This newsletter is written for entrepreneurial organisational leaders and aims to help map current events to longer term themes of our context and provide questions, tips and tools that can help in navigating these times.
“We will do everything we can to mobilise all the key actors and international community to put enough pressure on Myanmar to make sure that this coup fails” - António Guterres, the UN secretary genera,
“An incredible act of hostility” - Northern Ireland’s First Minister Arlene Foster on the EU attempting to enforce an Irish Border so that vaccines do not leak out of the EU
“The war in Yemen must end” - US President Joe Biden
“ChAdOx1 nCoV-19 vaccination programmes aimed at vaccinating a large proportion of the population with a single dose, with a second dose given after a 3 month period is an effective strategy for reducing disease, and may be the optimal for rollout of a pandemic vaccine when supplies are limited in the short term.” - University of Oxford research paper showing that transmission falls significantly as a result of vaccinations.
“We’re past the peak.” - England’s Chief Medical Officer Chris Whitty
“Financial bubbles and crisis triggers are usually only visible from the wreckage of the next crisis.” Christopher Smart, Chief Global Strategist & Head of the Barings Investment Institute
Let’s start with an apology. Three of the readers of this newsletter have reached out in the last week to ask where the Weekly Distillation was last week. This remains a no-income side-project for me (until Elon Musk or some other Billionaire wants to pay me to write for fun) and so sometimes it gets sacrificed at the necessity of work and family and health. When I sit down to start writing at 1am…it’s a good indication it’s time to leave it for a week! I’m changing up the format this week to make it more concise as a result.
We are in an asset inflation bubble
Photo by Clay Banks on Unsplash
Robinhood. There are certain companies that I have never used their services, and I probably never will. One of those is Uber. Another is WeWork. Robinhood is rapidly falling into this camp too. When I see behaviours, statements and values screaming out that are just wrong, I vote with my wallet. Uber under Kalanick was that business (and I’m not convinced it has fixed that entirely yet - see Weekly Distillation no.15), WeWork under Neumann the same and Robinhood, despite its $11bn valuation, shows worrying signs of heading the same way. Creating lots of wealth but selling out on values to do it. (To caveat, I know people who worked for WeWork who are great).
I wrote about Robinhood in Weekly Distillation no.8, no.11, no.12 and no.17 so I’m not surprised to see it being front and centre in the media again - this will be a company that makes headlines the way Uber did. Yes, it provides a great service (although it’s not quite as generous to the day trader as you might think) but it’s the “how” that matters.
In 2004-06 I worked for one of the largest UK hedge funds. It had $10bn of capital under management and had access to additional leverage multiple times that amount. I worked on the equity fund and we went long and short companies all round the world. We made lots of money shorting stocks and lost money shorting lots of stocks. I will happily have a conversation with anyone who thinks hedge funds are evil speculators and explain the other side of the story.
The situation with Gamestop was fascinating. High street game store was heading for the route of Blockbuster. Rumours abound of whether there might be a buyout/turnaround play (these regularly abound when shares are depressed by shorting - it’s an easy way for a trader (or a hedge fund that is long) to (illegally) force a short squeeze as people look to cover their shorts in minutes. Price rises. Several hedge funds short the stock in size, retail investors pile in, hedge funds short more - and it becomes heavily shorted (a piece of data that is available and every hedge fund monitors regularly), retail investors go large. Stock goes through the roof - liquidity becomes an issue, as do margin calls. And then it went wrong.
Here’s what concerns me in this. Ultimately fundamentals will win out - you can’t keep a share price high if the business goes bankrupt - eventually it will revert to its true value (or close to it). So all the retail investors are doing here is either 1) betting on a takeout (guesswork) or 2) forcing hedge funds to cover their shorts. The latter is fascinating - we put around $25m minimum into a position - and then leveraged it. So a normal size for us in one stock might have been $100m in a short. There are over 10,000 hedge funds in the world. Then there are the prop trading desks of the banks. There is no way the weight of money doesn’t win out in that trade.
So how do you short? You go to your primary broker and ask to borrow stock. They borrow it from the holder (yes, the person who wants it to go up lends it to the person who wants it to go down - for a fee). But if the retail investor becomes the holder and doesn’t lend it, you can’t borrow the stock. So then you have the option for a naked short - you short it but don’t own the stock to meet the delivery of the sale you just made. That leaves you very exposed. And if options trades are then layered on top, you get a massive squeeze on the stock.
But when does this become market manipulation? And at what point are you allowing for the unsophisticated investor to get dragged along and lose their shirt?
There is a lot of this behaviour that feels very 1999. Look at Silver prices. Rumours of a blank cheque SPAC merging with WeWork for it to go public. Mining companies in Australia with a similar ticker to Gamestop go up 50%. Tesla being worth more than all the oil stocks in the S&P 500.
Why does any of this matter? It matters because it demonstrates that ethics, values, integrity all matters.
It also matters because it’s helpful to understand the trend - this is not about picking winners as much as looking at which boats are more leveraged to rising tides. When I was the oil analyst at the hedge fund, we ran about $500m of the fund in oil stocks. Whenever we felt the oil price was going to fall, we immediately shorted Canadian Natural Sands, as it had one of the highest costs of producing oil and so it would be a very leveraged share price. It was nothing really to do with the company, it was all about the trend in the market. Any asset value right now may well be being inflated by quantitative easing, ultra low interest rates and the lack of real CPI. Inflation could end this.
And in the real world, 255 million jobs were lost last year. 255,000,000 full time equivalent jobs. Brutal.
Coronavirus
Photo by Biegun Wschodni on Unsplash
Spring is coming! The Scottish Government announced this week that children in P1-P3 (ages 5-7) may be going back to school on February 22nd. This is fantastic news, especially as my children fall in that bracket. It felt like the turning point. With 10m people having received a vaccine, and the evidence showing that 1) there are no serious side effects so far and 2) the vaccine is considerably slowing the transmission of the virus, optimism is rising rapidly.
Everyone is fed up of it. Everyone is ready for lockdown to be gone. We want to go to a restaurant, the movies, to church, to get on a plane, to see our families again. I buy the narrative that once enough people are vaccinated (70-80%) then there will be a significant upsurge in economic activity across the board.
The future of work
Photo by manny PANTOJA on Unsplash
One of the other trends I have been reflecting on is work from anywhere (“WFA”). I tried this back in 2016 and 2017, working from the US for a month at a time and moving our whole family out there for a few weeks. There are only two real challenges - one is timezones (which you can beat by selecting your location carefully) and the other is culture of clients or your employer. I think the latter has shifted significantly - and this is likely to lead to a lot of people shifting mindsets from WFH to WFA. The conversation currently seems to be around a permanent WFA - so move to the country, or move from SF/SV to Miami, Nashville, Austin or Denver.
I’m curious on the temporary WFA though. 8 weeks in Tuscany in the summer? 4 weeks in NYC over Christmas? 3 months in Australia? Why not? Schools may be the other barrier - but it’s surprising what a school might agree to if you ask. Pretty much every piece of work I have done this week I could have done from Australia, Argentine, Canada, Russia or the North Pole. I had three great conversations with entrepreneurs this week - one in Uganda, one in South Africa and one in India. I would love to go live in their cities for a short period with my family - 2,3,4 weeks.
I do think it’s important to remain rooted though - to have connections locally, to have a base, a place you call home and invest into people and the local neighbourhood. But if you can get WFH, WFA and Office work balanced out (40/40/20?) you could have a far more engaging life and job.
Oh and don’t give up going to coffee shops when they open up again. It’s good for you.
A Long Read for the Weekend
Photo by Melissa Bradley on Unsplash
I’ve been reflecting this week on how almost every single one of my friends, family and work networks believes that things are going to get better from here. The equation goes like this: Lockdown + Vaccines = Falling cases = unwind lockdown = return to normality (slowly) = massive economic upturn = the roaring Twenties.
But what if it doesn’t? What if the 2020s are actually worse? What if Coronavirus isn;t the worst thing that happens this decade? I have no idea - but when 1 friend out of hundreds is thinking like that, I get concerned we’ve reached group think. In The Fourth Turning, the analysis if life and society in four stages of a cycle is really intriguing. If that authors are right, they believe that the 2005-2026 period is the Fourth Turning. Every fourth turning of the last 500 years has ended with total war.
“If there is a war, it is likely to be one of maximum risk and effort — in other words, a total war. Every Fourth Turning has registered an upward ratchet in the technology of destruction, and in mankind’s willingness to use it.”
Aside from war, we have Climate Change to worry about. This long read is a really interesting insight into how our psychology plays a factor when we go from being green aware and green supportive to actually trying to live differently. Climate Change remains an inevitability - technology and changed Government attitudes and regulation will be the ultimate fix - but only from a point of a lot of pain, which we in the West are not at yet.