Issue 3: Cyber sanctions, startups as an asset class, AI in central planning, tail risk in markets, space, and more

Alternatively: can Biden consolidate?

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Here’s the week’s best and most interesting.

Topics in this issue: cyber sanctions, European startups as an asset class, AI in central planning, tail risk in global markets, evolution, space, China, and more.

Technology

Viktoria Dendrinou and Nikos Chrysoloras on the first EU cyber-sanctions:

The EU may target Russian and Chinese-linked entities and individuals with sanctions over hacking. Formal discussions could result in the first application of the bloc’s cyber-sanctions regime.

Nicholas Colin on European startups as an asset class:

(The issue is a must-read. A parallel to draw: what about emerging African startups? If you’re interested in Africa — as I am — you should talk to the folks at Timon Capital.)

First, non-US startups are simpler and cheaper; they generally promise lower valuations, not greater returns. Second, those typically grow on emerging or insignificant markets. And third, leading VC firms’ most demanding LPs generally don’t want exposure to startups outside the US.

Asset allocators are following a known and safe playbook by overlooking European startups. This is an opportunity for new allocators who are willing to make an early bet on these “lesser” startups, grow from there, and then eventually compete with established players for the best deals at the high end of the startup market in Silicon Valley.

Matt Clifford on machine learning rescuing central planning:

A new paper by Jesus Fernandez-Villaverde re-examines whether machine learning can replace markets and concludes: “no.” The argument is a variant of Hayek’s classic The Use of Knowledge in Society: the problem is not computational, but behavioral; under planning, people don’t have the incentive or even capability to share all their relevant information. Machine learning will do many things, but fixing communism isn’t one of them.

Benedict Evans on governments and encryption:

The EU Commission told its staff to switch to Signal.

Markets

Cormac Mullen on surging remote work stocks:

One clear theme is emerging amidst the coronavirus-driven market rollercoaster: stay-at-home stocks are the place to be. [On the other hand,] global stocks have lost over 6% since late January and Tuesday's decline means U.S. shares now underperform their European counterparts.

Edward Harrison on tightening financial conditions and tail risk:

The contagion risk goes from coronavirus to lower oil demand to lower prices to an energy sector bear market to a rout in the US high yield sector (where energy firms are big players.) Interest rate policy has to come into play now. I take the curve inversion as a sign of expected aggressive rate cuts rather than an outright harbinger of recession per se. Will a couple of Fed rate cuts end the trouble? Probably not. But the Fed sitting on its hands would be a policy error that increases tail risk.

Evolution

Freeman Dyson on biological and cultural evolution: (Godspeed.)

In the near future, we will be in possession of genetic engineering technology which allows us to move genes precisely and massively from one species to another. Careless use of this technology could make the concept of species meaningless, mixing up populations and mating systems so that much of the individuality of species would be lost. Cultural evolution gave us the power to do this.

Space

Andrew Cantino and Ben Lachman on the realities of the Moon and Mars missions:

The annual NASA Authorization Act prioritizes Mars over the Moon, pushes a lunar landing back to 2028, and prevents NASA from using PPPs for lunar landing services. The bill’s requirement of SLS and “cost-plus” contracts with mega-contractors could lead to an unsustainable price tag of $35 billion. The presidential mandate of a 2024 lunar landing isn’t supported by Congress and probably will not be supported by a Democrat presidential candidate.

China

Bill Bishop on actionable signs that the outbreak is contained:

1. Xi visits Wuhan;

2. The announcement of a date for the “Two Meetings;”

3. Kids go back to school.

The political risk of sending kids into harm’s way is too high. Until it is safe for kids to go back to school it is hard to see the economy operating at anywhere near normal levels [while five more regions lower emergency response level.]

Various & Sundry

Things of note this week: US markets having their worst week since 2008; Turkey opening up its borders to raise pressure on the EU over Russia’s Idlib offensive.

Things you should read this week:

• The Great Technology Shift -- China and The Rise of the Rest

• On the nature of Bloomberg as a political hedge fund

• The Global Competition for Scientific Minds Is Heating Up

Thought of the week: what if Super Tuesday clarifies nothing? Scenarios of a brokered convention have been floated recently. There are two plausible ways such an outcome could be averted: either Sanders breaks through or Biden consolidates the vote. Two big “ifs” despite Biden’s big (yet, shrinking over time) lead in SC polls.

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