Tuesday, April 25, 2017

Hemingway the Investor

From the Paris Review, March 24:

Papa the Investor
How Hemingway became a major shareholder in a venerable Italian publishing house.
Ernest Hemingway had a rough time with his Italian publisher, Einaudi, the venerable Turin-based house that still prints a good portion of his titles today. The issue, as is so often the case, was money: Einaudi, Hemingway complained, were communists looking for any excuse to withhold his overdue royalties. After 1947, he’d grown so exasperated that he refused to publish another book with them. So it’s all the more startling to discover that in the spring of 1955, he quietly agreed to convert a large part of his growing credit with the house into company stock, becoming a major shareholder overnight. Hemingway was usually very prudent with his money—and the chronically mismanaged Einaudi was hardly a safe investment. But having a stake in the publication of his own books, he hoped, would make it easier to get his hands on his growing pile of Italian cash.

As an author, Hemingway had gotten a late start in Italy. During the twenties and thirties, when the Anglophone world consecrated him as one of its brightest talents, he was persona non grata in the country. His blacklisting started as early as 1923, when Hemingway, still a young reporter for the Toronto Star, described Mussolini as “the biggest bluff in Europe.” In 1927, he wrote a few sardonic sketches on Fascist Italy for the New Republic. But it was the 1929 publication of A Farewell to Arms, with its antimilitarism and its powerful description of the rout of the Italian Army after Caporetto, that made him an enemy in the eyes of the Mussolini regime—a reputation further sealed by his support for the Republican cause in the Spanish Civil War.

Thus Hemingway’s books were banned in Fascist Italy even as the works of other American writers, such as Sinclair Lewis, William Faulkner, John Steinbeck, and John Dos Passos, were brought into translation with success and acclaim. But as soon as Mussolini fell, in 1943, publishers scrambled to buy up the translation rights to his novels. The first Italian edition of The Sun Also Rises was published by a little-known company, Jandi Sapi, in the early summer of 1944, only weeks after General Mark Clark’s troops liberated Rome. A Farewell to Arms, For Whom the Bell Tolls, and To Have and Have Not came out in quick succession with different houses the following year, immediately after the liberation of Northern Italy. The translations were hurried and the first editions sloppy; it was unclear which house owned which rights, if it owned any at all.

To sort things out, Hemingway gave his agents the go-ahead to sign several deals with Einaudi, a young, left-leaning literary house with a strong list of American authors. By early 1947, they’d secured the rights to The Sun Also Rises, The Fifth Column and the First Forty-Nine Stories, Green Hills of Africa, Death in the Afternoon, and To Have and Have Not, thus emerging triumphant in the postwar battle for Hemingway. But his two biggest titles, A Farewell to Arms and For Whom the Bell Tolls, still eluded them.

Arnoldo Mondadori, who’d built his eponymous publishing house during Mussolini’s years, claimed those two books based on contracts signed in Switzerland during the war. In the spring of 1945, he wrote an unctuous letter to Hemingway, begging him in rudimentary English for the privilege of becoming his “sole publisher” in Italy. “I intended to diffuse your name, almost unknown to the Italian public, as largely as possible, because I know the moral and cultural advantage our readers would have had by coming in touch with your poetic world,” he wrote. He would’ve written sooner, he added, but he was prevented by “draconian fascist prohibitions.” Mondadori had been a card-carrying member of the Fascist Party.

Understandably, Hemingway didn’t want his work disseminated by a former Fascist—at least not in the spring of 1945, when most of Italy was still in ruins. He left Mondadori’s letter unanswered. Even so, a series of court rulings awarded Mondadori the rights for Farewell to Arms and For Whom the Bell Tolls. The line was now drawn: Einaudi and Mondadori were rivals as the world plunged into the Cold War.
Three years later, in September 1948, Hemingway and his fourth wife, Mary Welsh, sailed to Europe. They’d planned to land at Cannes and cruise Provence, but a series of mechanical mishaps forced the ship to dock in Genoa. Hemingway hadn’t set foot in Italy in more than twenty years, and memories of his time as a volunteer at the front in 1918 came crowding back. He drove Mary to Stresa, on Lake Maggiore, where he’d spent time recuperating from his war wounds....MORE, including Silvio Berlusconi.

HT: Arts & Letters Daily
On blogroll at right

Unroll.me Co-Founder Responds To Criticism The Company Sold User Info To Uber

From Digg:
Over the weekend, a startup called Unroll.me faced backlash from customers over the revelation that it sold anonymized data from their inboxes to Uber. 
Update: On Tuesday, Unroll.me's co-founder, who no longer has a role or ownership stake in the company, added fuel to the fire by writing what people on Twitter are already calling "the worst possible take" on the Unroll.me debacle. 
"Data is pretty much the only business model for email and Unroll.me is not the only company that looks at, collects and sells your data. What exactly do you think is going on in your FREE gmail inbox? And honestly, anonymized and at scale why do people care? Do you really care? Are you really surprised? How exactly is this shocking? 
Or maybe you just hate yourselves because you think Uber is gross but you use them anyway and "why are these tech founders such assholes" that they have to ruin your experience where you need to delete your apps? And you love Unroll.me and you feel righteous and you have to delete that now too because you need to take a stand against these plain-as-da-in-the-terms-of -service practices. 
Look, respectfully, you have clearly been living under a rock because if you look at the entire tech ecosystem — It’s fucking gross."
There are plenty more typos and aggressively sarcastic rhetorical questions in Chase's defense of Unroll.me, which is really worth reading in full.
Here's some background on Unroll.me, how its data collection practices came to light, and why no one is satisfied by its CEO's attempt to explain the mess....MUCH MORE

"The Untenable Case for Perpetual Dual-Class Stock"

From The Harvard Law School Forum on Corporate Governance and Financial Regulation:
Editor's note
 Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance, at Harvard Law School. Kobi Kastiel is the Research Director of the Project on Controlling Shareholders of the Program. This post is based on their Article, The Untenable Case for Perpetual Dual-Class Stock, forthcoming in the Virginia Law Review. The Article is part of the research undertaken by the Project on Controlling Shareholders.
We recently placed on SSRN our study, The Untenable Case for Perpetual Dual-Class Stock. The study, which will be published by the Virginia Law Review in June 2017, analyzes the substantial costs and governance risks posed by companies that go public with a long-term dual-class structure.
The long-standing debate on dual-class structure has focused on whether dual-class stock is an efficient capital structure that should be permitted at the time of initial public offering (“IPO”). By contrast, we focus on how the passage of time since the IPO can be expected to affect the efficiency of such a structure.

Our analysis demonstrates that the potential advantages of dual-class structures (such as those resulting from founders’ superior leadership skills) tend to recede, and the potential costs tend to rise, as time passes from the IPO. Furthermore, we show that controllers have perverse incentives to retain dual-class structures even when those structures become inefficient over time. Accordingly, even those who believe that dual-class structures are in many cases efficient at the time of the IPO should recognize the substantial risk that their efficiency may decline and disappear over time. Going forward, the debate should focus on the permissibility of finite-term dual-class structures—that is, structures that sunset after a fixed period of time (such as ten or fifteen years) unless their extension is approved by shareholders unaffiliated with the controller.

We provide a framework for designing dual-class sunsets and address potential objections to their use. We also discuss the significant implications of our analysis for public officials, institutional investors, and researchers.

Below is a more detailed summary of our analysis:

1990, Viacom Inc., a prominent media company, adopted a dual-class capital structure, consisting of two classes of shares with differential voting rights. This structure enabled Viacom’s controlling shareholder, Sumner Redstone, to maintain full control over the company while holding only a small fraction of its equity capital. At the time, Redstone was already one of the most powerful and successful figures in Hollywood. Indeed, three years earlier, he had bought Viacom in a hostile takeover, exhibiting the kind of savvy and daring business maneuvers that subsequently helped him transform Viacom into a $40 billion entertainment empire that encompasses the Paramount movie studio and the CBS, MTV, and Showtime television networks. Investors during the 1990s could have reasonably been expected to be content with having Redstone safely at the helm.

Fast-forward twenty-six years to 2016: Ninety-three-year-old Redstone faced a lawsuit, brought by Viacom’s former CEO and a long-time company director, alleging that Redstone suffered from “profound physical and mental illness”; “has not been seen publicly for nearly a year[;] can no longer stand, walk, read, write or speak coherently; … cannot swallow[;] and requires a feeding tube to eat and drink.” Indeed, in a deposition, Redstone did not respond when asked his original family birth name. Some observers expressed concerns that “the company has been operating in limbo since the controversy erupted.” However, public investors, who own approximately ninety percent of Viacom’s equity capital, remained powerless and without influence over the company or the battle for its control.

Eventually, in August 2016, the parties reached a settlement agreement that ended their messy legal battles, providing Viacom’s former CEO with significant private benefits and leaving control in the hands of Redstone. Notably, despite the allegation and the evidence that surfaced, the settlement prevented a court ruling on whether Redstone was legally competent. Note that even a finding of legal competency would have hardly reassured public investors: Legal competence does not by itself qualify a person to make key decisions for a major company. Moreover, once Redstone passes away or is declared to be legally incompetent, legal arrangements in place would require the control stake to remain for decades in an irrevocable trust that would be managed by a group of trustees, most of whom have no proven business experience in leading large public companies. Thus, even assuming that Viacom’s governance structure was fully acceptable to public investors two decades ago, this structure has clearly become highly problematic for them.

Let us now turn from Viacom to Snap Inc. The company responsible for the popular disappearing-message application Snapchat has recently gone public with a multiple-class structure that would enable the company’s co-founders, Evan Spiegel and Robert Murphy, to have lifetime control over Snap. Given that they are now only twenty-six and twenty-eight years old, respectively, the co-founders can be expected to remain in control for a period that may last fifty or more years.

Public investors may be content with having Spiegel and Murphy securely at the helm in the years following Snap’s initial public offering. After all, Spiegel and Murphy might be viewed by investors as responsible for the creation and success of a company that went public at a valuation of nearly $24 billion. However, even if the Snap co-founders have unique talents and vision that make them by far the best individuals to lead the company in 2017 and the subsequent several years, it is hardly certain that they would continue to be fitting leaders down the road. The tech environment is highly dynamic, with disruptive innovations and a quick pace of change, and once-successful founders could well lose their golden touch after many years of leading their companies. Thus, an individual who is an excellent leader in 2017 might become an ill-fitting or even disastrous choice for making key decisions in 2037, 2047, or 2057. Accordingly, as the time since Snap’s IPO grows, so does the risk that Snap’s capital structure, and the co-founders’ resulting lock on control, will generate costly governance problems....MUCH MORE

"Jack Ma Sees Decades of Pain as Internet Upends Old Economy"

Feel the pain, embrace the pain, use Alibaba's Ant Financial, etc.

From Bloomberg:
  • Alibaba founder says education can ease blow from automation
  • ‘Machines should only do what humans cannot,’ Ma tells forum
Alibaba Group Holding Ltd. Chairman Jack Ma said society should prepare for decades of pain as the internet disrupts the economy.

The world must change education systems and establish how to work with robots to help soften the blow caused by automation and the internet economy, Ma said in a speech to an entrepreneurship conference in Zhengzhou, China.

“In the next 30 years, the world will see much more pain than happiness,” Ma said of job disruptions caused by the internet. “Social conflicts in the next three decades will have an impact on all sorts of industries and walks of life.”

It was an unusual speech for the Alibaba co-founder, who tends to embrace his role as visionary and extol the promise of the future. He explained at the event that he had tried to warn people in the early days of e-commerce it would disrupt traditional retailers and the like, but few listened. This time, he wants to warn against the impact of new technologies so no one will be surprised.

“Fifteen years ago I gave speeches 200 or 300 times reminding everyone the Internet will impact all industries, but people didn’t listen because I was a nobody," he said.

Ma made the comments as Alibaba, China’s largest e-commerce operator, spends billions of dollars to move into new businesses from film production and video streaming to finance and cloud computing. The Hangzhou-based company, considered a barometer of Chinese consumer sentiment, is looking to expand abroad since buying control of Lazada Group SA to establish a foothold in Southeast Asia, potentially setting up a clash with the likes of Amazon.com Inc....MORE

The Coming Opportunity From The Shift To Passive Investment Management

It is still some time in the future but when it comes the current and evolving structure of the market and the advisory biz is going to result in one of the largest wealth transfers in history. More to come as we get closer but in the meantime it is probably wise to internalize the parameters of the current game.
From David Keohane at FT Alphaville:

Soooooon, passive vs active edition
At some point in the next nine months a historic milestone will be passed. More than half of managed equity assets in the US will be run on a passive basis (for global equities the figure is 38%). At the current rate we forecast that this will happen sometime in January 2018. We don’t think that there will ever be any reversion back past this point, so from here on the majority of equity AUM in the US will be passive. In this short note we consider what this means.
That’s from Bernstein’s Inigo Fraser Jenkins and team. The charted version looks like this:
While the less intimidating version points out that when other holders of equities — retail, corporates holding their own stocks, SWFs etc — are taken into account, expressed as a share of market cap, passive is “only” 14.5 per cent, according to Bernstein.
And yes, this is the same Bernstein team which previously suggested that passive investing was worse than Marxism and ranked capital markets thus:
  1. Capitalist society with functioning capital markets
  2. Marxism
  3. Capitalist society with predominantly passive capital markets
Their argument is/was that markets exist to allocate capital and passively dominated markets won’t allocate it very well since there won’t be active managers doing the necessary fundamental legwork. Or: “In a Marxist society at least someone is doing the planning of capital allocation, but in a predominantly passive market then the capital allocation process is done by a marginal participant.”
There are numerous potential problems with this which have already been raised. For one, there is an argument, put forward by Credit Suisse’s Mauboussin earlier this year, that the shift away from active might actually be good for market efficiency:
Investors are shifting their investment allocations from active to passive management. This trend has accelerated in recent years. The investors who are shifting from active to passive are less informed than those who stay. This is equivalent to the weak players leaving the poker table. Since the winners need losers, this can make the market even more efficient, and hence less attractive, for those who remain. If you can’t identify the patsy, or weak player, it’s probably you…
Small and unsophisticated investors should build passive portfolios, with an emphasis on asset allocation and low cost. Sophisticated investors should seek active managers in asset classes with high dispersion. There are ways to assess money managers beyond past performance that may shade the odds in your favor
But even if you buy Bernstein’s side, their operative word is “predominantly” since the argument is that at some advanced level of passive domination the capital allocation function of the market will be damaged. It’s an argument that makes logical sense for an undefined level of passive domination.

More so, it’s unclear that a level high enough to be damaging to the market will be reached — arguably as soon as the market starts to become dysfunctional it will pay active managers to jump back in. That’s what those like Burton Malkiel who are passive fans would say, anyway....MUCH MORE

Ag Commodities: "Grain Bears Take Heart in Rapid US Plantings"

Last Chg
Corn 364-4-1-0
Soybeans 968-0-3-6
Wheat 418-4-0-6

From Agrimoney:
Grain bulls were stopped in their tracks by the advance of crop planting technology.
Investors hoping that strength in corn and soybeans, at least, in the last session might be the start of something more significant found such expectations challenged by data overnight, highlighting how significantly growers can exploit dry windows for accelerating sowings.
The US Department of Agriculture data showed that US farmers planted 11% of their corn crop last week, nearly catching up with the average sowings progress after a rain-delayed start.
Corn plantings were, as of Sunday, 17% complete - just 1 point behind the average pace, and 2 points above the level that the market had expected.
'Things can get done quickly'
The first reading of the season for soybean seedings, meanwhile, showed progress of 6% - twice the typical amount completed for the time of year, and three times the figure of 2% that investors had expected.
"Planting progress data was slightly bearish," said Joe Lardy at CHS Hedging,
Indeed, the data underlined what farmers, equipped with modern machinery, are capable of.
"Thanks to Precision Planting's new Speed Tubes, corn can be safely placed in the seed trench at speeds of 7.5-9.5 mph," Tregg Cronin at Halo Commodity Company noted.
"At 7.5mph, a 16-row corn planter can plant 36 acres an hour, while at 9.5mph it can plant 46 acres of corn per hour.
"With corn planters are large as 120 feet, things can get done quickly."
'Things could get interesting'
This "should keep producers calm for another 7-10 days", Mr Cronin added, with weather seen returning to a wet pattern which will hamper plantings.
"Heavy rains are slated for the heart of the Corn Belt through this week," said Benson Quinn Commodities.
"Looking out to May 7, the bulk of the Corn Belt is slated for average-to-above-average precipitation and average-to-below-average temperatures."
Mr Cronin said that if corn sowing progress "doesn't move past 50% by the May 7 report, then things could get interesting".
Dollar down
However, with farmers having achieved more sowings last week than the market had expected, easing crop uncertainty, it was hard for bulls to get excited in early deals, even with the dollar easing back a touch more....MUCH MORE

Monday, April 24, 2017

Deliver Us From Traffic

From CityLab, April 20:

Cities Seek Deliverance From the E-Commerce Boom
It’s the flip-side to the “retail apocalypse:” A siege of delivery trucks is threatening to choke cities with traffic. But not everyone agrees on what to do about it.

This post is part of a CityLab series on open secrets—stories about what’s hiding in plain sight.
Just before 3 in the afternoon on a rainy spring day, Keith Greenleaf busts out his “bricklaying” skills. That’s delivery-driver parlance for balancing an inordinate amount of cardboard boxes on a metal handcart. As high as his collarbone he stacks them, packages labeled HP, J. Crew, Amazon Prime. “This is probably one of the first days I don’t have Pampers or dog food,” he says.

Greenleaf also doesn’t have any 60-pound boxes of copier paper, which is a welcome way to finish his daily rounds.The veteran UPS driver is parked near 22nd and I St. in Washington, D.C., having arrived there about six hours earlier in a truck loaded down with 320 boxes. In a few hours he’ll drive back to the distribution center in Landover, Maryland; several hours after that, he’ll be at Outback Steakhouse downing beers with a few fellow drivers.

Right now, however, Greenleaf’s in the thick of it. For 15 of his 25 years driving for UPS, he has delivered along roughly a 10-block route close to 22nd and I. Several years ago, to meet the demand, UPS shortened Greenleaf’s route by two blocks and gave them to a new driver on a new route. When I meet up with him mid-afternoon one Friday (per UPS media ride-along convention, I’ve been given my own iconic brown uniform, including pants so baggy MC Hammer would cringe), he’s unloading boxes from his parked truck onto a loading dock underneath the Residences on the Avenue, an apartment building with a Whole Foods right next door. As I get ready to climb aboard, he tells me we won’t be making any deliveries in the truck.

Several years ago, the 56-year-old was delivering mainly to commercial locations. Now half his drop-offs are residential. The traffic congestion and lack of available parking has become so unworkable that Greenleaf would rather walk the remainder of his route, delivering packages by handcart, which is what he’s done every afternoon for the last three years.

Pick any other major city or metropolitan area in the U.S., and the situation’s probably the same: a massive surge in deliveries to residential dwellings, one that’s outstripping deliveries to commercial establishments and creating a traffic nightmare.

Consumers today are spending less time in local stores and more time online, buying not only retail items but also such goods as groceries from Peapod, office supplies from Postmates, and whatever the hell they want from Amazon. It’s estimated that, on average, every person in the U.S. generates demand for roughly 60 tons of freight each year, according to the National Capital Region Transportation Planning Board. In 2010, the United States Post Office—which has overtaken both FedEx and UPS as the largest parcel-delivery service in the country—delivered 3.1 billion packages nationwide; last year, the USPS delivered more than 5.1 billion packages. The growth in e-commerce is fueling a commensurate rise in the number of delivery vehicles—box trucks, smaller vans, and cars alike—on city streets.

While truck traffic currently represents about 7 percent of urban traffic in American cities, it bears a disproportionate congestion cost of $28 billion, or about 17 percent of the total U.S. congestion costs, in wasted hours and gas. Cities, struggling to keep up with the deluge of delivery drivers, are seeing their curb space and streets overtaken by double-parked vehicles, to say nothing of the bonus pollution and roadwear produced thanks to a surfeit of Amazon Prime orders.

“A humongous amount of externalities are being produced,” says José Holguín-Veras, director of the Center of Excellence for Sustainable Urban Freight Systems at Rensselaer Polytechnic Institute. “Every 25 people produce one Internet delivery. … So imagine any congested city you know of. Imagine that you were to increase freight traffic by a factor of three. This is what’s happening now.”

It didn’t used to be like this.

The urban home-delivery ecosystem of yore evokes images of icemen making their rounds or kindly white-capped milk men stopping by with a new glass bottle. City dwellers, with their density of retail options within close walking distance, often had newspapers and perishables delivered daily, but in the earlier decades of the 20th century, home delivery of purchased goods was typically something arranged after a trip to the store, where shoppers tried on or tested out the clothes and furniture they wanted, and then scheduled what they couldn’t carry back by hand or in taxis or streetcars to be dropped off later. It was for this very purpose that UPS was founded in 1907 in Seattle. Overall, though, bulk deliveries predominated. These were deliveries of large retail goods to stores in shopping districts, where some thought had been given to how streets would accommodate trucks....MUCH MORE
HT: MetaFilter

"We're 'heartbroken' we got caught selling your email records to Uber, says Unroll.me boss"

It's getting so you can't trust any of these companies with your data.
Any of them.

From The Register:
Not sorry we did it – just sorry you're pissed off
Jojo Hedaya, the CEO of email summarizer Unroll.me, has apologized to his users for not telling them clearly enough that they are the product, not his website.

Unroll.me is owned by analytics outfit Slice Intelligence, and the site began life in 2011 with a fairly useful function. Its software crawls through your email inbox, noting which services and alerts you have signed up for. You can unsubscribe from the stuff you don't want, and shift all those regular emails you do want into a digest, sent once a day.

It's a way of tidying up and organizing all those notifications from your bank, newsletters, and so on. It's also free to use, and it accesses your email account, and so obviously it sells anonymized summaries of your messages to anyone with a checkbook.

Over the weekend, it emerged Uber had, at times, played fast and loose with people's privacy. At one point, it was buying anonymized summaries of people's emails from Unroll.me, allowing the ride-hailing app maker to, for instance, figure out how many folks were using rival Lyft based on their emailed receipts.

Not a great look. So in a blog post Sunday, Hedaya apologized – not for actually selling off the contents of users' inboxes, but for upsetting people when they found out.
"Our users are the heart of our company and service. So it was heartbreaking to see that some of our users were upset to learn about how we monetize our free service," he said. "And while we try our best to be open about our business model, recent customer feedback tells me we weren't explicit enough."

Hedaya didn't apologize for selling the data, which he said was all legitimate and above board. If users had bothered to go through the 5,000 words that make up the app's terms & conditions and privacy policy, they would have seen the legalese that allows such practices....MORE
In fact as we said about this Kalanick fellow in a different context back in 2014:
Here's the Real Problem With Uber: You Can't Trust Them

Ralph Lauren Still Paying $68K Per Day Lease On Closed NYC Flagship (RL)

$68,493 per day for 39,000 square feet?
We may have found one of the problems with retail. Back in 2011 Airbnb was offering Liechtenstein for $70 thousand per night, links below.

From the New York Post:

Ralph Lauren still paying rent at abandoned former flagship store
For passersby on Fifth Avenue on Thursday, there was no evidence that legendary American designer Ralph Lauren operated a grand flagship store at 55th Street.

The royal blue awnings are gone and the flagpole, which once proudly flew a banner with the fluttering image of a horse and polo player, stands naked.

And just as important, there is no new tenant setting up shop and, according to sources, no broker has started marketing the 39,000-square-foot space that has been dark since the designer shut off the lights one last time on Saturday.

The only constant, it appears, is that Ralph Lauren Corp. continues to pay rent of nearly $70,000 a day.

“That gives you a good indication of how poorly they were doing at that location that they are paying rent there on an empty space rather than stay open until they find a new tenant,” said one real estate expert, who did not want to be identified.

The stunning and sudden departure of the retailer after just two years on the most famous shopping corridor is unprecedented, said Tom Cusick, president of the Fifth Avenue Business Improvement District. “I don’t recall any company pulling out of a location with a long-term lease after such a short time on Fifth Avenue.”

The iconic fashion house, which has been fighting sagging sales and has closed 50 other stores, signed a $400 million, 16-year lease for the flagship store in 2013. That rent averages $25 million a year, or $68,493 a day....MORE
The graphic the Post chose to illustrate the story:

Ralph Lauren's Fifth Avenue store is some white elephant - the lease 
isn't up for about 13 years at an eye-popping rate of $68,500 a day.

Meanwhile in comparisons, we linked to a post in June, 2010 that may have given someone an idea

"Snoop Dogg tries to rent entire country of Liechtenstein"
From Foreign Policy's Passport blog:
In a too-good-to-check item, the Daily Mirror reports that rapper Snoop Dogg recently attempted to rent the entire nation of Liechtenstein for a music video:
The request surprised authorities in the state of Liechtenstein - population 35,000 with an area of 61.7 square miles between Switzerland and Austria.
Local property lease agent Karl Schwaerzler said: "We've had requests for palaces and villages but never one to hire the whole country before.">>>MORE
which was followed a few months later by a story in the Guardian:

Liechtenstein for hire at $70,000 a night
Liechtenstein rental scheme includes customised street signs, temporary currency and accommodation for 150
Vaduz castle in Liechtenstein. Photograph: Paul Trummer/Getty Images 
Executives with cash to burn traditionally hire luxury yachts, secluded villas or expensive hotel suites to impress clients. Now they can take corporate hospitality to a new level by hiring an entire country, albeit a small one.

The principality of Liechtenstein has decided to make itself available to private clients, from $70,000 (£43,000) a night, complete with customised street signs and temporary currency. It's a big step for the country best known for its tax-haven status and exporting false teeth: last year Snoop Dogg, pictured, tried to hire it to use in a music video, but received a stern refusal from authorities.

Since then they have woken up to the marketing opportunities of their mountainous landscape. The price tag includes accommodation for 150 people, although the 35,000 inhabitants would remain.

Any personal touches, such as an individual logo created out of candle wax or a customised medieval procession, come at an extra, undisclosed cost.

Upon arrival in Liechtenstein, visitors would be presented with the symbolic key to the state, followed by wine tasting at the estate of the head of state, Prince Hans-Adam II. Other options include tobogganing, fireworks and horse-drawn carriage rides through the capital Vaduz....MORE
So what's the all-in price for an après-wine-tasting tobogganing outing with the Prince?
Under the fireworks, natch.
While throwing temporary currency to the Liechtensteiners (who suffer GDP envy re: Monaco)
With Ralph Lauren steering the toboggan.

Platts: "Why the crude rally has fizzled: Market analysis series" Part II

Our intro to to Part I, April 20, 2017:

Here's the last year of WTI prices via FinViz:

$51.34 up 49 cents, last.
Currently $49.32, down another 30 cents.
From Platts' The Barrel blog:
This is the second of a three-part look at why oil prices have failed to rally despite OPEC’s best efforts at managing supply cuts. Read part 1 here.

So, why is everyone so bullish?

Many oil analysts take as a fait accompli that OPEC-led production cuts thus far are key to balancing the crude market. If this is the case, though, why hasn’t it happened yet?
But the bulls say give it time. In the long run, the market will balance.

Everyone knows what Keynes said about the long run (that we are all dead).

That the market is prime for a rally has become gospel truth. But isn’t something so paradigmatic just a little bit risky?

“Oil prices will get better, and you can take that to the bank,” David Purcell, head of macro research at Tudor, Pickering and Holt, said at a recent Dallas conference.

“The market is under-supplied, inventories are back to normal levels by the end of the year, and if you guys don’t drill the Permian too fast, we’re okay,” Purcell said.

But drilling too fast is just what drillers have been doing. According to Platts Analytics RigData, active Permian horizontal rigs now stand at 280, 40% of all US horizontal drilling. The number of US horizontal rigs will likely break above 700 soon, revisiting a number last seen in April 2015, when Permian rigs made up just 25% of the total.
Permian looking increasingly profitable
Calling for $60/b by the year’s end, FGE Chairman Fereidun Fesharaki said at a Fujairah bunkering conference last month that recent price pessimism was overdone and that financial players in the short term were misreading the market.

Many of the banks have been driving this home as well.

While Credit Suisse analysts earlier this month conceded that both Atlantic Basin and Asia-Pacific crude markets are suffering from oversupply — widening price discounts for Asian grades like Russia’s ESPO Blend and Qatar’s Al-Shaheen can attest to that — they also say that it is too early to ditch the idea that just because prices have struggled, the market isn’t rebalancing....MUCH MORE

Capital Markets: "Dramatic Response to French Election"

I have a sneaking suspicion that gap is going to fill:

$1.0891 last.

From Marc to Market:
The results of the first round of the French election spurred a dramatic response in the capital markets. Our thesis that there is no populist-nationalist wave sweeping the world is supported by the previous results in Austria, the Netherlands, and now France. The AfD in Germany is wilting in the polls, and there too the center will hold. The populist-nationalist wave seems a result of the Anglo-American two-party system in which the center-right party adopted part of the populist-nationalist platform.

The euro gapped higher in pre-Pacific trading. It had finished the week in North America a little below $1.0730 and jumped to almost $1.0860 on its way to nearly $1.0940. However, it drifted lower in Asia and steadied in Europe around $1.0850. The gap is found between $1.0738 (Friday's high) and $1.0821 (today's low). The immediate issue is what kind of gap it is? The longer it is unfilled, the more bullish are the implications.

There are some events that are the week that could challenge it. The ECB meeting stands out as a risk. The March meeting was seen as hawkish, and this does not seem to be Draghi's intent. Draghi's comments before the weekend reiterated the line about rates being this low or lower. The ECB's Nowotny explained that policy for 2017 has already been set, and a decision about 2018 will be made in the second half.

Meanwhile, as President Trump's 100-day in office approaches, there seems to be a push to make something happen, but this could be a dangerous game if the inflated expectations are not satisfied. In particular, there has been the suggestion that a vote on health care reform could be held this week, but it does not look ready. Trump reportedly will make an announcement on tax reform (Wednesday), but this is likely more of a wish list that detailed proposals. Reports suggest that it will not include the controversial border adjustment tax.

Also, some measure must be passed before the end of the week on the spending authorization of the federal government. Some sort of short-term extension rather than a real solution is likely. It is what has happened to the debt ceiling as well. The Treasury Department has already begun taking extraordinary measures, including reducing its cash balances at the NY Fed, which some have linked to reducing the cost of dollar funding in the cross currency swaps.

Investors' sight of relief at the results of the French election is the main driver today. It is sufficient to overwhelm the decision by Fitch before the weekend to downgrade Italy's sovereign rating to BBB from BBB+. Italian 10-year bond yield is off six basis points, while the German 10-year yield is up nearly 10 bp. Spain's 10-year yield is down five basis points. France is off 10 bp.

In recent weeks, the fund trackers have reported strong demand for European stocks. European bourses are sharply higher today. The CAC leads the way with a 4.4% advance that has lifted the benchmark to its best level since 2008. The DAX's nearly 3% gain lifts it to a new record high. While sterling itself is marginally firmer, the FTSE 250 is up nearly 1% to a new record high. The Dow Jones Stoxx 600 is up almost 2%, led by the financials, industrials, and telecom. None of the major industry groups is up by less than 1%.

Asia-Pacific interest rates and equity markets rose. The MSCI Asia Pacific Index rose 0.4%, for a third consecutive advancing sessions. The Nikkei advanced more than 1% for the second consecutive session, something not seen since January. Chinese shares were not invited to the party. The Shanghai Composite lows 1.4% amid reports of a regulatory crackdown. It was the largest decline of the year. It is off nearly 5% since the 15-month high was set two weeks ago....MORE

Crispin Odey: "It Feels Lonely Being Bearish"

From ZeroHedge, April 20:
In Crispin Odey's latest letter to investors, the billionaire hedge fund manager laments "how quickly everything has changed", notes that "without the reflation fireworks, equity markets feel vulnerable", and concludes that while a year ago it was easy to be bearish - China was slowing, world trade was creaking, Europe was not recovering and the oil price was hitting new lows - "a year later to be bearish feels lonely, despite the fact that the reflationary story of the past year looks difficult to sustain and auto loan lending has joined a long list of risks along with Trump and Brexit."
 And yet, unlike Horseman, he is not throwing in the towel just yet: "Money creation alone has taken markets to all-time highs but what strong arms take, strong arms must defend. Valuations demand that they do."

And while Odey's trenchant appeal that "when we look back at this madness, some people will feel ashamed" is accurate however, considering his YTD P&L of -4.9%, following a 1 year drop of 33.7% (and more than half over the past 3 years), Odey may not be among those looking back.
Full letter below:
Look how quickly everything has changed. Trump, defeated over the Obama Healthcare reform has, as it were, retreated into an aggressive foreign policy which is almost the opposite to the Monroe doctrine which he was adopting earlier. Bannon is on the back foot. In the absence of a corporate tax cut or any kind of VAT tax reform, the US economy is succumbing to an overvalued dollar and a growing crisis in subprime lending, centred on the second hand car market. The government bonds have already guessed Yellen’s mind. No more rate rises. We are now just waiting for the Fed to set up a lending business, loaning 5 year old cars to people who can neither drive nor borrow. That is what they need to do to stop the subprime losses ballooning.

Last year what bailed everyone out after the bad first quarter was China and the oil price. Despite China pumping in 40% of GNP in new lending, the statistics are revealing. The economy grew nominally 7½%. Consumption of steel grew by 2%, despite steel prices rising 60%, and the auto market started to weaken (by 2.5%) in the new year after being driven up by the size of the support exercise. For this year, it is going to be difficult for China to even continue its recovery. The chances have to be high that we have just witnessed a giant rally in a bear market for commodities. Where is Trump’s massive infrastructure boom?
Without the fireworks, equity markets feel vulnerable. The Great Reflation was responsible for a re-rating of stock markets. If all we have left is the Central Bank’s bond bubbles, that may not generate enough growth to support prices.

Whilst undoubtedly bonds were in bubble territory last year as evidenced by the fact that the only way a buyer could possibly make money was by selling the loss making asset to a bigger fool, the equity market did become compliant in the game. Companies learnt to pay out dividends with borrowed money and became very adept at using shares as dividends – so called scrip. Very popular with corporates.

Several of our favourite shorts have shown a tremendous appetite for scrip. Intu Properties, the largest shopping mall owners in the UK are valued at £8bn EV, not surprisingly when they received £447m in net rent and £408m in EBITDA in 2016. They paid out £240m on interest and hedging costs (year end LTV of 44%), needed to spend £121m in capex to keep the tenants happy and so shareholders got £183 million in dividend of which £29m was in scrip (£73m in scrip the year before). The problem with scrip is people are starting to find that it is not worth the paper it is written on. Intu this year say they will  spend not £121m but £297m to keep tenants happy. In a world where scrip is no longer being appreciated that leaves a £300m shortfall after £230m interest payable, capex and dividend. Whoops!

With the subprime problem emerging in the used car market, remember that this is nothing but a can (car) kicked down the track some years ago. In 2012, with the compliance of the Fed, leases on cars were extended from 3 years to 5 years with a residual value of 20% of the new at the end of the 5 years seeming reasonable given that cars last 10 years. The result was a 30% increase in demand for new cars on the back of a 30% decline in cash costs. Five years later, with subprime in the USA some 2.3x larger than it was in 2008/9, these second hand cars are not attracting bids at or above the residual prices built into the leases. At present, prices are just 7½% below the expected price. Dangerous but not critical. What frightens everyone is who is going to buy so many second hand cars for cash over the next few years? A change to the new leasing price now needs to be made. Just when sales have already been weakening.

Another inadvertent child of QE has been the rise of disruptive technologies – Amazon, Uber, Tesla, Artificial Intelligence, ViaSat. All promise to undermine incumbents and most importantly the current assets employed by the incumbents, lent against by the banks and the corporate bond market. Paradoxically it is also the reason that productivity is falling – losing income earners are not easily found, equally well paid jobs. It is putting pressure on property prices in much the same way as it is hitting second hand car prices.

Unless we are happy to see the Fed and other central banks extend their remits drastically these new developments must have repercussions in the capital markets. The unwillingness of investors to discount this, has made stock markets both so resilient and so difficult to read.

The Bank of England, under Carney, have taken this further than most, presiding over personal savings rates falling from 12% in 2008 to 3.5%. At a time of uncertainty of trade terms, the UK is reliant on credit equal to 5% of GNP. With inflation rising thanks to the fall in ster-ling towards 4% and short rates at 0.25% and 10 year bonds yielding 1%, prices are not that tempting. No wonder that foreign investors have been selling down their gilts. The optimist will tell you that sterling is 25% too cheap ‘on the Big Mac Index’ and is due a bounce. But a bounce presupposes that individuals will start to save again. With all interest rates negative they seem intent on borrowing and spending. When we look back at this madness, some people will feel ashamed. Twisted facts and twisted logic may be met in the quiet of the night by reality.

A year ago it was easy to be bearish. China was slowing, world trade was creaking, Europe was not recovering and the oil price was hitting new lows. A year later to be bearish feels lonely, despite the fact that the reflationary story of the past year looks difficult to sustain and auto loan lending has joined a long list of risks along with Trump and Brexit. Money creation alone has taken markets to all-time highs but what strong arms take, strong arms must defend. Valuations demand that they do.
* * *
Finally, as per his position breakdown, we may have identified one of the biggest cable shorts. In light of recent events, it appears that Odey's losses are set to continue....MORE

Sunday, April 23, 2017

HBR: "The Trade-Off Every AI Company Will Face"

There is a phenomena is science known as simultaneous discovery or simultaneous invention. The two most famous examples are probably calculus and evolution but there are dozens if not hundreds of cases.

Here's another one.

From the Harvard Business Review, March 28:
It doesn’t take a tremendous amount of training to begin a job as a cashier at McDonald’s. Even on their first day, most new cashiers are good enough. And they improve as they serve more customers. Although a new cashier may be slower and make more mistakes than their experienced peers, society generally accepts that they will learn from experience.

We don’t often think of it, but the same is true of commercial airline pilots. We take comfort that airline transport pilot certification is regulated by the U.S. Department of Transportation’s Federal Aviation Administration and requires minimum experience of 1,500 hours of flight time, 500 hours of cross-country flight time, 100 hours of night flight time, and 75 hours of instrument operations time. But we also know that pilots continue to improve from on-the-job experience.

On January 15, 2009, when US Airways Flight 1549 was struck by a flock of Canada geese, shutting down all engine power, Captain Chelsey “Sully” Sullenberger miraculously landed his plane in the Hudson River, saving the lives of all 155 passengers. Most reporters attributed his performance to experience. He had recorded 19,663 total flight hours, including 4,765 flying an A320. Sully himself reflected: “One way of looking at this might be that for 42 years, I’ve been making small, regular deposits in this bank of experience, education, and training. And on January 15, the balance was sufficient so that I could make a very large withdrawal.” Sully, and all his passengers, benefited from the thousands of people he’d flown before.

The difference between cashiers and pilots in what constitutes “good enough” is based on tolerance for error. Obviously, our tolerance is much lower for pilots. This is reflected in the amount of in-house training we require them to accumulate prior to serving their first customers, even though they continue to learn from on-the-job experience. We have different definitions for good enough when it comes to how much training humans require in different jobs.
The same is true of machines that learn.

Artificial intelligence (AI) applications are based on generating predictions. Unlike traditionally programmed computer algorithms, designed to take data and follow a specified path to produce an outcome, machine learning, the most common approach to AI these days, involves algorithms evolving through various learning processes. A machine is given data, including outcomes, it finds associations, and then, based on those associations, it takes new data it has never seen before and predicts an outcome.

This means that intelligent machines need to be trained, just as pilots and cashiers do. Companies design systems to train new employees until they are good enough and then deploy them into service, knowing that they will improve as they learn from experience doing their job. While this seems obvious, determining what constitutes good enough is an important decision. In the case of machine intelligence, it can be a major strategic decision regarding timing: when to shift from in-house training to on-the-job learning.

There is no ready-made answer as to what constitutes “good enough” for machine intelligence. Instead, there are trade-offs. Success with machine intelligence will require taking these trade-offs seriously and approaching them strategically.

The first question firms must ask is what tolerance they and their customers have for error. We have high tolerance for error with some intelligent machines and a low tolerance for others. For example, Google’s Inbox application reads your email, uses AI to predict how you will want to respond, and generates three short responses for the user to choose from. Many users report enjoying using the application even when it has a 70% failure rate (i.e., the AI-generated response is only useful 30% of the time). The reason for this high tolerance for error is that the benefit of reduced composing and typing outweighs the cost of wasted screen real estate when the predicted short response is wrong.

In contrast, we have low tolerance for error in the realm of autonomous driving. The first generation of autonomous vehicles, largely pioneered by Google, was trained using specialist human drivers who took a limited set of vehicles and drove them hundreds of thousands of kilometers. It was like a parent taking a teenager on supervised driving experiences before letting them drive on their own.

The human specialist drivers provide a safe training environment, but are also extremely limited. The machine only learns about a small number of situations. It may take many millions of miles in varying environments and situations before someone has learned how to deal with the rare incidents that are more likely to lead to accidents. For autonomous vehicles, real roads are nasty and unforgiving precisely because nasty or unforgiving human-caused situations can occur on them.
The second question to ask, then, is how important it is to capture user data in the wild....MORE
Coming in at a less oblique angle of attack and with a topical/timely hook, FT Alphaville:
Tesla says this is not the vaporware you are looking for

A Deep Dive Into What Elon Musk Is Up To With His Neuralink Company

From WaitButWhy:

Neuralink and the Brain’s Magical Future
Last month, I got a phone call.
Okay maybe that’s not exactly how it happened, and maybe those weren’t his exact words. But after learning about the new company Elon Musk was starting, I’ve come to realize that that’s exactly what he’s trying to do.

When I wrote about Tesla and SpaceX, I learned that you can only fully wrap your head around certain companies by zooming both way, way in and way, way out. In, on the technical challenges facing the engineers, out on the existential challenges facing our species. In on a snapshot of the world right now, out on the big story of how we got to this moment and what our far future could look like.

Not only is Elon’s new venture—Neuralink—the same type of deal, but six weeks after first learning about the company, I’m convinced that it somehow manages to eclipse Tesla and SpaceX in both the boldness of its engineering undertaking and the grandeur of its mission. The other two companies aim to redefine what future humans will do—Neuralink wants to redefine what future humans will be.
The mind-bending bigness of Neuralink’s mission, combined with the labyrinth of impossible complexity that is the human brain, made this the hardest set of concepts yet to fully wrap my head around—but it also made it the most exhilarating when, with enough time spent zoomed on both ends, it all finally clicked. I feel like I took a time machine to the future, and I’m here to tell you that it’s even weirder than we expect.

But before I can bring you in the time machine to show you what I found, we need to get in our zoom machine—because as I learned the hard way, Elon’s wizard hat plans cannot be properly understood until your head’s in the right place.

So wipe your brain clean of what it thinks it knows about itself and its future, put on soft clothes, and let’s jump into the vortex.
Part 1: The Human Colossus
Part 2: The Brain
Part 3: Brain-Machine Interfaces
Part 4: Neuralink’s Challenge
Part 5: The Wizard Era
Part 6: The Great Merger
Notes key: Type 1 are fun notes for fun facts, extra thoughts, or further explanation. Type 2 are boring notes for sources and citations.

Part 1: The Human Colossus
600 million years ago, no one really did anything, ever.
The problem is that no one had any nerves. Without nerves, you can’t move, or think, or process information of any kind. So you just had to kind of exist and wait there until you died.
But then came the jellyfish.
The jellyfish was the first animal to figure out that nerves were an obvious thing to make sure you had, and it had the world’s first nervous system—a nerve net.
The jellyfish’s nerve net allowed it to collect important information from the world around it—like where there were objects, predators, or food—and pass that information along, through a big game of telephone, to all parts of its body. Being able to receive and process information meant that the jellyfish could actually react to changes in its environment in order to increase the odds of life going well, rather than just floating aimlessly and hoping for the best.

A little later, a new animal came around who had an even cooler idea.
The flatworm figured out that you could get a lot more done if there was someone in the nervous system who was in charge of everything—a nervous system boss. The boss lived in the flatworm’s head and had a rule that all nerves in the body had to report any new information directly to him. So instead of arranging themselves in a net shape, the flatworm’s nervous system all revolved around a central highway of messenger nerves that would pass messages back and forth between the boss and everyone else:
The flatworm’s boss-highway system was the world’s first central nervous system, and the boss in the flatworm’s head was the world’s first brain.

The idea of a nervous system boss quickly caught on with others, and soon, there were thousands of species on Earth with brains.

As time passed and Earth’s animals started inventing intricate new body systems, the bosses got busier.
You won't believe how much more


"5 Neuroscience Experts Weigh in on Elon Musk's Mysterious "Neural Lace" Company"
Questions America Wants Answered: Would Elon Musk's Neuralink Solve All of Accounting’s Problems?
"Elon Musk launches Neuralink, a venture to merge the human brain with AI" UPDATED
"Too Funny: Reporting On Elon Musk's New Brain Implant Company, The Nerds at Boy Genius Report..."
In other news...

But what about rockets? For the asteroid mining cancer cures? 

Saturday, April 22, 2017

Don't Fear the (McCormick) Reaper

I too have fallen under the spell of the reaper's song. Links below.
From The Conversable Economist:

Don't Fear the (McCormick) Reaper
The McCormick reaper is one of the primary labor-saving inventions of the early 19th century, and at a time when many people are expressing concerns about how modern machines are going to make large numbers of workers obsolete, it's a story with some lessons worth remembering. Karl Rhodes tells the story of the arguments over who invented the reaper and the wars over patent rights in  "Reaping the Benefits of the Reaper," which appears in the Econ Focus magazine published by the Federal Reserve Bank of Richmond (Third/Fourth Quarter 2016, pp. 27-30). Here, I'll lay out some of the lessons which caught my eye, which in places will sound similar to modern issues concerning innovation and intellectual property.

The reaper was important, but it didn't win the Civil War
The reaper was a horse-drawn contraption for harvesting wheat and other grains. Rhodes quotes the historian William Hutchinson who wrote: "Of all the inventions during the first half of the nineteenth century which revolutionized agriculture, the reaper was probably the most important," because it removed the bottleneck of needing to hire lots of extra workers at harvest time, and thus allowed a farmer "to reap as much as he could sow."

But somewhere along the way, I had imbibed a larger myth, that the labor saving properties of the reaper helped the North to with the Civil War by allowing young men who would otherwise have been needed for the harvest to become soldiers. However, Daniel Peter Ott in a 2014 PhD dissertation on " Producing a Past: Cyrus McCormick's Reaper from Heritage to History." Ott traces the claim that the reaper helped to win the Civil War back to some  promotional materials for the centennial celebration of the reaper in 1931 produced by International Harvester which included this statement:

"Secretary of War Stanton said: ‘The reaper is to the North what slavery is to the South. By taking the place of regiments of young men in western harvest fields, it released them to do battle for the Union at the front and at the same time kept up the supply of bread for the nation and the nation’s armies. Thus, without McCormick’s invention I feel the North could not win and the Union would have been dismembered.’"
Ott argues persuasively that this quotation is incorrect. Apparently, Edwin Stanton was a patent attorney before he became Secretary of War for President Lincoln, and he was arguing in court in 1861 that McCormick's reaper deserved an extension of his patent term. Ott quotes a 1905 biography of Edwin Stanton, written by Frank A. Flower, which included the following quotation attributed to an 1861 patent case, in which Stanton argued:
"The reaper is as important to the North as slavery to the South. It takes the place of the regiments of young men who have left the harvest fields to do battle for the Union, and thus enables the farmers to keep up the supply of bread for the nation and its armies. McCormick’s invention will aid materially to prevent the Union from dismemberment, and to grant his prayer herein is the smallest compensation the Government can make."
There doesn't seem to be any documentary evidence directly from the 1860s on what Stanton said. But it appears plausible that the he argued as a patent attorney in 1861 that the McCormick reaper deserved a patent because it could help to with the Civil War, and that comment was later transmuted by a corporate public relations department into a claim that Secretary of War Stanton credited the reaper with actually winning the Civil War.   

New innovations can bring conflict over intellectual property
Oded Hussey patented a reaper in 1833. Cyrus McCormick patented a reaper in 1834. By the early 1840s, Hussey had sold more reapers than McCormick. But the idea of a mechanical reaper had been in the air for some time. Joseph Gies offered some background in "The Great Reaper War," published in the Winter 1990 issue of Invention & Technology Gies wrote:
"In 1783 Britain’s Society for the Encouragement of Arts, Manufactures, and Commerce offered a gold medal for a practical reaper. The idea seemed simple: to use traction, via suitable gearing, to provide power to move some form of cutting mechanism. By 1831 several techniques had been explored, using a revolving reel of blades, as in a hand lawn mower; a rotating knifeedged disk, as in a modern power mower; and mechanical scissors. Robert McCormick had tried using revolving beaters to press the stalks against stationary knives. Cyrus McCormick and Obed Hussey both chose a toothed sickle bar that moved back and forth horizontally. Hussey’s machine was supported on two wheels, McCormick’s on a single broad main wheel, whose rotation imparted motion to the cutter bar. Wire fingers or guards in front of the blade helped hold the brittle stalks upright."
Hussey and McCormick then both argued in 1848 for their patent rights to be extended for a first time. By 1861, at the time patent attorney Stanton made his comments about the importance of the reaper, Hussey's patent rights had been extended for a third time, and McCormick wanted his patent rights extended, too....MORE
In the words of The Bruce Dickinson:
"I mean, really.. explore the space. I like what I'm hearing. roll it."
Way back in May of 'aught-seven we took the reaper as our hook for some posts on trading government policy:

Global Warming, Politics, Laws and Opportunity
Climateer Investing readers will be well served if they keep track of the various bills currently in Congress, or alternatively if they check in with CI from time to time (he said modestly).

We have entered the political (money) phase of the climate change discourse. So of course I am going to write about wheat.

I first became aware of just how much money can be made by paying attention to what the politicians are up to when I re-read the story of Cyrus McCormick and his Reaper twenty years ago. Most of what I knew of the story turned out to be wrong. On Monday evening I dug out my 1961 edition of "Historical Statistics of the United States" for some backround.

First off the reaper was probably invented by Cyrus' dad: The great demonstration of 1831 was done just six weeks after Robert McCormick's failed demonstration. Second, McCormick's version was not the first patented. Third, the invention was a commercial failure (at first).

There have been many reasons put forth to account for the eventual success of the machine. At a 1931 ceremony marking the centennial of the first test a former governor of Virginia said:
Rather jocularly speaking, he was possessed of a combination of qualities which have at all times proved invincible. He was a Virginian, he was a Democrat, and he was a Presbyterian; and so God blessed him with success because he deserved it.
Invented in 1831 and patented in 1834, McCormick didn't sell a single machine until 1840. The sales figures for the early years are debatable but these are the best I could put together:

1840------- 2
1843------ 29
1844------ 50
1845------ 58
1846------ 75

External factors played a part: Florida, Texas and Iowa were admitted to the Union in '45, '45 and '46 respectively.

Miles of railroad trackage, 2818 miles in 1840 increased to 4633 in 1845 and 9021 in 1850.
The nation's asset base grew e.g. life insurance in force went from $4.7mm (face) in 1840 to $97.1mm in 1850. The country was growing pretty fast.

On the corporate level, McCormick was a pioneer of installment sales.
The company moved to Chicago in 1847. Contrary to what this wonderfully illustrated 12 page history says:
It was not until 1847, when he built his own factory in Chicago, that he was able to sell a significant number of machines.
the salesmen's order books were filling up prior to the move.

This is getting to be a long post. I think I will serialize and show the opportunity created by laws and politics in the next posting....

Global Warming, Politics, Laws and Opportunity--Part II

To summarize part I (below) the McCormick family invented the reaper, sales in the first nine years were zero and in the next seven averaged 31 per year. They then exploded to 800 machines in 1847. What happened?

As reported by The Economist May 16, 1846, the British House of Commons had repealed the "Corn Laws", eliminating the tariff on imported wheat, the day before. Corn in this usage is not maize but rather is generic for grain. Prime Minister Peel won the battle but lost his premiership, the quote of the day was "Peel and repeal."

Some historians have argued that Peel's motive for this early example of free trade was the ongoing famine in Ireland, Peel himself had raised the issue in an earlier speech. This idea is patently false as Ireland's landlords continued to export food throughout the famine, with the dead Irish (est. 800,000 although some historians put the number at two million) being replaced by 977,000 head of cattle.

In his May 15, 1846 speech Peel said: "But let me say, altho it has not been brought prominently under consideration, that, without any reference to the case of Ireland, the working of the law, as far as Great Britain is concerned, during the present year has not been satisfactory."

According to "Historical Statistics of the United States:" wheat exports from the U.S. to the U.K. more than doubled from 1846 to 1847 and the McCormick family fortunes were assured....MORE

If you ar going to take this approach to investing, especially as my-little-crony direct investment rather than on a portfolio basis,  always, always, always heed the words of our first inductee into the Climateer Hall of Fame, the 26th Secretary of War, Democrat and Republican (!) Senator from Pennsylvania, Simon Cameron:
Our Hero
Simon Cameron
"The honest politician is one who when he is bought,
will stay bought."

Paul Tudor Jones Apparently Hit A Nerve With His Dire Warning (Asness, Fischer et. al.)

Yesterday the FT's Izabella Kaminska directed our attention to this article:
Of course the timing of the toppy trigger getting pulled will be very news driven, French election outcomes, for example, could be the rationale for a 5% up-move or a 15% drop in developed country indices.
Just as interesting is the scalded-cat reaction of some folks to what Jones said.

First up, the article that started it all, from Bloomberg April 20 with an update April 21: 

Paul Tudor Jones Says U.S. Stocks Should ‘Terrify’ Janet Yellen
  • Says U.S. market cap to GDP ratio highest since 2000
  • Stocks could rise higher after next month’s French election
Billionaire investor Paul Tudor Jones has a message for Janet Yellen and investors: Be very afraid.
The legendary macro trader says that years of low interest rates have bloated stock valuations to a level not seen since 2000, right before the Nasdaq tumbled 75 percent over two-plus years. That measure -- the value of the stock market relative to the size of the economy -- should be “terrifying” to a central banker, Jones said earlier this month at a closed-door Goldman Sachs Asset Management conference, according to people who heard him.

Jones is voicing what many hedge fund and other money managers are privately warning investors: Stocks are trading at unsustainable levels. A few traders are more explicit, predicting a sizable market tumble by the end of the year.

Last week, Guggenheim Partner’s Scott Minerd said he expected a “significant correction” this summer or early fall. Philip Yang, a macro manager who has run Willowbridge Associates since 1988, sees a stock plunge of between 20 and 40 percent, according to people familiar with his thinking.

Even Larry Fink, whose BlackRock Inc. oversees $5.4 trillion mostly betting on rising markets, acknowledged this week that stocks could fall between 5 and 10 percent if corporate earnings disappoint.

Caution Flags
Their views aren’t widespread. They’ve seen the carnage suffered by a few money managers who have been waving caution flags for awhile now, as the eight-year equity rally marched on.

But the nervousness feels a bit more urgent now. U.S. stocks sit 2 percent below the all-time high set on March 1. The S&P 500 index is trading at about 22 times earnings, the highest multiple in almost a decade, goosed by a post-election surge.

Managers expecting the worst each have a pet harbinger of doom. Seth Klarman, who runs the $30 billion Baupost Group, told investors in a letter last week that corporate insiders have been heavy sellers of their company shares. To him, that’s “a sign that those who know their companies the best believe valuations have become full or excessive.”...MORE
This was followed by the Vice-Chairman of the Federal Reserve Board saying on CNBC:
"Fed's Fischer: Stock market volatility doesn't terrify me"

Back to Bloomberg, who also caught the Fed man's comments,  

Quants Fire Back at Paul Tudor Jones After His Attack on Risk Parity
  • Macro manager sees strategy as driver for next stock selloff
  • Risk parity didn’t dump all stocks in last correction: AQR
Paul Tudor Jones says automated trading strategies are poised to blow up the market when volatility returns. That’s not going over well at one of the biggest quant shops on Wall Street.

Speaking at a closed-door Goldman Sachs Asset Management conference earlier this month, the billionaire hedge fund investor said that a portfolio strategy known as risk parity will eventually act as “the hammer on the downside” when turmoil returns to equity markets.

For AQR Capital Management LLC, a giant in the risk parity field, the concerns are overblown, with any selling forced by the strategy having an “utterly trivial” impact on the $23 trillion U.S. equity market.

“There are scenarios in which risk parity funds sell equities, but the possible magnitude of that is very small,” said Michael Mendelson, a risk-parity portfolio manager at AQR.“Some reports have grossly exaggerated the potential impact.”

Jones, who oversees $10 billion in his Greenwich, Connecticut-based Tudor Investment hedge fund, is the latest active asset manager to whip up fears surrounding the automated strategies that were a favorite target of bank researchers during the selloffs in August 2015 and early 2016. The strategy has less than $150 billion invested in it, according to data provider eVestment, most of at AQR and Bridgewater Associates’ All Weather Fund.

That’s significantly lower than the roughly $500 billion that some have estimated. And of that total, only around a third is investing in equities, Mendelson said. That compares to the nearly $2 trillion in market value that evaporated from U.S. equities during the last stock market correction.
“Even on a sharp move in the stock market, the positioning changes would be utterly trivial and would have about zero impact,” Mendelson said.

A spokesman for Paul Tudor Jones did not immediately respond to an email request seeking comment.

Cash Fleeing
Risk parity bases its allocations to different asset classes on risk rather than capital, as in the typical 60-40 stock-bond fund. So, for example, U.S. Treasures and international government bonds often play a larger role in risk parity funds than in other asset pools, while stocks usually take up a smaller slice.

In addition, money has fled risk parity funds in seven of the past nine quarters, for net outflows of more than $16 billion among funds tracked by eVestment....MORE
Finally, ZeroHedge who had posts on both Bloomberg stories has this interesting note:
...To be sure, Qian did hit Jones where it hurts: right in his performance, or lack thereof. “First you had Leon Cooperman and now it’s a hedge fund guy,” said Qian. “Any time performance isn’t doing well, they just blame risk parity.”

That however, does not change the fact that both Kolanovic and Jones are right (for more details see "One Year Later, This Is What Would Prompt Another "Risk-Parity" Blow Up"). And since volatility now appears to be rising, and sharp moves in both equities and bonds are likely on the immediate horizon, we present one of our favorite charts: the risk parity deleveraging sensitivity analysis. As BofA showed last summer, the most risk of deleveraging from vol controlled risk parity funds comes when both volatility and correlation of the underlying components rise together (i.e. quadrants 2 and 3 in the chart below).
In other words, a day which sees a -4% SPX drop and +1% bond rally (good diversification) would generate no selling pressure, "underscoring the critical role played by bond-equity correlation in governing the severity of risk parity unwinds." However, a troubling scenario is one where even a relatively benign 2% selloff of the S&P coupled with just a 1% selloff of the 10Y could result in up to 50% deleveraging, which in turn would accelerate further liquidations by other comparable funds, and lead to a self-fulfilling crash across asset classes.

We look forward to those two market conditions being met and watching the market's response as only that "experiment" will finally resolve the debate over whether risk-parity is the market's most pressing, imminent time bomb.

Also at ZH: "Fed's Fischer Responds To Paul Tudor Jones"