What We’re Reading (Week Ending 18 December 2022) - 18 Dec 2022
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 18 December 2022):
1. Why Competitive Advantages Die – Morgan Housel
“Being right is the enemy of staying right because it leads you to forget the way the world works.” – Jason Zweig. Buddhism has a concept called beginner’s mind, which is an active openness to trying new things and studying new ideas, unburdened by past preconceptions, like a beginner would. Knowing you have a competitive advantage is often the enemy of beginner’s mind, because doing well reduces the incentive to explore other ideas, especially when those ideas conflict with your proven strategy. Which is dangerous. Being locked into a single view is fatal in an economy where reversion to the mean and competition constantly dismantles old strategies…
…Brands are hard to build and even harder to span across generations. You can do everything right and still fail because customers don’t want to be associated with products of their parents’ generation. Morgan Stanley could make the indisputably best robo advisor in the world and millennials would still prefer Betterment. That’s how Charles Schwab blossomed in the 1980s and 1990s; with a brand baby boomers felt was theirs, not their parents’. One of my goals as a writer is to bow out the moment I realize I’m too old to understand how the game is played anymore. Companies, with indefinite time horizons, have to keep trying. A few of them pull it off; more often it’s painful to watch.
2. The Next Frontier in Carbon Capture is a Hungry Bacterium – Illumina
Primitive microbes, or those found in extreme environments such as hydrothermal vents in the deep sea, have been converting carbon monoxide (CO) and carbon dioxide (CO2) into fuel for billions of years. Simpson and Foster first took a collection of microbes that were known to do this and began feeding them gases from a steel mill. In that initial screening and discovery stage, they found that an anaerobic bacterium called Clostridium autoethanogenum possessed an ancient pathway that could ferment both CO and CO2, effectively converting it into ethanol under the right conditions. Ethanol, in turn, can be made into polyester fabrics, aviation fuel, and—of course—alcohol…
…Illumina’s technologies helped LanzaTech to genetically modify C. autoethanogenum to synthesize acetone—an important solvent and chemical building block—from industrial emissions. Today, acetone is made exclusively petrochemically from fresh fossil fuels, but in the early 1900s it was produced by fermentation from sugars into a mixture of acetone, butanol, and ethanol. Due to substrate cost and low selectivity, the process was eventually abandoned over the course of the last century, but the strains were preserved and LanzaTech used that collection as a starting point.
“The initial hope was that some of these strains would also be able to utilize the gases we work with,” Köpke says. “Unfortunately, that was not the case and the collection of microbes was sitting in the corner for several years. Advancements in next-generation sequencing technology allowed us to revisit the collection.” Illumina’s sequencing technology helped LanzaTech identify the microbial genes responsible for making acetone, and with those sequences in hand, their researchers synthesized and transferred them into their organism. Acetone is used as a solvent for cosmetics, paints, electronics, and consumer products, and can be used in manufacturing acrylic glass—in which case, the formerly atmospheric carbon is locked away practically forever in a stable, solid form. “You can achieve not only carbon neutrality, but actual carbon-negative production,” says Köpke.
3. The mortgage time bomb ticking beneath Poland’s banks – Raphael Minder
In 2006, Polish couple Marek and Małgorzata Rzewuski bought a house on the outskirts of Warsaw because they were expecting a child and “we wanted more space and our own garden”.
Like hundreds of thousands of other Polish homebuyers at the time, they were advised by their bank to get a mortgage in Swiss francs to benefit from lower interest rates in Switzerland than in Poland. Nobody discussed the flip side of introducing a foreign exchange risk into a 30-year mortgage of SFr200,000 ($205,000).
“This was presented as the best opportunity on the market,” Marek recalls. “The Swiss franc was very stable and very popular and we knew many people who were doing the same.”
Two years later, however, the global financial crisis struck. Investors flocked to the Swiss franc as a haven from the market turmoil, and its value surged against the Polish zloty and other currencies. The franc is now worth more than double its exchange rate of 2 zlotys before the crisis.
The lending practice in effect ended in 2008. But in the years since, it has become a time bomb for the Polish banking sector as customers like the Rzewuskis have begun winning lawsuits to force their banks to bear the cost of a currency bet that went spectacularly wrong.
If mortgage holders continue to win their court battles, officials and bankers warn that some lenders could collapse.
“It’s my obligation to raise the red flag, because pretending that everything is fine is going to have some dramatic consequences,” says Jacek Jastrzębski, chairman of the KNF, Poland’s financial watchdog…
…If courts decide that every bank must bear the full cost of their Swiss investments, Jastrzębski fears at least one or two may collapse.
One has already fallen. The country’s 10th-largest lender, Getin Noble, had to be rescued in September by the Polish state bank guarantee fund and a consortium of banks. The 10.3bn zloty ($2.2bn) bailout was Poland’s largest since the Soviet era.
Getin had already suffered several years of losses due to its aggressive sale of subprime products, but it was also heavily exposed to the Swiss franc, which accounted for one-quarter of its loan portfolio.
Polish banks have provisioned a combined 30bn zlotys to cover their Swiss-franc lending. But their final bill could rise by another 100bn zlotys if the judiciary rules that they should have received zero interest rate income on invalid Swiss-franc mortgages, according to Jastrzębski.
Polish courts have already annulled many Swiss-franc mortgages, after ruling that banks used “abusive” foreign exchange rates compared with those of the National Bank of Poland.
But the court battle has recently shifted on to the question of whether banks were entitled to charge customers for using their capital until their mortgages were annulled, an issue that was also brought last month by a Warsaw court before the European Court of Justice.
If courts in Poland and Europe side with consumers, the potential fallout would be worse. Up to five banks would be pushed to the brink of collapse in a worse-case scenario, warns Cezary Stypułkowski, mBank chief executive.
4. Fusion energy breakthrough by US scientists boosts clean power hopes – Tom Wilson
US government scientists have made a breakthrough in the pursuit of limitless, zero-carbon power by achieving a net energy gain in a fusion reaction for the first time, according to three people with knowledge of preliminary results from a recent experiment.
Physicists have since the 1950s sought to harness the fusion reaction that powers the sun, but no group had been able to produce more energy from the reaction than it consumes — a milestone known as net energy gain or target gain, which would help prove the process could provide a reliable, abundant alternative to fossil fuels and conventional nuclear energy.
The federal Lawrence Livermore National Laboratory in California, which uses a process called inertial confinement fusion that involves bombarding a tiny pellet of hydrogen plasma with the world’s biggest laser, had achieved net energy gain in a fusion experiment in the past two weeks, the people said…
…“If this is confirmed, we are witnessing a moment of history,” said Dr Arthur Turrell, a plasma physicist whose book The Star Builders charts the effort to achieve fusion power. “Scientists have struggled to show that fusion can release more energy than is put in since the 1950s, and the researchers at Lawrence Livermore seem to have finally and absolutely smashed this decades-old goal.”
5. Twitter thread on the implications of the US government’s breakthrough in nuclear fusion – Wilson Ricks
The National Ignition Facility (NIF) has achieved net energy gain from fusion! This is incredibly exciting scientifically, but what does it mean for the future of energy? In all likelihood, very little.
NIF uses inertial confinement fusion, which involves shooting ultra high-powered lasers into a small capsule containing a deuterium-tritium fusion fuel pellet. The surface the pellet heats, causing an implosion that crunches the interior until (hopefully) fusion is achieved.
In this particular instance, it appears that NIF successfully induced a fusion reaction that generated more energy than was originally delivered to the pellet via the lasers. This is Net Gain, a milestone that fusion engineers have been pursuing for half a century.
So as a scientific and symbolic achievement, this is huge. But how much closer does it put us to ‘limitless clean energy’? Unfortunately not much closer at all. For inertial confinement fusion, there’s a VERY long way to go between net gain and viable electricity generation.
To explain just how far, let’s look at the power balance of this experiment. If the reports are correct, the fusion reaction generated 2.5 MJ, compared to 2.1 MJ of laser power.
BUT, the huge lasers at NIF are less than 1% efficient, so to generate more fusion energy than actual input energy to the facility, you’d need to increase the yield 100x…
Plus, the fusion power is in the form of heat and radiation, and needs to be converted back to electricity. Assuming a 40% steam cycle efficiency, that’s another 2.5x increase in required yield. So we need a fusion reaction *250x MORE POWERFUL* to achieve true electric net gain.
6. An Interview with Coinbase Founder and CEO Brian Armstrong about FTX and Crypto Realities – Ben Thompson and Brian Armstrong
What’s your take? I mean, you jumped to FTX, what’s your take on the FTX situation?
BA: Oh, well, I mean, FTX, what can I say about it? I mean, it appears that a massive fraud was committed. I think that customer funds appear to have been moved over to his hedge fund that he owned 90% of, and that those customer funds were lost. I mean, this is a violation not only of the terms of service as it’s written as far as I understand it, but it’s also probably just against the law and outright fraud.
It’s been pretty bizarre to kind of watch the whole thing unfold, primarily because I do feel like mainstream media has given a lot of softball interviews, and even this tweet back and forth with Maxine Waters very politely asking him to attend a hearing, and him politely deferring, it was bizarre. I mean, this guy just committed a $10 billion fraud, and why is he getting treated with kid gloves? Compare her tweets about Mark Zuckerberg for instance, who never stole $10 billion from people, whatever you think about the guy. So these kind of things are just, it’s a little strange for me to see it all happening.
What’s the one question, if you had a chance to interview him? You had a disguise on, you’re Mr. Mainstream journalist, Brian Armstrong. What’s the one question you would want to ask him?
BA: Honestly, I don’t think I have any questions at this point. I think it’s pretty clear what happened, and I think every time he’s being asked these questions, that people are giving him a chance to evade. There’s some journalists who have done better than others in terms of really pinning him down on this stuff. But I kind of just want to turn the page on the whole thing, to be honest. The bankruptcy lawyers, and the DOJ, and everybody are going to have to figure out how to hopefully put these folks behind bars. Not just Sam, but the other people involved. I mostly want to think about where do we go from here as an industry.
Do you feel vindicated or outraged, particularly over the customers that you lost to FTX? Because it’s very visible. Tons of branding in the US. Yes, they had FTX.us in the US, but then they had FTX abroad. And to your point, how many Americans ended up there? It’s an interesting question. Is it just really irritating, or do you feel like, hey look, that’s the problem. You should have stuck with Coinbase, your reliable friend in crypto?
BA: Well, look, I mean I think it does validate the approach and the strategy that we’ve taken over the last 10 years, which is not always the most sexy thing. It’s not the most hyped thing. I do think it’s the right strategy long term, and we think it’s going to be the right strategy to build a company for the long term. But look, this is not a moment for me to take any victory laps or celebrate. I mean, a bunch of people lost money, it’s a terrible, terrible thing for the industry and those customers…
…Well, now that you said you’re happy to have that role, I now get a seize the opportunity to hold you to that. And so here’s a question that I would imagine that some of my readers are going to have. Why is crypto a real thing, and not just regulatory arbitrage? I think that’s a question particularly when it comes to exchanges and the more financial products — there’s a separate product question. But what’s the pitch? And yes, it’s a question you’ve had to answer for 10 years, but it’s one that arguably is even more pressing today given what has happened.
BA: Yeah, okay, so is crypto a real thing? I think the answer is unequivocally yes. And the reason is you can just look at the fact that more people are using it every year, or every cycle that happens. So there’s two or 300 million people in the world now who’ve used crypto or have some, and yes, it goes up in up cycles, it goes down in down cycles, but it’s in an upward channel. So every cycle, if you look even just back to the year, I think 2020…
The floor today is still like 5X what it was a few years ago.
BA: Yeah, exactly. So I mean, yes, crypto is definitely a real thing, and it’s a real thing in a number of ways. I mean, first it’s a new form of money, and that’s actually a really important thing. Many places in the world, people don’t have stable currency, and there’s all kinds of wealth that’s eroded from the poorest people in society. It’s just a foundational part that we take for granted in the US, given that we have eight or 9% inflation, which we think is extreme. In many places in the world, you get 25% in a month or something.
I mean, one of the most compelling cases made for Bitcoin I’ve ever heard was someone, I believe he was from Venezuela, but I’ve heard similar things from people from Argentina, about this sort of inflation protection. Is it fair to say that that is still regulatory arbitrage, it’s just maybe good regulatory arbitrage that protects people and keeps them safe? I mean, I’m trying to steelman this argument here. But is that okay to admit, or is there something beyond that?
BA: Yeah, okay. Well, just to finish the thought, so it’s money and then it’s new types of financial services. It’s also this new application platform. We can talk about that too, with identity and decentralized social, so it’s lots of different things. But is it regulatory arbitrage? I mean, maybe. I think I would say it in a different way, which is that, it’s helping alleviate inefficiencies in the global economy. Some of those things are put in place for a good reason and some of them are not there for a good reason. For instance, if you wanted to build a global lending marketplace or something like that, you’d have to go to all 200 countries in the world, and all 50 states in the US. Only then could you make a more efficient global market for how to get a loan between somebody in India and somebody in Brazil or whatever, but the amount of bureaucracy and rules in place and everything, from having this kind of patchwork quilt of different proprietary systems in every country of the world, makes that infeasible. And so, yeah, crypto is a new, more global, more fair, more transparent, more free system.
It’s not just that inefficiency and the global regulatory apparatus though, it’s also dealing with the technology improvements of just how quickly you can send an asset somewhere, or make a transaction on a decentralized ledger. So it’s permissionless, it’s decentralized, it’s global, there’s technological benefits to that. There are, I would say, inefficiencies that it helps you get around. And that’s part of why a lot of innovation is on this frontier right now. Just like what happened with the Internet 20, 25 years ago.
Well, I mean, one argument that I think I’ve made in the past is that this concept of digital money makes a lot of sense when you’re in the virtual world. Now virtual world could be a full-blown metaverse sort of thing, it could just be the Internet broadly. Real money makes sense — fiat money or whatever you want to call it — in the real world. But where I’m a little skeptical is when there’s an intersection between the two. There’s the famous story of the guy that bought two pizzas with a Bitcoin or whatever it might be, which I’m skeptical about in the long run.
What’s your view on this? Is this a virtual-only thing, or do you see a real porous interchange between the two? Obviously a porous interchange would be in Coinbase’s interest, given you are an exchange, you sit at that interface. What do you see as the interaction between the virtual and the “physical” as it were?
BA: I think it’s both. It’s probably going to lean virtual in the early days, because that’s just a more natural fit. But it’ll eventually do more and more in the physical world as well. So virtual is probably easier to follow just in terms of if you’re going to build a new community on the Internet, it would be discriminatory or weird to use the currency of one country in something that’s open to people all over the world…
…Did it shake your belief a little bit though, that as inflation went up, Bitcoin’s price went down?
BA: No, it didn’t shake my belief. I definitely thought that crypto might be viewed as an asset people would flee to in a time of uncertainty. I think in the crypto economy, Bitcoin is sort of the gold.
People did flee to Bitcoin, but they were the people who were already in crypto.
BA: Right.
That’s a good point.
BA: But the broader macro economy is still much bigger, and in that environment, they treat all of crypto as a kind of growth stock as opposed to the thing to flee to. And it’s also so liquid that it was easy for people to liquidate it.
I like that analogy because it does kind of get to my theory about the virtual being in many respects, in a different economy than the physical. That bit about within crypto itself, Bitcoin is gold. And maybe it was just a little too presumptuous to say that it’d be gold for the broader economy, at least at this point in time.
BA: Yeah, I think that’s right. But if you look, I think the trend is very clear, which is basically virtual is becoming a bigger and bigger percentage of the pie in terms of the global economy, GDP. I think it’s really interesting, look at e-commerce, right? Back in 1999, 2000, people were saying, oh, I’d never put my credit card on the Internet. And then it was a tiny, it was less than 1% of all global GDP, right? Now, fast forward 20 years, and e-commerce is now I think about 15, 16, 17, and I think COVID accelerated it, right? It almost hit 20% of global GDP. For people like you and me, that even sounds low. I probably do 78% of my spending online or whatever. But we’re sort of living in a different world.
So think about that trend in terms of crypto as well. If you fast forward another 10 years, are more people going to be doing things virtually than physically? Probably. Is a larger percentage of the economy going to be happening virtually? Probably. So crypto is incredibly well positioned as the inherent currency of the Internet, the more transnational global currency of the Internet. And so it’s just very hard for me to imagine a world 10 years from now, where there’s more e-commerce, more people using the Internet, more virtual economy, and crypto is not much bigger right along with that.
7. These Transistor Gates Are Just One Carbon Atom Thick – Charles Q. Choi
For decades, silicon transistors become smaller and smaller, but they are fast approaching the point at which they can no longer shrink the lengths of their gates—that is, how far current must travel in these devices. Now, by using atomically thin materials, scientists in China have created a transistor with a record-breaking gate length of just roughly one-third of a nanometer wide, only as thick as a single layer of carbon atoms, shedding light on how much smaller—if at all—transistors can possibly get.
In all transistors, current flows from the source to the drain, and that flow is controlled by the gate, which switches on and off in response to an applied voltage. The length of the gate is a key marker of a transistor’s size…
…Recently, scientists began exploring two-dimensional materials for next-generation electronics, including graphene, which consists of single layers of carbon atoms, and molybdenum disulfide, which is made of a sheet of molybdenum atoms sandwiched between two layers of sulfur atoms. For example, in 2016, scientists created a transistor with gates each just 1 nm long using carbon nanotubes and molybdenum disulfide.
Now scientists in China have created a transistor using graphene and molybdenum disulfide with a gate length of just 0.34 nm by exploiting the vertical aspect of the device. “We have realized the world’s smallest gate-length transistor,” says study senior author Tian-Ling Ren, an electrical engineer at Tsinghua University in Beijing…
…This new work pushes the scaling limit for gates further to “just the thickness of a single layer of carbon atoms,” says Huamin Li, a nanoelectronics scientist at the State University of New York at Buffalo, who did not take part in this study. “It will be hard to beat this record for quite some time.”
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. We currently have no vested interest in any companies mentioned. Holdings are subject to change at any time.
