The Week That Matters (24th-28th July, 2023)
"Maybe she's crazy; maybe she ain't. So was Picasso and so were the saints" Kris Kristofferson (Sister Sinead)
Jerome Powell is a lost soul
What few people realize is Cathie Wood, the Founder of ARK Invest, has been playing in the Premier League for longer than most Venture Capital analysts have been alive. In the early 1980s, she took on the establishment, the former Chair of Solomon Brothers, in a debate about the direction of interest rates. She said they would go down. He said they would go higher. She was proven to be correct.
Part of her argument was interest rates were a blunt instrument that had no obvious impact on inflation. It was a controversial statement at the time as the Milton Friedman lobby had just “cancelled” John Maynard Keynes and were fanatically pumping out their monetarist doctrine. She pointed out how all higher interest rates had done was make the recession of the early 1980s worse. Secretly, Ronald Reagan agreed with her. He couldn’t stand Paul Volker.
Fast forward 40 years and we can see the same mistake being made by the Federal Reserve again. Interestingly, the author doesn’t think it would have gone this way with a Janet Yellen or a Ben Bernanke at the helm. But Jerome Powell is not even really an economist. He has clung to Paul Volker simply because he lacks a North Star. The myth that is Paul Volker was his safety blanket.
Luckily, the economy is holding in there for now unlike the early 1980s. At this point, as one investor recently noted, the economy is taunting most macro newsletter writers. Remember when Sequoia published their bearish forecast? When investment firms, who are supposed to be growth investors, start talking macro, it’s time to worry. They are almost always wrong!
The economy has been resilient because a lot of companies had already refinanced in 2018/2019/2020 and so the higher interest rates aren’t hurting them as much as one would imagine. And consumer balance sheets are also still healthy for the time being. That being said, Powell is playing a dangerous game continuing to keep interest rates high. He is risking another crisis like SVB. Things are not that good under the hood in the financial sector. Why do you think Bank of California merged with PacWest this week?
Japan: a blueprint for the world
The Bank of Japan deserves more respect. Equity fund managers sitting in Boston have often criticized the Bank of Japan’s actions over the years, but they have always missed a key point. The Bank of Japan didn’t care about Japanese equity prices in the 1990s and 2000s. They cared about keeping the bond market stable and creating an environment where Japan didn’t implode. Given that Japan didn’t fall into a deflationary abyss in the 1990s, the banks slowly got re-capitalized after the fallout from the Bubble and Japan’s unemployment rate never exploded, you have to say the Bank of Japan and Japan’s Ministry of Finance were pretty successful, no?
This week the BOJ said it might ease its yield curve control policy. For the free market fanatics, the Bank of Japan controlling the yield on the 10 year was a form of Communism. It was, to be fair, experimental but it might have served its purpose. And we should be celebrating the fact that Japan is now in a situation where it might not need it anymore. We arguably have Shinzo Abe, the former Prime Minister of Japan, now deceased, to thank!
His Three Arrow initiative of late 2012/early 2013 has given the West a blueprint to break out of deflation and bring a joie-de-vivre back to what is a moribund global economy. It’s a matter of time before we ,in the West, realize that we will need a very aggressive policy too to get us out of own deflationary funk. This newsletter has always believed the inflation we have seen is transitory.
The future of AI applications
The author has always believed that most fintech solutions are a huge waste of time. Fintech simply provided an opportunity for Marc Andreesen and his ilk to allocate capital into a vertical (think of the fees) that had an appealing narrative. Who didn’t want to get behind a payment app that was going to fix the wealth poor divide?
Unfortunately, the results have been very poor. For the most part, all we’ve got in return for all the energy and money thrown at the vertical are apps that help poor people spend money they don’t have (BNPL) or banking applications, which no one really trusts (see the average balance in any neo bank).
Instead of letting the “innovators” dominate the narrative, we should have spent more time supporting banking reform. Isn’t that what we really needed in 2010? Elizabeth Warren was wrong to say she was Native American, but she was right about the need for policy change when it came to consumer banking. How was Jamie Dimon allowed to make over 1bn dollars from overdraft fees from small business people in 2020 during the darkest depths of COVID, for example?
It’s becoming very clear to the author that if Apple or Microsoft want to get involved in a particular vertical, venture-backed companies are almost irrelevant. It took time for Apple to decide to get into fintech but now they have turned on the switch, no one can compete with them. Their scale is too big. A good example is the BNPL vertical.
The CEO of VC backed Klarna said that, “there’s so many limitations that it will take years before (Apple) has any potential significant impact on what we’re doing.” That was in 2021. It looks like Apple will overtake Klarna’s market share in a couple of months.
Apple was a late comer to fintech and Google and Microsoft didn’t even care that much about it. But all three companies care passionately about AI as it’s another way to dominate the cloud. Microsoft has already provided a benchmark price for AI apps.
This is why the author believes the app trade is not going to work for the VCs this time. People will soon realize that unless the investee company has an AI engine and that takes years to develop and access to a lot of data, it’s probably just worth buying Microsoft or Apple to get exposure to the trade.
The only thing left to save the VC model is lower interest rates. Fortunately for Silicon Valley, that’s on the horizon. Otherwise, the pain would be huge. Didn’t Adam Neumann, a person who A16z gave hundreds of millions of dollars, just default on a loan? Hello! What is going on?
How to celebrate Sinead’s life?
Morrisey has had a way with words since he was a young man. And his remarks this week following the death of Sinead O’Connor were as poignant as ever. He was right when he said Sinead was not given the love she deserved when she was alive. She was a vulnerable person looking for help. The music industry spat her out and her “show biz friends” turned their back on her. Russel Crowe’s tweet about Sinead was more about him than her. (See her version of Don’t cry for me, Argentina. Best version ever?)
Don McClean said “this world was never meant for one as beautiful as (Vincent Van Gogh),” but a similar song might easily be written about Sinead. She had a sensitive, troubled soul, which, at times, was very raw, like so many artists who give so much (George Michael?). Despite the tattoos and the trend setting short hair, she seemed to be searching for something deeper than the usual pop icon. In the godless industry that is the music business, theology and faith seemed to attract her more than money as did a sense of family. But above all else, it was her courage to be true to herself that stood out.
We live in a performative age. People are happy to express support for an idea if the idea is ordained by Hollywood or a showman like Marc Andreesen but very few people support an idea based on first principles. Very few people think through what they actually believe in and then defend it. We are told that the modern world is all about breaking down traditional standards and being free but it often feels we are becoming more restricted in what we can say, perhaps what we can even think.
Sinead was the opposite. She was an original thinker and she was ready to stand up for her beliefs and make sacrifices for them. The best example of that was the Saturday Night Live incident. It might have been jarring to see Sinead tear up a photo of the Pope all those years ago, but her intent, in hindsight, must be recognized. There was a serious problem and she shined a light on it at much expense to herself.
Perhaps, then, if the stars who keep tweeting about Sinead, really want to celebrate her life, they should get behind the movie, Sound of Freedom, which has been released recently in the US. It deals with the ghastly topic of the trafficking of very young people, including kids.
What strikes the author as odd is the lack of attention it’s getting amongst the major celebrities of our day. Their silence is deafening. Where is Bono, for example? It’s usually hard to shut the bugger up. But he hasn’t said a word. Why?
The author suggests that one thing we could do to celebrate Sinead’s life is to have a concert like Live Aid or the many we had for HIV to increase awareness of the plight of the kids portrayed in the movie. The author is not particularly religious but he feels if we don’t do something about it, we might not need to worry about the heat from fires in Cyprus. We might need to worry about the heat from fire and brimstone. IF the movie’s content is only half right, we are dealing with a case of good versus evil, on a biblical level. Awareness of the problem is the first goal, surely. The author believes Sinead, who clearly loved children, would have supported the initiative.
As always, thank you for reading. I wish you the very best with family, business and trading.
Best regards
Mateen
DISCLAIMER: None of this is financial advice. The opinions expressed are purely my own opinions and it is imperative for you to do your own research. They do not represent the views of any company I am associated with.