Random Interesting Links #4

History edition

Labour repression & the Indo-Japanese divergence. I think I have posted this one before, but I reread it the other day and it is still one of my favourite blog posts. Basically Japanese textile factories had a massive productivity advantage over India’s factories about a century ago. Like 4-5x to 1. Even when factory owners promised to share the profits did workers not want to learn and use new more efficient machines and production processes as it meant some portion of workers within their tight knit communities would lose their jobs. Often spontaneous large scale strikes would happen if factory owners tried to force it. What is crazy is that the regions in India that saw the most crippling strikes did not even have labour unions! 

The authorities did not really do anything to help the factory owners. Pretty ironic to think that passivity of the British colonial government actually hurt Indian economic development. And it really shows how some regions of the world can essentially have massive productivity growth once they do get past these social hurdles. And how so much of economic growth is dependent on the social atomization of society. You could boost the productivity of an Indian textile factory by several 100% and benefit from huge profit margins due to tariffs that protected them if you could somehow figure out a way to get your workers to use and learn these new machines optimally and show up on time every day. In fact Japanese factory owners tried to do this in India and failed. 

Interesting article with nice graphics on why China would really struggle with taking Taiwan. The bigger hurdle might actually be that an invasion could destroy Taiwan’s chip factories, they produce 60% of the world’s chips. This would throw the world in an economic depression of epic proportions and would create all kinds of very unpleasant first, second and third order consequences for China. And make it very hard for the rest of the world to ignore the conflict, as Taiwanese authorities could use these factories as hostages basically (if you don’t help us, we will destroy them!).

Xi seems to have figured this out as in his recent speeches he has toned down his rhetoric already, and implies that an invasion should only happen if it has overwhelming odds of success. He probably realized that starting one of the most complex operations in military history with a largely inexperienced army that could potentially trigger world war III is not the best way to spend his golden years.

I have thought about this a lot lately and I have come to the conclusion that the odds of a military conflict about Taiwan are very slim in the coming decade or two. And the main reason you hear so much about it is that US generals and admirals use it as a boogeyman so they could get larger budgets.

Why no Roman industrial revolution? I am sure everyone has already read a take on this, but I thought this one was particularly interesting. Same blogger also has interesting posts on military history. 

Signals, noise & bond market predictions. Very interesting post by Citrini how well the bond market predicted major historical events. I quite like these historical finance posts. If you liked that, more here. Would be cool actually if someone wrote a Jack Schwager type of book about epic traders doing their thing a 100+ years ago.

I found this podcast with Citrini interesting to listen to as well. The whole macro trading thing isn’t for me, but props to him for repeatedly hitting it out of the park in the past couple of years. 

The Technological Innovations that Produced the Shale Revolution. 

A website made by an angry ex-Boeing engineer. Thoroughly trashing management and then offering to help them put Boeing back on track LOL. This was written 15-16 years ago? And it has aged very well. A nice case study how MBA beancounters can slowly destroy a company from the inside out. (blue line is Airbus):

The bear thesis for oil: China trying to become energy independent. 

Thought provoking post by Andrew Walker on the importance of conviction. Something I have not yet fully mastered. And why making macro trades has not worked for me. I’ve had a few times where I saw a clear macro development that I didn’t think the markets had properly discounted. And for some reason I didn’t pull the trigger.

One was in February 2020 when airline share prices were acting as if Covid wasn’t spreading exponentially. I was actually following Covid developments fairly closely. For a while there was a perception Covid was levelling off (Elon Musk famously said that it would blow over within a few months). But because of lack of test equipment the exponential growth did not really show up in case numbers. And created the illusion that infections were levelling off. And the media was reporting test figures as actual case numbers. Which seemed really misleading to me.

I remember looking at buying some airline puts in February (as I thought the trade would either work or be proven wrong within a month or two). It seemed crazy to me they were basically flat when a global pandemic was going on that seemed likely to be significantly more deadly and infectious than the flu. 

But I didn’t end up doing anything because airline valuations looked cheap. They were all trading at about 6-7x earnings. Which was a dumb reason to not pull the trigger. And I did not want to bet against Buffett (who ended up selling them at a loss a few months later LOL). And hey maybe this really would all blow over in a month or two in Summer! Here is what those graphs looked like for various US airlines:

Some of these puts were 10-20+ baggers in less than a month. Curse those value investing instincts! I still think this was one of the better examples of market inefficiency. Airline share prices should have at least slowly declined starting in January?

But the most painful one was probably Rheinmetall at 80-85 euros a few months before the Ukraine invasion. It was trading at about 9x earnings, below its historical average. I still don’t know why the hell I did not buy some shares.

I think my reasoning for not doing anything at the time was that Putin would be smart enough to only do a quick incursion in the east and then get out (since various credible military analysts like Kofman made convincing arguments why it could get really messy for Russia). And that I would buy if it hit 8x earnings. 

I correctly identified a macro theme, prediction markets were pricing in 40-50% odds of a serious escalation in Ukraine. Intelligence reports were strongly indicating this was not a bluff. The way Putin was negotiating, it seemed he was looking for a Casus belli, and not for concessions. Holding period for this to play out would be less than a year and with German defence spending at only 1.4% of GDP (far short of the 2% target) plenty of room for growth. And no need to fuck around with options. I had a cheap quality stock to play this that was trading below its historical average valuation:

The correct move here was to throw off those nickel and dime value investor chains and fully embrace the macro. Well maybe not fully embrace, but at least fist bump it or something.

A few months later the stock was up 150%. 2 years later the stock is up 400%. Probably one of my biggest mistakes of omission in terms of risk/reward. Coulda woulda shoulda.