Tracy Alloway

2021 was a tough one for me personally. I burnt out in the early part of the year and got very sick. Then I somehow managed to break my foot in three places and couldn’t walk properly for months. For someone who was looking forward to lots of October and November hikes around Hong Kong, this was a pretty annoying and unexpected development.

On the plus side, 2021 did mark a major return to writing thanks to the launch of the Odd Lots blog. This means I actually have quite a bit of bylined work to highlight here this year (I’ve grouped it below according to theme). Meanwhile, the podcast itself is going from strength the strength and I think some of my favorite episodes were recorded this year. My cohost, Joe Weisenthal, and I are both hugely grateful to all those who are listening to and reading this content.

Speaking of which, we do have some big Odd Lots things planned for 2022, so stay tuned!

Supply chains

What Pandemic Puppies Can Tell Us About Supply Shortages, June 17
This was my first deep-dive into the bullwhip effect as explained through one of my favorite things: puppies. The bullwhip effect is, IMHO, essential to understanding what’s been going on with the economy and inflation. It describes how small changes in consumer demand at one end of the supply chain can end up leading to big swings in production at the other end. Those swings can get bigger and more problematic as demand and supply struggle to reach equilibrium, leading to repeated supply shortages (or gluts) and wild swings in prices.

Introducing the Chokepoint Economy, When Shortages Start to Matter, Aug. 4
I think this was an important change in 2020/201. The dramatic experience of the global pandemic seems to have taught many policymakers that the relative flow of goods and capital can matter more than the absolute levels. That means ‘chokepoints’ rather than Keynesian ideas of abundance may be a more useful framing for the future direction of the world’s biggest economies, with governments increasingly focused on building up strategic capacity in things like food security, transportation/shipping, semiconductors, etc. (Of course, China has been doing this for years).

What the Semiconductor Shortage Has to Do With Corporate Bonds, Sept. 15
Joe made me write this but I actually ended up thinking it’s a decent analogy. At first glance, the business of selling chips doesn’t have much in common with the business of selling the debt of blue-chip companies (ha). But as the piece makes clear, both those industries are dealing with a problem of how to allocate an asset that’s in short supply and they end up doing it in similar ways.

What the Economics of Sawdust Can Tell Us About Supply Shortages, Oct. 22
One of the difficult things about supply chain disruptions is that they can expose unexpected connections and therefore have difficult-to-predict consequences. The story of sawdust in the mid-2000s is a great example of this kind of unexpected connection. I don’t think many people would have expected a housing bust to lead to higher milk prices.

ESG and oil

What’s Wrong With ESG Investing as Explained Through the Medium of Ohio
First, let me say that the volume of gushing ESG press releases and investment guides far outweighs the amount of critical stuff out there. But what criticisms of ESG you do tend to see, often veer into highly abstract and conceptual territory. This story was an attempt to illustrate some of the biggest ESG drawbacks through a single thing: the great state of Ohio.

Get Ready for the Inflationary Pushback to ESG Investing, July 15
This wasn’t a long or very detailed post but it did end up being very prescient. As gas and oil prices soared in the latter half of the year, there was a lot of hand-wringing over whether or not underinvestment in fossil fuels had contributed to the problem. I don’t think you can blame it all on ESG, but there is certainly a capital markets component here (see below).

Why Surging Oil Prices Have a Lot to Do With Capital Markets, Oct. 18
To understand what’s going on with the nodding oil pumps in US shale country, it helps to look to the gleaming skyscrapers of New York. In other words, there’s a perception that as oil prices go up, it will inevitably attract more energy players who will dig more wells and increase supply etc. But that ignores a big structural break in the energy’s relationship with capital markets after the shale oil boost of 2014/2015. Investors don’t want to see energy companies spend all their money on drilling and exploration anymore, instead they’re asking for buybacks and discipline on spending. It’s no longer about aggressively growing production, but more about preserving ROE.

Inflation

We Need to Talk About the Great Mayonnaise Inflation Mystery
Part of the reason Odd Lots episodes have been so fun this year is because supply chain issues have given Joe and I a chance to go very, very micro and examine individual businesses, industries and even products. In that spirit, here is a deep dive into what’s going on with mayonnaise prices and how they’re actually measured in CPI indices. So come for the insights into how mayonnaise is actually made, and stay for the deep dive into index construction.

Why We Should All Start Talking About ‘Whackflation’
I still think this is probably the best way to look at inflation right now. This is the monetary equivalent of the bullwhip effect described above. It means that prices can be prone to inflationary booms but also deflationary busts if demand suddenly evaporates, or if it becomes clear that businesses have over-ordered. You can see the whackflation idea clearly in lumber prices, which have already gone through a few mini cycles of booms and busts as the market struggles to reach equilibrium.



Capital Markets

No, the U.S. Isn’t Being Overrun by Zombie Companies, June 23
Every time the Fed lowers interest rates someone ends up complaining about how the central bank is creating zombie companies, or businesses that aren’t economically viable but are being kept artificially alive. But the idea of zombie companies running amok in the U.S. economy isn’t born out in anecdotes (see for instance, Hertz’s big comeback after filing for bankruptcy last year) or in the numbers (most companies took advantage of ultra-low interest rates to refinance and term out their debt, meaning they’re actually less indebted than they were before 2020) I do think there are important tradeoffs and risks to think about when it comes to central bank stimulus, but keeping zombie companies alive after the worst global pandemic in more than a century isn’t one of them.

One Sign That the Fed Changed Everything in Corporate Bonds, Sept. 13
Following on from the above, it’s important to realize that something big and important did happen in credit markets in 2020. The Fed for the first time effectively backstopped the entire corporate bond market (even without having to actually buy that much of the debt). The downside of this is that market participants rarely forget a new central bank backstop, and there are signs that corporate bond investors have permanently priced this new reaction function in.

When Everything Is a Growth Stock And All Money Is Venture Funds, Dec. 3
What do you get a credit market that has everything? How about billions of dollars of loans at ultra-low interest rates to companies with no income? This is a deep dive into recurring revenue loans, which are based on expected revenue from a company’s service contracts or subscriptions due (aka annualized recurring revenue). One way of thinking about these is that they’re the credit market equivalent of what’s going on in equity markets, where lofty stock valuations are often justified by wildly optimistic earnings forecasts (see also the below piece on the slaughter in growth stocks).

In the Tarantino Market, the Hottest Stocks Are Getting Quietly Killed, Dec. 3
November was a really weird month for equities. On the one hand, the S&P 500 was basically flat. But on the other hand, some stocks were getting absolutely slaughtered. What’s interesting about this under-the-surface selloff was that it hit all the hottest stocks with seemingly little catalyst. Nothing much happened other than retail investors and hedge funds took a breath and decided that those super-hyped growth narratives maybe looked a little far-fetched.

Treasuries

A $21 Trillion Treasuries Mystery Is Bedeviling Global Markets, March 3
Another year, another bout of weird price action in the $21 trillion U.S. Treasury market that forms the bedrock of financial markets and the benchmark risk-free rate. This year, the gap between bid and offer prices for the 30-year hit its widest since the panic of March 2020 (when the Treasury market was also roiled by leveraged players). It was yet another strange move in a market that really isn’t supposed to have this many strange moves.

Treasuries Acting Like Meme Stocks Helps Explain Low Bond Yields, Oct. 14
The other big mystery in the U.S. Treasury market has been the persistent bid for U.S. debt despite all those worries over inflation and looming rate hikes. One possible explanation is that there are just a lot of buyers for USTs right now who aren’t all that price-sensitive. Buyers like big U.S. banks need Treasuries to satisfy regulatory requirements and so on. Another way to think of it, is that the way a financial asset behaves can change depending on who’s holding it.

Accounting

What One of China’s Biggest Developers Can Tell Us About Debt, Sept. 29
“If you want to avoid being seen to cross any red lines, you could simply go dark” is the opening line of this piece on how one Chinese property developer seems to have responded to the country’s recent crackdown on real estate leverage. It pretty much sums it up.

What the Heck Is a ‘Reverse Repo Note’ and What Happened to All of Tether’s?, Dec. 9
Tether’s financial accounts use some odd nomenclature to describe the financial assets that are supposed to be backing their stable coins, including something called a “reverse repo note.” This shouldn’t be confused with a basic “reverse repo,” which is a normal and well-known term in financial markets. No one in the repo market seems to have ever heard of ‘reverse repo notes’ before though.

Arbitrage

There’s a Massive Arbitrage Opportunity in the Plastics Market, July 13
Do you know what a nurdle is? After reading this post about plastic markets you will. The story centres around a potential arbitrage opportunity in the plastics, with polyethelene in the U.S. and Europe trading at a massive premium to prices in China, but it’s mostly about the compounding effect of supply chain disruptions as shortages in one area (shipping containers, refining capacity) end up adding to scarcity of something else (plastics elsewhere in the world). 

A Huge Arbitrage Opportunity Has Just Opened Up in Crypto, Nov. 24
There was a moment this year where you could buy Bitcoin at a double-digit discount to prevailing market prices so long as you purchased from certain Indian crypto exchanges. Of course, the whole incident was pretty short-lived but it does illustrate a wider point about ostensibly decentralized money — it’s really not that decentralized depending on the exchanges and regulations involved (i.e. you can’t necessarily port money from India to elsewhere that easily).

Scoops

Goldman Bankers Beg to Work Only 80-Hour Weeks in Stinging Deck, March 18
In spring of this year, a group of first-year bankers at Goldman Sachs conducted an anonymous survey, formatted the responses into a slide deck (obviously) and then sent it to on to higher-ups. The deck contained a litany of grievances including long working hours, unrealistic deadlines and an overall pattern of declining mental health as first-years grappled with pandemic-related isolation combined with a bumper year for deals. The deck kicked off something of a reckoning on Wall Street as investment banks started competing with each other to better compensate their burnt-out junior bankers, with higher pay, somewhat restricted hours and even Pelotons.

Billions in Secret Derivatives at Center of Archegos Blowup, March 29
This was the first story to draw attention to the type of financial instruments Bill Hwang had been using at Archegos, the $20 billion fund which went spectacularly belly-up in the space of a few days in March. As noted in the piece, Hwang’s use of swaps meant that he could amass big positions in stocks without actually owning the underlying securities. He also didn’t have to provide as much margin to his prime brokers. Since this piece was published, the SEC has proposed new rules that would require more disclosures for swaps and limit how much hedge funds can use them.

Morgan Stanley to Repay Hong Kong Staff $5,100 for Quarantine, Nov. 24
Morgan Stanley was the first investment bank in Hong Kong to announce that it would reimburse staff for quarantine costs, a story which also kicked off a round of competitive offerings from investment banks. The issue of quarantine reimbursement is probably of limited interest to anyone outside of Hong Kong, but it’s certainly been a big topic in a city where it’s now prohibitively difficult and expensive to travel. Hong Kong’s extreme quarantine requirements have very much altered its attractiveness for expat financial workers and fundamentally changed the value proposition of being based the city (by way of personal example, I haven’t traveled outside the territory for more than two years now).

Misc.

Bonds of Power – Lecture for Investor Amnesia’s Imperial Finance: A History of Empires
Putting this lecture together for Jamie Catherwood’s Investor Amnesia series was a lot of work but it also ended up being surprisingly fun. It’s a deep dive into one of my favorite topics — the nature and moral obligations of debt — as explored through the prism of defaulted Russian imperial debt and imperial Chinese bonds. One thing it illustrates perfectly is that because bonds are so often tied up in stories of who owes what to whom, they can end up being surprisingly powerful political tools. (You should also check out some of the other great lectures by Marc Andreessen, Niall Ferguson and Kim Oosterlinck, who has also done some sterling work on the topic of morality and bonds).