Surf Report: The Fed, the pine, and the brick waves of England

Issue 25: 03.14.2021 (Free Version)

March 14, 2021

Hey everyone—I’m so glad to have you here. What a week.

In England you sometimes see these "wavy" brick fences. Do you know why? No, it’s not just for decoration or a lingering homage to some legendary Tudor surfer. The answer is actually efficiency. It turns out this shape uses fewer bricks than a straight wall. A straight wall needs at least two layers of bricks to make it sturdy, but the wavy wall achieves the same amount of strength due to the arch support provided by the waves.

It reminded me of a book I read called Obliquity: Why Our Goals Are Best Achieved Indirectly. I’m always on the lookout for the best mental models through which to assess the world and make decisions within it, and it turns out some of the most effective strategies don’t involve simple cause-and-effect assumptions but rather more roundabout means that require patience, indirectness, and doing the opposite of what conventional wisdom advises. In the case of the brick walls, while a straight line is indeed the shortest distance between two points (and should be expected to require the fewest bricks), it’s not necessarily the strongest distance between two points. The problem lay with the premise: if you ask a mason to build a wall of shortest length it will be straight. If you ask them to build a wall of greatest strength it will be wavy. Be careful what you ask for.

What’s this got to do with the markets? Everything!

Last November I created a breakdown of Mark Spitznagel’s book The Dao of Capital: Austrian Investing in a Distorted World for all my paying subscribers, and in it he repeatedly refers back to the Austrian pine and its “roundabout” strategy of growing on rocks for not only just surviving wildfires but actually using them to its advantage:

While conifers growing on the rocks may appear to be nature's outcasts, theirs is truly the false humility of the Daoist manipulator-sage: They withdraw to where others cannot go and then act when conditions suddenly shift and an opportune moment arises, such as after a wildfire. Then we can see the wei wuwei—or what we might call here "seeding by not seeding"—of the conifers: By growing on the rocks they avoid mal-seeding in the fertile areas and thus establish a defensive position that, in time, becomes an offensive vantage point from which they can disperse seeds to be wind-borne to the fire-cleared areas—the same fertile ground from which they originally retreated.

Retreat from fertile ground? Seems foolish. Why would an organism do such a thing? Of course, the pine tree gets the last laugh (though it has to wait first for a forest fire) as it moves into the now-cleared, and extremely fertile, forest area to prosper.

And right now in the world of markets: the Fed is the forest fire.

Jerome Powell, chair of the coalition of private banks called the Federal Reserve, will be speaking to the public again this week on March 17th, and many are expecting him to address the topic of an SLR extension. The SLR (supplementary leverage ratio) is simply the amount of capital that commercial banks are required to maintain on their balance sheet. The SLR requirement was lowered last year “temporarily” as a result of Covid relief measures, to help banks weather the storm and lend more money. If this measure isn’t extended and banks are forced to go back to holding more capital, then the markets will likely get spooked. Why? If the Fed ends their low SLR cushion, then US banks will essentially become a net seller of Treasuries. If banks begin selling Treasuries instead of buying them, the 10-year Treasury yield would likely be pushed up to 1.6% and likely higher. That 1.6% interest rate is what the government needs to pay out. It’s a government cost, owed to the buyers of their Treasury bonds. And given the number of Treasuries out there, a tiny increase in the yield means the government gets a lot more expensive to keep the lights on. (For example, an increase of ~0.25% amounts to the cost of the entire US Navy. Another ~0.25% is roughly the cost of the US Marines. And these are the mighty forces that back the US dollar itself)

So no SLR relief means banks will have to turn away new deposits to stay within the SLR requirement, and can only sell these expensive Treasury bonds. Now I’m no expert, but removing the largest bond buyer from an entire market will probably create some pretty gnarly waves across all markets. I am not alone in thinking this.

If Powell does extend the SLR on Wednesday, then the can is just kicked down the road to be dealt with later this year. Which he probably will.

So in an effort to directly maintain a “healthy” and “strong” market through exceptions like this, has the Fed backed themselves into a corner and actually created one of the riskiest markets in history? Time will tell. This was all my roundabout way of explaining part of the reason why I have been rotating out of equities entirely and retreating like a pine tree to harder financial terrain for the time being. (Subscribers who are able to see all my investments and trades this week may be… surprised).

But as we’ve seen, sometimes the best way out isn’t through1. It’s around.

Until next time 🤙,


"The sooner you make a choice, the sooner you can make an adjustment." —James Clear

Breaking 🌊

🤖 Online gaming platform Roblox ($RBLX) hit a $38 Billion market cap on its public debut. Their stated mission is to create the “metaverse," which is a collective, virtual shared space where users explore, build, and socialize in 3D digital worlds. Features like Roblox Studio teaches users how to code and create games for its platform, and the Roblox Developer 101 course is used by educators around the world.

🎮 GameStop is transforming itself into a technology company

🔋 Tesla is building secret giant batteries connected to Texas power grid

🏧 PayPal announced plans to acquire Curv, a cryptocurrency startup based in Tel Aviv, Israel.

₿💱 Bitcoin price topped the $61k mark for a new all-time high; Norwegian industrial giant Aker has established a new firm called Seetee to invest in the Bitcoin ecosystem, and the shareholder letter is about as bullish as they come. They have already purchased 1,170 BTC worth $58 million for its treasury with plans to add more; JPMorgan Chase is preparing a ‘Cryptocurrency Exposure Basket’; Goldman Sachs just included Bitcoin in their weekly report: “Bitcoin’s 2021 returns destroy everything on Wall Street”; Crypto-lending platform BlockFi is now valued at $3B; NYDIG announced the appointment of New York Life Chairman and CEO Ted Mathas to its Board of Directors “to help strengthen our Board significantly as we expand institutional access to Bitcoin.” (Mathas also serves as Chairman of the American Council of Life Insurers. The ACLI represents 280 member companies, which collectively represent more than 95% of the life insurance industry in the US, more than $7 trillion in assets.)

From The Tweetbox 🐦

The biggest thing about trillions of dollars in stimulus is that it sets a precedent for future recessions that policymakers will have to match or else they’ll look like they don’t want to help (vs can’t help).

When millions are buying to sell: bubble. When millions are buying to own: revolution.

Bitcoin is rising with yields. How could the market better express a lack of faith in the dollar?

The reason I so often defend unpopular ideas is not that those are the only kind I like. It's because popular ideas don't need defending.

Early conviction is indistinguishable from madness.

For The Pros 😎

Here’s An Idea 💡

I’ve come to the view that five fields teach more about investing than most finance textbooks:

  • Health, and how people make short-term tradeoffs with long-term consequences.

  • Sociology, mostly people’s desire to belong to a tribe and signal their success.

  • Military history, and how people underestimate complex systems, become overconfident in their abilities, react in stressful situations in ways they hadn’t imagined, and underestimate risks that hadn’t been considered.

  • Evolution, which shows how competitive advantages are gained and squandered.

  • Nature (anything from geology to forestry) which has the best examples of compounding because incredible things happen over very (very) long periods of time.

There is a flip side to this. If we can learn about investing through the lens of other fields, can we learn about other fields through the lens of investing?

Oh gosh, yes. So, so much.

Source: Investing: The Greatest Show On Earth

Worth A Read 📃

Is Choice Always Worth the Anxiety? The piece from Zeynep Tufecki is about Covid but this sentence is about everything:

"Deciding in the face of uncertainty can’t always be done with certainty, and sometimes, the differences aren’t big enough or known enough to keep worrying about them."

The Fed Isn’t Printing As Much Money As You Think. It’s true, the Fed has printed a tremendous amount of money, just not quite as much as it's sometimes made to appear.


“The beginnings of all things are small.” —Cicero

Groms 🐣

TinySeed has just raised $25 million to back smaller, bootstrapped startups. It’s notable because it comes on the heels of news that another company trying to do something similar,, is shutting down.

Don’t tell me what you think, tell me what you have in your portfolio.” —Nassim Nicholas Taleb

Drop Ins 🏄

Buy & Hold Investments

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Swing Trades (1-3 month time horizon)

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Closeouts 💀

This section is only available for contributing subscribers. If you’d like to trade and invest along with me, consider one of the paid tiers!

Pods & Schools 🐬🐠

🔊 Modern Wisdom #292 - Rob Henderson - Signalling: Why You Do The Things You D‪o

“If we are built to hide ugly motives and substitute pretty ones, we should suspect that our actual motives are uglier than we think.”

📚 Debt: The First 5000 Years, by David Graeber (2011)

“By the late 1970’s the existing order was clearly in a state of collapse, plagued simultaneously by financial chaos, food riots, oil shock, widespread doomsday prophesies of the end of growth, and ecological crisis. All of which, it turns out, proved to be ways of putting the population on notice that all deals were off.

Tools of the Trade ⚒

Products I use to make money

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StockCharts. I easily make back the small monthly subscription fee with the superpowers it gives me.

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Nothing in this email is intended to serve as financial advice. Do your own research.