Longreads + Open Thread
Housing, Chips, Books, Yandex, Hedge Funds, Bonds
Brian Potter at Construction Physics takes a look at the housing shortage thesis. This is a great, data-driven piece that—like almost anything data-driven—comes to more ambiguous conclusions than a higher-level theoretical analysis would. Predicting housing demand is not just a matter of extrapolating trendlines, but also looking at underlying drivers: an important contributor to US housing starts has been the shrinking size of households. Put another way, one result of a housing shortage is that multigenerational homes become more common, which is a return to the older status quo rather than a new development.
Rebecca Heilweil at Vox looks at the many incentives provided by the Federal government and state governments for domestic chip manufacturing. Any policy that's reacting to supply chain problems will tend to be more expensive than it would have been if it had anticipated them: a chip shortage is both a cause and effect of an equipment shortage, so reshoring chips will be expensive. But the US does have an advantage in cheap capital and consistent regulation, and high-margin exporters are in a better position to withstand currency appreciation, so this is one of the manufacturing industries that the US could specialize in.
And speaking of supply chains: Erik Hoel has a good piece on how book publishing works. There are parts of books that obviously have a long lead time: it takes a while to go from a concept to a finished manuscript! What's surprising in this piece is how much of the marketing has to be planned in advance, too. (And don't miss the chart part of the way through showing that bestselling books, like all forms of popular culture, are increasingly dominated by established brands.)
Paul Starobin at Wired has a great in-depth piece on the struggles of Russian search engine Yandex as it deals with typical tech company struggles and a uniquely challenging relationship with the government. You can look at strategically important industries in two ways: when times are good, they get protectionism or subsidies because they're a source of soft power for the government; Putin would like it if more searches in other countries went through Yandex's servers and earned profits for a Russian company, and strongly prefers that Russian searches do. But when times are bad, the government gets more defensive, and starts using some of that asset value it's helped create.
And from the archives: in 1966, Carol Loomis at Fortune wrote a profile of an obscure investor, Alfred Winslow Jones, who ran an unusual financial vehicle, a fund that could go long or short. Jones called it a "hedged fund," but it got written up as a "hedge fund." The piece is a good look at the very early days of the vehicle. And one thing it clarifies is that part of their early edge came from market structure and incentives: mutual funds had to pay for distribution, which made it harder for them to also pay for good research, and hedge funds got around this by finding a different fundraising model. There is money to be made from having an edge in analysis and trading, but for managers there's also alpha in mastering back office functions. (And it’s a more durable competitive advantage—a clever way to systematically reduce operating costs gets way less attention than a clever trade.)
The Bond King: a wonderful book about Bill Gross and Pimco. Like any good book about a financial institution, rather than a company, The Bond King goes back and forth between talking about great trades and talking about high points in corporate drama. (There is, as it turns out, a lot of drama in grinding out above-average returns for decades.) One thing the book made me wonder about: most of the funds in the book made money from assets under management, not performance fees, and a classic argument for hedge funds (and equity compensation) is that performance is better when economic incentives are aligned. They were certainly directionally aligned, and Bill Gross is a billionaire. But I did wonder why he was running $200bn+ in unlevered assets for a management fee instead of running, say, $20bn in equity levered 10:1 and taking performance fees, too. For whatever reason, Pimco did not need this incentive to encourage employees to work hard and take risks; there's a great story about exploiting a poorly-specified futures contract in the 80s to corner the market in a category of mortgage-backed securities. So incentives matter on the margin, but when someone gets tasked with solving a problem they happen to really enjoy and are well suited to, they'll still do a great job even if their paycheck doesn't have as many zeroes as it could.
Drop in any links or comments of interest to Diff readers.
There are people who excel in boom times, people who make all their alpha from bad times (Hetty Green is the example to beat, here). But an especially interesting phenomenon is leaders and investors who execute a good pivot: being crazier-than-thou when markets are crazy, and executing a ruthless pivot to focusing on cash flow and survival in downturns. What are some good case studies here?
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