond rates are rising which is said to be bad for high multiple growth stocks therefore if we can just get ahead of when rates might stop rising, maybe people will stop selling high multiple growth stocks and start buying them again.
Now, of course, this “analysis” completely disregards the fact that stocks and interest rates have a history of rising together. This happens all the time. Stocks have risen in 13 of the last 15 rising rate environments. Tech stocks too. High multiple tech stocks too.
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. We don’t have a vested interest in any companies mentioned. Holdings are subject to change at any time.
