Saturday, October 25, 2014

Con Man: "The Appearance of Being Earnest"

From the Appendix:
The French confidence man who took credit for what one nineteenth-century paper called “the most gigantic swindle of our time.”
It’s 1879. The courtroom in Santiago is full. The tables and benches and sidelines hold a defendant, his accomplice, the lawyers for all sides, the justice of the Chilean Supreme Court, and onlookers. The trial had dragged on for two years. The defendant was incarcerated all the while at the nearby Des Hotel Ingles. This autumn afternoon was the end of a very long journey.

Up to that point in life, the accused had “engaged the most elegant suite of rooms in the most fashionable hotels,” charming investors with his “large, eloquent eyes.” Having spent the prior decade crisscrossing half the globe from Europe to North America to South America, he was the man papers from the United States to New Zealand called “foremost in the ranks of the world’s swindlers,” the man who they said had “the black heart of a conscienceless scoundrel,” the one the New York Times devoted ten long paragraphs to in his obituary six years later as the “king of swindlers.” He was the Chevalier Alfred Paraf.

Paraf was a Frenchman. He was born on June 10, 1844, in the Alsace region near the Rhine. He’s not part of historical memory anymore, though the image of his deceptive capacity was a stock reference in stories about swindlers for decades. He had, such sources say, a big personality and a winning smile. He had, they said, “the suave address of a gentleman.” And of course, yes, he had a wax-tipped moustache. One paper described him as a man with “the form and features of an Apollo” to match “the polished manners of a citizen of the world.” Another called him “handsome, polished, well educated, known for his keen intelligence and ready wit.” In an age of confidence men—con men—a Brooklyn daily said of Paraf that he stood “above and beyond his fellows, who, compared with him, were mere bunglers in operations which he had reduced to an exact science and of which he was the greatest…exponent.” From Alsace to Scotland to New York to Rhode Island to San Francisco to Nevada to Chile, Paraf made his name as “handsome, refined, clever, brilliant, extravagant, immoral and audacious.”

His swindle? His crime? His unconscionable deed?

Fake butter. Oleomargarine. The scourge of dairy natures.

Paraf was an adulterator. He made artificial versions of natural things and sought to pass them off as equivalent. Adulteration is the term long used to describe the contamination, deception, or false substitution of one product for another. New chemical additives for processing, preserving, and cheapening an entire range of foods; new ways to dilute milk, cheese and other dairy items; new processes for refining or creating alternatives for sugar; cheap substitutes for the grains of bread and other baked goods; thrifty uses of meatpacking by-products, with the fats and oils of cattle and hogs ending up quite far from stockyards; new supply chains that called into question the identity of the tea, coffee, spices, and liquors coming from afar.

Oleomargarine was a purported adulterant of butter. In the century to come, many would think of it as a cheap substitute for butter. Margarine’s evolution in public consciousness is so great that, rather than concealing the deception, by the later twentieth-century marketers took it as a point of pride that consumers could be tricked—they couldn’t believe it’s not butter. Yet in the decades after its invention in 1869, it would be cast instead as “the most gigantic swindle of our time.” The charges against it were serious and severe. “The Cow Superseded,” said the San Francisco Chronicle. “That atrocious insult to modern civilization,” if we follow the Washington Post. It was puzzling and complicated because it was about far more than fake butter.

Here we are then, at the dawn of the age of manufactured food. Here we are, in the midst of a century of mobility, invention, expansion, and industrial development. Confidence men, charlatans, and swindlers were at the time—and forever after—the fodder for untold numbers of cautionary tales in a changing world. Swindlers, to be sure, did not alone spawn adulteration, as there were any number of reasons why the claims about a product might differ from the reality: accidents, spoilage, natural decay, storage issues, simply losing track of ingredients. But the same questions of trust and confidence that framed the world of the charlatan set the stage where concerns and fears over deceptive or contaminated foods played out. Though Paraf was a member of an age-old class of huckster, his particular swindle was very much of its time....MORE

Not a Lot of Bets On Europe's Stress Test:

From Alhambra Investment Partners:
We will find out Sunday if all the rumors are correct (and by how much) about a significant portion of European banks either failing or still with their “feet wet” after the usual comedy of the stress tests. You never really know with these types of weighty events, as there are all sorts of biases and trading considerations in where these rumors come from and how they manifest. However, the ECB’s history here is far less than ideal, which places them in a precarious position of a huge conflict of interest.

Given what the ECB is trying to accomplish with regard to lending, there is enormous pressure to simply “pass” everyone, or at least most of them, in order to move in that direction (though it is as yet unclear as to why struggling banks will suddenly lend since their struggles have not magically been contained to this point under any of the dozens of “liquidity” programs started and completed by now).

For his part, Mario Draghi has been talking and talking the “stimulus” game, and I have little doubt that he is trying to assuage growing nervousness not just about the direction of Europe (economy and finance) but now to questions about depth once more. To that end, I have to give him credit as it appears, somehow, as if his words still carry some weight. Credit markets in Europe have paused this week, and whether that is the reverse condition of widespread stress test “failures” bringing about even more “stimulus”, as might relate to why Draghi has been so vocal this week, should be cleared up by Monday. You would think that rumors of so many failures would be driving credit markets even more bearish, so I have to assume that contrary take here (or that markets are unconvinced by the rumors).
For the most part, European credit, the primary drivers of ECB ire at the moment, has moved to the sidelines for whatever ultimate reason.
ABOOK Oct 2014 Europe Credit GermanABOOK Oct 2014 Europe Credit Swiss Curve
The only indications of any merit to my own attention are the shifts in Swiss currency and swaps. The franc has moved upward once more (against the euro) to the closest “challenge” to the peg since September 4. That would indicate cash market hedging or laying off some risk should this weekend go badly (or Europe stumbles further)....MORE

Friday, October 24, 2014

Radio City Music Hall's Secret Apartment

From Atlas Obscura:
Radio City Music Hall is one of the jewels in New York's art deco crown.

Since it opened in 1932, over 300 million visitors to the "show place of the nation" have marveled at its breathtaking elegance. Designed by architect Edward Durrell Stone and interior designer Donald Deskey, Radio City is a gilded palace of luxurious drapes, gold leaf, bakelite detailing, and beautiful murals.

The man charged with replicating the building's magnificence on stage was theatre impresario Samuel "Roxy" Rothafel. Roxy's nickname had become a byword in opulence, glamour, and entertainment; Cole Porter's hit song from Anything Goes, "You're the Top," went so far as to say, "You’re romance, you’re the steppes of Russia, you’re the pants on a Roxy usher." His eponymous Roxy film theatre in Times Square, sadly demolished in 1960, was known as the "cathedral of motion pictures." Roxy gave Radio City his magic touch, producing thrilling and ground breaking shows. He introduced synchronized orchestral scores to silent films, and audiences flocked to what was at the time the world's largest indoor theatre to see the latest film releases paired with his glittering troupe of dancing Rockettes.

According to legend and to show their appreciation for his talents, Stone and Deskey decided to give Roxy a present. High up inside Radio City, they built him an apartment. As lavishly detailed in the art deco style as the theatre downstairs, Roxy wined and dined such leading lights as Olivia de Havilland, Samuel Goldwyn, and Alfred Hitchcock there. With 20 foot high ceilings covered in gold leaf, and walls decorated floor to ceiling with plush drapes, Roxy's apartment was as mesmerizing as his opulent stages shows below....MORE
Possibly also of interest:
The Apartment Inside Grand Central Terminal

"Why Investors Are Finally Souring On Amazon’s Spending Binge" (AMZN)

The stock is down $27.39 at $285.79.
Always jam tomorrow, never jam today worked just fine for the White Queen in Wonderland.
For Alice not so much.
From MoneyBeat:
For more than a decade, Wall Street gave Inc.'sAMZN -8.87% spending spree a pass. The company regularly reported quarterly loss after quarterly loss, yet strong revenue growth gave investors confidence the online retail giant was on the right path.

It doesn’t seem to be getting a pass any more.

Amazon late Thursday reported its largest quarterly loss in 14 years amid a surge in spending on new-product development, music and video licensing, and more. Even amid a 20% jump in revenue, Amazon reported a $437 million third-quarter loss, its biggest loss in 14 years.
Shares sank more than 7% on Friday and recently traded around $290, its lowest level of the year. The stock, which is down more than 25% this year, has now suffered sizable drops after each of its past four quarterly reports.

Analysts say investors are growing impatient and want to see the payoff from all the spending.
“We believe Amazon is shifting to the status of a ‘show me’ story as each time a margin inflection point seems to be in reach, it disappears,” B Riley analyst Scott Tilghman wrote on Friday.

“It is unclear how long the current investment cycle is going to continue, and the company has not shown any interest in driving even the tiniest amount of leverage off its sizable revenue base,” Colin Gillis, technology analyst at BGC Partners, wrote to clients on Friday.

Part of the quarterly loss was driven by a $170 million charge the company took on its Amazon Fire smartphone, which analysts say is selling poorly.

And the online retailer unveiled a cautious outlook for the current quarter, arguably its most important due to the holiday season....MORE

"North Korea to bar foreign tourists over Ebola concerns"

So much for any Winter in Pyongyang daydreams anyone may have been harboring.
From Reuters:

North Korea will bar entry to foreigners on tourist trips from Friday because of worries over the spread of the deadly Ebola virus, operators of tours to the isolated country told Reuters.

At least 4,877 people have died in the world's worst recorded outbreak of Ebola, the World Health Organization (WHO) estimates, with nearly 10,000 cases recorded by Oct. 19, though the true toll could be three times as much.

It was not immediately clear if the North Korean ban also covered non-tourist members of the diplomatic or business community with ties to Pyongyang.

"We have just received official news from our partners in the DPRK that, as of tomorrow, tourists from any country, regardless of where they have recently visited, will not be permitted to enter," said Gareth Johnson of Young Pioneer Tours, a travel company based in China that runs tours in North Korea.

DPRK stands for the North's official name, the Democratic People's Republic of Korea....MORE

A traffic enforcement officer at work in treacherous conditions; automobile traffic has steadily increased in Pyongyang in recent months. (Photo by Nile Bowie)
A traffic enforcement officer at work in treacherous conditions; automobile traffic has steadily increased in Pyongyang in recent months. 

"How to talk in Silicon Valley without saying anything"

From PBS' NewsHour:
I moved to San Francisco in 2010, in time to witness the extraordinary growth in the Bay Area tech scene. Since then, the startup boom has dominated business headlines: from the leadup to Twitter’s IPO, Facebook’s acquisition of WhatsApp for $16 billion, and the rise of Uber, now valued at more than $18 billion. The list goes on and the entrepreneurial fervor has inspired countless Ivy-League dropouts to pack-up their hoodies and head West with dreams of becoming the next Mark Zuckerberg.
But the underreported truth is that most startups fail.
Tuesday night’s “Startup Zombie” segment on the PBS NewsHour explores the companies that never quite found their footing. They didn’t “fail fast” or yield big returns but rather claw along like the living dead. The result: A cottage industry of Valley businesses that acquire zombie companies so the investors can write off the losses on their tax return. Watch the piece here to get the full picture...

...For those like me with an affinity for the ridiculous, the recent tech boom has offered one silver lining: it’s very easy to poke fun at. It certainly gave me plenty to talk about in the PBS Digital Studios series “Everything But the News,” which I co-created with my partner Noah Pink. The show earnestly covers the absurdities of tech culture from the perspective of a Jim Lehrer-obsessed, tote-bag carrying outsider. Binge viewing of the digital series available here.

NOTE: Longtime NewsHour viewers can rest-assured that Tuesday night’s piece was a slight departure in tone from “Everything But the News.” Fortunately (for me, you and Jim Lehrer) it included first-rate reporting from journalist Nic Pollock.

We introduced the Startup Zombie segment with some of the hyperbolic language that plows down the streets of San Francisco faster than a Google Bus. The terminology can be off-putting, nonsensical and completely ridiculous. It often masks the grim realities of a hypercompetitive marketplace, especially for those unwilling to throw in the towel.

Below, we’ve provided a startup glossary to help interpret the jargon. Who knows, maybe it will come in handy the next time you’re seated beside a budding entrepreneur coding for gold at an elite Bay Area coffee shop.

Startup Glossary
PIVOT: Our idea tanked so we’re doing something else.

DISRUPT: Finding unconventional ways to overhaul established business models. Example: Uber disrupted the taxi industry.

SHARING ECONOMY: Socio-economic system built around the sharing of human and physical resources in such a way that a middleman platform can make obscene profit. (Uber example above applies here too.)

GROWTH HACKER: Another way of saying “marketing,” typically used by males.

FABLET: A really big phone, or a really small tablet, you choose.

CRUSHING IT: Such effusive language in the Valley often masks real trouble. In other words, “We’re crushing it,” can mean “We’re sinking. Please hire me!”

ROCKSTARS, NINJAS, and JEDIS: Add this as a prefix to your existing title. Your job hasn’t changed, but it makes you much more fun at parties.

BURN RATE: “We’re spending money as if we were lighting it on fire.” Hide this from the investors. Remember, you’re “crushing it!”...

Revisiting Jeremy Grantham's Bullish 2 Year Outlook

I'm not as dour as Mr. Grantham and on some specific issues-fertilizer supply to feed the billions being one-think he is flat out wrong but it is very instructive to note his thinking and review how subsequent events played out.

This piece was originally published in Barron's Wall Street's Best Minds column, November 19, 2013. The S&P 500 closed that day at 1,787.87, 130% of which is ~2325 vs yesterday's close of 1950.82 :
November 19, 2013
Economics is a very soft science, but it has delusions of hardness or what has been called physics envy. One of my few economic heroes, Kenneth Boulding, said that while mathematics had indeed introduced rigor into economics, it unfortunately also brought mortis.
Later in his career he felt that economics had lost sight of its job to be useful to society, having lost its way in a maze of econometric formulas, which placed elegance over accuracy.
At the top of the list of economic theories based on clearly false assumptions is that of Rational Expectations, in which humans are assumed to be machines programmed with rational responses. Although we all know – even economists – that this assumption does not fit the real world, it does allow for relatively simple conclusions, whereas the assumption of complicated, inconsistent, and emotional humanity does not. The folly of Rational Expectations resulted in five, six, or seven decades of economic mainstream work being largely thrown away. It did leave us, though, with perhaps the most laughable of all assumption-based theories, the Efficient Market Hypothesis (EMH).
We are told that investment bubbles have not occurred and, indeed, could never occur, by the iron law of the unproven assumptions used by the proponents of the EMH. Yet, in front of our eyes there have appeared in the last 25 years at least four of the great investment bubbles in all of investment history.
First, there was the bubble in Japanese stocks, which peaked in 1989 at 65 times earnings (on their accounting) having never peaked at over 25 times previously, to be followed by a loss of almost 90% in the MSCI Japan index! Second, we had the Japanese land bubble peaking a little later in 1991.
This was probably the biggest bubble in history and was certainly far worse than the Tulip Bubble and the South Sea Bubble. And, yes, the land under the Emperor's Palace, valued at property prices in downtown Tokyo, really was equal to the value of the land in the state of California. Seems efficient to me … California is so big and unwieldy. Next, we had by far the largest U.S. equity bubble in 2000, which peaked at 35 times earnings compared to a peak of 21 times in 1929, yet had had previous growth rates less than half of those in 1928 and 1929.
Finally, we had what I described in 2007 as the first truly global bubble. It covered all global stocks, fine arts and collectibles, and almost all of the real-estate markets. The last of these was led by the U.S. housing market, which, having benefited from its great diversity, had historically been remarkably stable until Greenspan got his hands on it.

Compared to previous ultra-stable data, this measured as a 3.5 sigma event, which, according to the EMH assumption of perfect randomness, should have occurred only once every 10,000 years. Yet, encouraged (brainwashed might be a more accurate description) by the EMH, Bernanke (and Yellen) could not, or would not, even recognize the risk, to our very substantial cost.
The edifice of unproven and totally inaccurate assumptions represented by the EMH was not defended as having useful output, but was defended, especially by the high priests of the theory, as being the most accurate reflection of reality that could be rolled out.
Thus, 12 reasons were given as to why the 22% drop in one day (over one-third in a day and a half) in the 1987 crash was a rational economic response to a suddenly changed world. (My then partner, Dick Mayo, typically immersed in market trading 10 hours a day, was indeed braced that day for remarkable events.
He, like other professionals, had paid no attention to any of these reasons, but had focused on the new, unproven so not appear on the list of 12!) Similarly, Japan at 65 times earnings was justified by counting errors and low interest rates, and the Tech Bubble by Greenspan's "permanently" increased productivity that appeared everywhere except in the data, which showed a subsequently reduced level of productivity. I must admit that I have never heard an EMH rationale for the Emperor's Palace, but you get my point. It has also been suggested that Fama's work led to indexing. Not really.
When we offered indexing at Batterymarch in 1971 we did so because we knew it was a zero-sum game. That for us was a complete and sufficient reason for indexing: active managers summed to market returns less large fees and commissions while indexers summed to market returns less small fees. To prove our belief, we simultaneously ran an active portfolio that ended its first eight years – a random number selected to coincide with my stay there – up 7% a year relative to the S&P. Batterymarch more or less shared the indexing business in its first few years with Wells Fargo, with the considerable propaganda skills of Dean LeBaron, our senior partner, more or less offsetting their huge size. They however did talk about the market's efficiency, which, particularly back then, only existed in the minds of a few professors and apparently one or two academically inclined Wells Fargoans. To nail home this point, Jack Bogle's Vanguard Index Fund in 1975 was, like us, also emphatically based on the concept of a zero-sum game and the certainty it offered that most players would underperform. None of this efficient market nonsense was detrimental to us value managers so I should find time to thank all those involved for producing and passionately promoting the idea. During the 1970s and 1980s I am convinced it helped reduce the number of quantitatively-talented individuals entering the money management business.
Why waste your Ph.D in particle physics on an efficient market? The field was left for an extra 20 years or so to very ordinary, not particularly quantitatively-minded individuals. And very nice it was too. And, by the way, the proponents of the EMH not only promoted their theory, but via the academic establishment the high priests badgered academic researchers into leaving, resigning themselves to nontenure, or getting religion, as it were. Into this morass of false assumptions there did come a ray of light back in 1981, when Robert Shiller proposed a simple test of market inefficiency. He assumed total clairvoyance and asked the question: What were markets worth back in, say, 1880, 1915, 1961, etc., if you knew both the long-term market return, or discount rate (in the 6% to 7% range after inflation), and, more importantly, you also knew the complete and accurate future stream of dividends? Even on its own the dividend stream really is fairly smooth, but because the market is worth the sum of all future discounted dividends, it becomes remarkably smooth so two-thirds of the time the "fair value model," as we'll call it, is within ±1% of its long-term trend. The trend turns out to be about a rather modest 1.5% real. (The relatively stable series of GDP is put in here for reference. It is within ±4.5% two-thirds of the time.) The red series is what we emotional and career-protective investors do to this stable world. The S&P 500 is within ±19% of its trend two-thirds of the time! This almost ridiculous volatility, 19 times more than is really justified by the underlying fundamentals, is in my opinion caused mainly by individual investors driven by behavioral factors that result in herding: non-experts simply feel more comfortable in a herd and, indeed, "prudent" investing has long been legally defined as doing what others do. For professional investors it is caused by the need to report upwards to decreasing levels of market familiarity – the top decision-makers usually look and feel very much like individual investors (with some very notable exceptions) and impose their will on the institutional investors, whose number one imperative is to keep their jobs. Being wrong on your own, as Keynes describes so eloquently in Chapter 12 of The General Theory, is the cardinal crime for an investment manager. To avoid this, the professionals try very hard to ensure that if they are going to run off any cliff they will: a) have a lot of company; and b) that most of the company will be one step ahead. In short, the management of career risk results in very destructive herding. It also produces a great deal of extrapolation, also designed to protect their careers. After all, if you make a forecast, Lord knows, you can be wrong. So, instead you use extrapolation, which Keynes said is a convention we adopt even though we know from personal experience that it is not applicable in the real world. (Keynes was 47 years ahead of all other economists in understanding markets. And counting, for they are still nowhere near catching up.) Going back to Shiller's simple experiment: was it enough to cause a pause in the march of market efficiency? Not for a second. It was batted away like a bothersome fl y for reasons that I cannot explain with a straight face.
This brings up an interesting question. What would it take to become as volatile as the market? I believe there are only two choices here, one bad and one good. The bad one is typically self-referential: that investors change the discount rate minute by minute. In this way we would have to believe that they did not panic in 1987 as portfolio investors all tried to squeeze through the small door of the burning theatre, but that they merely reassessed the distant future that morning as very much less attractive than the day before! Whatever the ridiculous move in the market, the math will "solve" with an equally ridiculous change in the assumed discount rate. The second theory, though, is compatible with everything I know about the market (or what I accepted from Keynes): that extrapolation dominates the workings of the market.
Let me briefly give you my prime evidence. I will spare you one of my favorite exhibits in the interest of saving space. What it would show is that the 30-year U.S. government bond peaked in 1982 at a 16% yield, because inflation had spiked for a second to 13% (even though Paul Volcker was already on the anti-inflation warpath). Yes, you might expect the T-Bill to be 14% or so, which it was. But a 30-year bond!
To extrapolate a full 13% inflation – a complete outlier event, by its very nature bound, kill or cure, to be temporary – for a full 30 years! More recently, of course, we extrapolate currently very low inflation for 30 years. My case rests....MUCH MORE
I want to highlight this bit:
...Timing Bear Markets
My personal view is that the Greenspan-Bernanke regime of excessive stimulus, now administered by Yellen, will proceed as usual, and that the path of least resistance, for the market will be up. I believe that it would take a severe economic shock to outweigh the effect of the Fed's relentless pushing of the market. Look at the market's continued advance despite almost universal disappointment in economic growth. Only Japan was a modest pleasant surprise at 0.7% ahead of forecast and the U.K. and Switzerland scraped home by the skin of their teeth.
Everyone else fell short.
There have been few such occasions when such broad disappointment with economic growth still allowed the U.S. and most other major economies to make material upward moves in their stock markets. It is yet another testimonial to the global reach of the Fed's stimulus of equities (as was the very substantial decline in emerging market equities on just talk of tapering! In equities there are few signs yet of a traditional bubble. In the U.S. individuals are not yet consistent buyers of mutual funds.
Over lunch I am still looking at Patriots' highlights and not the CNBC talking heads recommending Pumatech or whatever they were in 1999. There are no wonderful and influential theories as to why the P/E structure should be much higher today as there were in Japan in 1989 or in the U.S. in 2000, with Greenspan's theory of the internet driving away the dark clouds of ignorance and ushering in an era of permanently higher P/Es. (There is only Jeremy Siegel doing his usual, apparently inexhaustible thing of explaining why the market is actually cheap: in 2000 we tangled over the market's P/E of 30 to 35, which, with arcane and ingenious adjustments, for him did not portend disaster. This time it is unprecedented margins, usually the most dependably mean reverting of all financial series, which are apparently now normal.) By June this year, markets felt relatively quiet and under the surface there was still a considerable undertow of risk aversion in the institutions.
The Russell 2000 and the GMO High Quality universe were both just level with the S&P, all up 16%. Normally we would have expected the Russell to outperform handsomely. However, since then speculation has perked up so that today, the broad U.S. market is up 20% and the Russell 2000 is a more typical six points ahead while stocks in the GMO High Quality universe are several points behind. We have also had a sharp and unexpected uptick in parts of the IPO market in the U.S., so I would think that we are probably in the slow build-up to something interesting – a badly overpriced market and bubble conditions.
My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up.
And then we will have the third in the series of serious market busts since 1999 and presumably Greenspan, Bernanke, Yellen, et al. will rest happy, for surely they must expect something like this outcome given their experience. And we the people, of course, will get what we deserve. We acclaimed the original perpetrator of this ill-fated plan – Greenspan – to be the great Maestro, in a general orgy of boot licking....

Jeff Bezos: At Least He Makes the Trains Run On Time (AMZN)

From Scratchbomb:
This week brought a post by Matt Yglesias at Vox in which he says, more or less, it’s a good thing that Amazon is bringing the publishing industry to its knees. I’ve made my position on Amazon clear, but even beyond my baseline antipathy toward the online shopping giant, Yglesias’s post disturbed me. It exemplified the most troubling attitudes of the Silicon Valley Thinkfluencers who are supposedly leading us to a glorious digital utopia.

The thrust of Yglesias’s pro-Amazon argument is that the publishing industry is full of inefficient corporate dinosaurs. By this reasoning, Amazon’s dominance of the bookselling market has done nothing more than expose that industry’s soft underbelly. Now that any person can make an ebook and sell it on Amazon themselves, he says, publishers are “superfluous” and “don’t contribute anything of value.”

Yglesias’s main objections to the publishing industry seem to be over questions of efficiency. He believes publishers should put their money into software/hardware development and marketing, and not into author’s advances. They should stop publishing print books, which cost way too much to produce and ship. They should charge rock-bottom prices for their ebooks because these cost very little to produce.

The culture of digital innovators lies somewhere between Ayn Rand and Logan’s Run. For them, the Invisible Hand Of The Market dictates the path on the evolutionary cladogram of business. Follow it or die. The implication of Yglesias’s post is that publishers’ failure to take any of the steps he prescribes is proof enough of their obsolescence, a sign their extinction is not only inevitable but deserved.

The problem is, publishing can’t follow Amazon’s example, even if it wanted to. The industry was founded around a far different core than the company that aims to bury it.

It is true enough that most publishing houses now are owned by conglomerate behemoths indistinguishable in their size and structure from the GE’s and Viacoms of the world. It is true that publishing houses, like any branch of the culture industry, produce as much malnourished dreck as any fast food chain. But this bloated exterior is wrapped around a nucleus that actually wants to produce quality....MORE

The Guy Who Actually Predicts the Future

From GQ:

William Gibson Writes the Future
He coined the term cyberspace before we even knew cyberspace existed. He imagined reality TV years before it was everywhere. He's made the leap from cult novelist to mega-selling oracle by writing intensely enjoyable techno-thrillers about viral-ad agencies and shadowy clothing designers and Cuban-Chinese data traffickers. And while William Gibson insists that he's the last guy to know what's coming next, predictions he made decades ago keep coming true. Which is a little alarming, actually. Because his new novel, The Peripheral, is his most dire yet

William Gibson lives in an overwhelmingly green suburb with old-money roots south of Vancouver's downtown, and it is in this suburb that I am currently wandering, looking for William Gibson. Yesterday, over lunch, he'd given me an address that seems not to actually exist, and just a minute ago, over the phone, he gave me a real address that wasn't his. I know this because I'm standing in front of a massive gated house, the kind of house in which a reclusive beverage magnate might live, marveling at the elaborate hedges, when Gibson appears behind me. He's laughing.

"I'm not that rich," he says, apologizing for the confusion. He's wearing wire-framed glasses and has a kind of severe oracular thinness that complements his severe six-foot-four-inch height. At 66 he is permanently bent over, breaking-wave-shaped, the result of a lifetime of leaning down to listen. He points across the street at a more modest but still quite stately home where he actually lives.

Inside it's Arts and Crafts-y, wood floored, quiet. We sit in the living room, and without ceremony he picks up where we left off the day before.

"I figured out the two things where I was most dumbstruck," Gibson says. "The two questions were: Was I thinking about retiring? Which I still haven't got my head around. But the other one, which I think is gonna be the big one when I tour with this book"—The Peripheral, his tenth and most recent novel—"is: Have I been too terribly bleak, or do I think the world is absolutely fucked?"

And do you?

"I don't have an answer for that yet," Gibson says, the light slanting through his windows. "In retrospect, I think I wrote the book to try to find out."

We all should probably hope William Gibson doesn't think the world is fucked. In the thirty years since the publication of his first novel, Neuromancer, he's gotten plenty wrong about the future but also an unsettling amount of it right. We have Neuromancer to thank for making ubiquitous the word cyberspace, which Gibson described as "a consensual hallucination"—still maybe the best description of whatever it is we now spend most of our days doing. Since then, in books like Virtual Light (1993) and Idoru (1996), he's imagined a pretty convincing facsimile of modern reality television, long before the advent of anything that actually resembled modern reality television; a cure for AIDS that increasingly seems like a way we will in fact finally cure AIDS (Virtual Light again); and a whole host of other now familiar ideas about nanotechnology and viral marketing and drones shaped like silvery penguins that swim through the air (2010's Zero History; yes, they do exist).

His hard-boiled books—cool but not cold, deceptively well written—go by in tangles of sleek sentences. Uncannily prescient ones. "I was never able to predict," Gibson says. "But I could sort of curate what had already happened."

The Peripheral is an emphatic return to the science fiction he ceased to write after the turn of this century, set in not one but two futures. The first, not far off from our own present day, takes place in a Winter's Bone-ish world where the only industries still surviving are lightly evolved versions of Walmart and the meth trade. The second future is set further along in time, after a series of not-quite-cataclysmic events that have killed most of the world's population, leaving behind a monarchic class of gangsters, performance artists, and publicists in an otherwise deserted London. Like many Gibson books, The Peripheral is basically a noirish murder mystery wearing a cyberpunk leather jacket and, after an uncharacteristically dense first one hundred pages, a super enjoyable read—though perhaps less so when you consider just how accurate Gibson can be when he's thinking about what might come next.

Because according to The Peripheral, what is coming next is, to borrow Gibson's phrase again, well…fucked....MORE

Thursday, October 23, 2014

"Now That’s a Volatile Market: Dow Gains 216 Points, Ninth 200-Point Move This Month"

We're still of the opinion that we see new highs on the S&P 500 (above 2,019.26) before we re-visit the recent 1820.66 low. 1950.82 last.
From Barron's Stocks to Watch:
When they said volatility had returned to the stock market, they weren’t kidding.

The Dow Jones Industrial Average gained 216.58 points, or 1.3%, to 16,577.90 today, the ninth move of 200 points or more in either direction in 17 trading days so far this month. Not only is that more than the seven such days that had occurred previously in 2014, you have to go back to August 2011, when there were 10 such days, to find more (and that took an entire month to accomplish).

The S&P 500, meanwhile, gained 1.2% to 1,950.82, the Nasdaq Composite advanced 1.6% to 4,452.79 and the small-company Russell 2000 finished up 1.8% at 1,116.49.

Why is the market surging? Top-notch earnings from big Dow components like Caterpillar (CAT) and 3M (MMM), and a dividend increase from Visa (V) certainly have helped, as these are some of the priciest stocks in the price-weighted Dow. And then there’s the economic data. US jobless claims rose to 283,000, a tad bit higher than expected but still ridiculously low. Global purchasing managers’ indexes also showed signs of improvement, especially in Europe. If the recent selloff was a “growth scare,” then perhaps growth isn’t as scary as many investors thought.  

ISI Group’s Dennis DeBusschere, however, worries that the stronger-than-expected growth out of Europe could ultimately be bad news for the markets:
We have been of the opinion that Fed actions are less important today than they have been over the past few years as markets are now priced to a point where we need to see growth not just easy policy. That is not as true for the Eurozone, so these better than expected manufacturing data could be considered negative for risk assets if they further slow the progress of fiscal reforms and monetary stimulus.
Marketfield’s Michael Shaoul and team are pleased with the state of corporate earnings but worry that the market could retest its recent lows....MORE
Although the Energy Select Sector SPDR ETF (XLE) was up 1.86% to $85.90 we believe we'll have an opportunity to own the hydrocarbon equities cheaper.

"Testing for Ebola Vaccines to Start Soon, W.H.O. Says"

From the New York Times:
Health authorities and pharmaceutical companies are planning to test several new vaccines to prevent Ebola infection over the next few months, including one that is taken as a tablet, making it easier to deploy in West Africa.

The plans signify that a response to the Ebola outbreak is finally gathering steam. It is still unclear if any of these vaccines will work, however, and even if they do, they may not be ready in time to help stem the current epidemic.

Starting in January, two vaccines will be tested in large studies in the West African countries most affected by the outbreak, the World Health Organization said on Tuesday. At least three other vaccines will begin safety testing in healthy volunteers outside the outbreak zone in the first quarter of 2015.

One of those three is actually a combination of two inoculations being developed by Johnson & Johnson and Bavarian Nordic, a Danish company,

Johnson & Johnson announced early Wednesday that it was committing $200 million to the program, including making an equity investment of about $43 million in Bavarian Nordic to help pay for that company’s part in the project. It says it plans to begin safety trials in January and hopes to produce one million doses in 2015, with 250,000 available for broad application in clinical trials by May....MORE

Real Estate: "$5.6M Buys the Comely Garden Retreat of Napolean's First Wife"

From Curbed:
A part of the Château de Malmaison, the country estate that Napoleon's first wife, Joséphine de Beauharnais, bought for them in 1799, has been put on the market for €4.45M ($5.65M). The orangerie, which was converted to a private residence around 1830, has had a long succession of owners since 1814, when Joséphine's died, four years after Napolean divorced her for not bearing him any children. The current owners have lightly updated the 5,380-square-foot, 15-room house, repainting the exterior, replacing the floors with new oak panels, updating the heating and electrical systems, and most importantly (let's be real), installing fibre-optic cables for faster internet.

Not most important but certainly up there are original details like the Empire-period mural in the dining room depicting Joséphine's native Antilles. If that weren't regal enough, the Times reports that "tone sphinxes preside over a small terrace off the living room," and a "Napoleonic eagle preens from the ironwork balustrade of the main stone staircase." The dreaminess continues in the eight bedrooms, each overlooking some section of the 1.3 acres of Joséphine's gardens that come with the property, which borders the grounds of the Château de Malmaison, now a Napoleonic musée national....MORE

The Dramatic Decrease In Hurricanes, Tornadoes and Wild Fires Is Very Good For Insurers: Travelers Hits an All-time High (TRV)

The property/casualty boys are cleaning up.
TRV $96.77 up  $1.19 and just off the $97.03 all-time high set earlier this morning.
Allstate at $62.04 is just under its $62.59 all-time high set in September.

First up, the National Interagency Fire Center shows the lowest acreage burned in over a decade:

Year-to-date statistics
2014 (1/1/14 - 10/10/14) Fires: 41,790 Acres: 3,070,737
2013 (1/1/13 - 10/10/13) Fires: 40,070 Acres: 4,146,336
2012 (1/1/12 - 10/10/12) Fires: 49,682 Acres: 8,862,671
2011 (1/1/11 - 10/10/11) Fires: 61,993 Acres: 8,292,982
2010 (1/1/10 - 10/10/10) Fires: 59,464 Acres: 3,137,127
2009 (1/1/09 - 10/10/09) Fires: 70,796 Acres: 5,673,359
2008 (1/1/08 - 10/10/08) Fires: 58,530 Acres: 4,451,214
2007 (1/1/07 - 10/10/07) Fires: 75,020 Acres: 8,155,980
2006 (1/1/06 - 10/10/06) Fires: 84,767 Acres: 9,125,714
2005 (1/1/05 - 10/10/05) Fires: 54,520 Acres: 8,194,349
2004 (1/1/04 - 10/10/04) Fires: 61,964 Acres: 7,781,957
Annual average prior 10 years
2004-2013 Fires: 62,864 Acres: 6,796,329

Next up, NOAA shows this year's tornado season approaching the record low set last year:
tornado chart
Finally, with no hurricanes hitting the U.S. this season President Obama's yearly count will drop even further:
ScreenHunter_165 May. 04 12.50

Société Générale's Albert Edwards: There May Be Something Going On In China's Foreign Currency Reserves

Are they converting everything to gold?
From FT Alphaville:
Beware the Chinese FX reserve fall
The latest from SocGen’s Albert Edwards features this eye-catching chart:

As he notes, the most under-covered Chinese stat of the month is undoubtedly the $100bn decline in China’s Q3 FX reserves, the largest quarterly fall ever:
As I have explained, this reflects deterioration in Chinese competitiveness from its excessively strong real exchange rate and a deteriorating of its balance of payments. If we have been warning that slower growth in FX reserves represents monetary tightening, then a decline of this order of magnitude is like a credit crunch! These data will ultimately prove to be more important than last Wednesday’s US retail sales. As I said two weeks ago “sell everything and run for your lives”.
We’re not sure about selling everything and running for your lives (just yet), but we certainly agree that the key issue at hand is the market’s major misunderstanding about the renminbi’s real worth and why it is that the Chinese government doesn’t feel inclined to debase its way out of the problem this time around....

On The Passing Of Nelson Bunker Hunt, Two Words

"Liquidation only."

That is what Cassandra Does Tokyo was getting at in this morning's "In Memorium: Nelson Bunker Hunt":
...Your catchphrase 


have been: 

"Never squeeze

the people 

that can 

change the rules.
I've written dribs and drabs of my own, admittedly idiosyncratic, take on the events of early 1980.

July 2009
How to Break a Market Corner: Breeding Breakthrough Helps Sushi Baron Create Sustainable Tuna
...*In January 1980, as the Hunt Brothers were gunning the price of silver toward it's historic high, the CEO of one of the world's largest trading firms said "Those boys don't know what deep pockets are", rather an amazing statement when talking about billionaires.
Within 48 hours both U.S. silver futures exchanges had gone "Liquidation only", the corner was broken and the Hunt's had lost their fortunes.
I'll leave it to you to guess the CEO.
August 2010
"Wheat prices ease after Russia predicts stable exports" and "...Speculators ‘Hunt What’s Moving"
...Should prices see $8.50 the opportunities on the short side would almost be a lock.
I say almost because the serious money in commodities can pretty much get prices to where they want them, at least for short periods.

When the Billionaire Hunt brothers were attempting to corner the silver market in January 1980 the head of one of the world's largest grain traders said "Those boys don't know what deep pockets are". 
The "commercials" had been shorting into the Hunt bros. buying and the grain trader was at the top of the "commercial" heap.

On January 21 the COMEX went "liquidation only".
On January 22 the CBOT went "liquidation only".
On Tuesday the 22nd silver closed at $34, down 27% from its close the previous Friday.
The Hunt's still had enormous paper profits but any attempt to book them would smash the markets even further.

Prices declined to $17 by March, down 66% from the January high and the Hunt's were receiving calls of $60 Million per day in variation margin. On March 27 the price dropped from $21.62 to $10.80 and one of their brokers, Bache was in violation of net capital requirements and another, Merrill Lynch was on the brink. 
As the attorneys got involved over the next few years, oil prices headed south, destroying the value of Daddy's creation (and the brother's piggybank) Placid Oil.

Bunker Hunt filed for bankruptcy in September 1988 as did his brother and Placid.

At the time the grain trader spoke it is probable that the various branches of the Hunt families comprised the wealthiest "family" in America.

That's why I say "almost" a lock.
There have been a few others over the years.
"Still humping the American Dream, that vision of the Big Winner somehow emerging from the last minute pre—dawn chaos of a stale Vegas casino. Big strike in Silver City. Beat the dealer and go home rich. Why not? I stopped at the Money Wheel and dropped a dollar on Thomas Jefferson—a $2 bill, the straight Freak ticket, thinking as always that some idle instinct bet might carry the whole thing off. But no. Just another two bucks down the tube. You bastards! No. Calm down. Learn to enjoy losing.... 
-Hunter S Thompson
Fear and Loathing in Las Vegas

For another very idiosyncratic view of the silver action read "Henry Jarecki: Jarecki’s law", an interview with the owner of London based Mocatta & Goldsmid who "helped to unwind" the Hunt Bros. positions.

"Peak Google": Is Google Toast? (GOOG)

From Stratechery:
Despite the hype about disruption, the truth is most tech giants, particularly platform providers, are not so much displaced as they are eclipsed. IBM, for example, has been successfully selling and servicing mainframes for going on 50 years (although they are now in serious trouble (members-only)). During the PC era, though, they were eclipsed by Microsoft.
Mainframes didn't stop being a viable business; it was just a much smaller business than PCs
Mainframes didn’t stop being a viable business; it was just a much smaller business than PCs
The same happened to Microsoft: Windows still dominates PCs,1 and in all likelihood will for the foreseeable future (although there are certainly cracks in the foundation, a la IBM). The company isn’t going anywhere. PCs, however, have been eclipsed by smartphones, to the benefit of Apple (in terms of revenue and profit) and Google (in terms of market share).
PCs have in the past few years been eclipsed by smartphones. To see a similar graph with exact data, see this post by Benedict Evans
PCs have in the past few years been eclipsed by smartphones. To see a similar graph with exact data, see this post by Benedict Evans
These eclipses are obvious in retrospect, but the truth is few if any could have predicted them before they occurred. PCs were thought to be a tremendous boon for IBM, and they did profit greatly until Compaq copied their BIOS leaving Microsoft all the leverage; similarly, Microsoft looked set to conquer mobile (which was why Google bought Android in the first place) before a resurgent Apple introduced the iPhone. In both cases it turned out that the incumbents’ prior success resulted in misdirected incentives: IBM focused on selling and servicing PCs, instead of building a platform, while Microsoft focused on extending Windows to mobile instead of the user experience. If you’ll forgive a war analogy, both companies won the battle but lost the war.

And so, if one wishes to predict who might follow in this illustrious but ultimately tarnished path, it might be useful to look for similar characteristics: the company should be dominant in its field, and the company should seem to have an advantage in a far larger adjacent field, but that advantage, on closer inspection, should prove to be just as much a hindrance as a help.
The clear candidate is Google....
HT: Beyond Search

"Isaac Asimov Mulls 'How Do People Get New Ideas?”'

Published for the first time, October 20, 2014.
From MIT's Technology Review:
Note from Arthur Obermayer, friend of the author:

In 1959, I worked as a scientist at Allied Research Associates in Boston. The company was an MIT spinoff that originally focused on the effects of nuclear weapons on aircraft structures. The company received a contract with the acronym GLIPAR (Guide Line Identification Program for Antimissile Research) from the Advanced Research Projects Agency to elicit the most creative approaches possible for a ballistic missile defense system. The government recognized that no matter how much was spent on improving and expanding current technology, it would remain inadequate. They wanted us and a few other contractors to think “out of the box.”

When I first became involved in the project, I suggested that Isaac Asimov, who was a good friend of mine, would be an appropriate person to participate. He expressed his willingness and came to a few meetings. He eventually decided not to continue, because he did not want to have access to any secret classified information; it would limit his freedom of expression. Before he left, however, he wrote this essay on creativity as his single formal input. This essay was never published or used beyond our small group. When I recently rediscovered it while cleaning out some old files, I recognized that its contents are as broadly relevant today as when he wrote it. It describes not only the creative process and the nature of creative people but also the kind of environment that promotes creativity.

How do people get new ideas?

Presumably, the process of creativity, whatever it is, is essentially the same in all its branches and varieties, so that the evolution of a new art form, a new gadget, a new scientific principle, all involve common factors. We are most interested in the “creation” of a new scientific principle or a new application of an old one, but we can be general here.

One way of investigating the problem is to consider the great ideas of the past and see just how they were generated. Unfortunately, the method of generation is never clear even to the “generators” themselves.
But what if the same earth-shaking idea occurred to two men, simultaneously and independently? Perhaps, the common factors involved would be illuminating. Consider the theory of evolution by natural selection, independently created by Charles Darwin and Alfred Wallace.

There is a great deal in common there. Both traveled to far places, observing strange species of plants and animals and the manner in which they varied from place to place. Both were keenly interested in finding an explanation for this, and both failed until each happened to read Malthus’s “Essay on Population.”

Both then saw how the notion of overpopulation and weeding out (which Malthus had applied to human beings) would fit into the doctrine of evolution by natural selection (if applied to species generally).
Obviously, then, what is needed is not only people with a good background in a particular field, but also people capable of making a connection between item 1 and item 2 which might not ordinarily seem connected....MORE

Wednesday, October 22, 2014

"Newly Released Documents Show Former NSA Head Was Investing His Money in an Obscure Commodity Controlled by a Shadowy Cartel"

That's FP's headline. The commodity in question is not that obscure.
That said, Mr. Alexander is a scumbag of the first rank.
From Foreign Policy:

Why Was the NSA Chief Playing the Market?
At the same time that he was running the United States' biggest intelligence-gathering organization, former National Security Agency Director Keith Alexander owned and sold shares in commodities linked to China and Russia, two countries that the NSA was spying on heavily.

At the time, Alexander was a three-star general whose financial portfolio otherwise consisted almost entirely of run-of-the-mill mutual funds and a handful of technology stocks. Why he was engaged in commodities trades, including trades in one market that experts describe as being run by an opaque "cartel" that can befuddle even experienced professionals, remains unclear. When contacted, Alexander had no comment about his financial transactions, which are documented in recently released financial disclosure forms that he was required to file while in government. The NSA also had no comment.

Alexander's stock trades were reviewed by a government ethics official who raised no red flags, and there are no indications the former spymaster did anything wrong. There are also no indications that the trades did much for Alexander's personal wealth. Disclosure documents show that he earned "no reportable income" from the sale of commodity company stocks, meaning either that it was less than a few hundred dollars or that possibly he lost money on the deals.

Still, the trades raise questions about whether Alexander's job gave him insights into corporations and markets that may have influenced his personal financial investments. The NSA, which Alexander ran for more than eight years, routinely spies on foreign governments and businesses, including in Russia and China, where the agency has attempted to gain insights into political decision-making, economic strategy, and the countries' plans for acquiring natural resources.

The financial disclosure documents, which were released to investigative journalist Jason Leopold and published this month by Vice News, reveal nothing explicitly about why Alexander sold the shares when he did. On Jan. 7, 2008, Alexander sold previously purchased shares in the Potash Corp. of Saskatchewan, a Canadian firm that mines potash, a mineral typically used in fertilizer. The potash market is largely controlled by companies in Canada, as well as in Belarus and Russia. And China was, and is, one of the biggest consumers of the substance, using it to expand the country's agricultural sector and produce higher crop yields.

"It's a market that's really odd, involving collusion, where companies essentially coordinate on prices and output," said Craig Pirrong, a finance professor and commodities expert at the University of Houston's Bauer College of Business. "Strange things happen in the potash market. It's a closed market. Whenever you have Russians and Chinese being big players, a lot of stuff goes on in the shadows."

On the same day he sold the potash company shares, Alexander also sold shares in the Aluminum Corp. of China Ltd., a state-owned company headquartered in Beijing and currently the world's second-largest producer of aluminum. U.S. government investigators have indicated that the company, known as Chinalco, has received insider information about its American competitors from computer hackers working for the Chinese military. That hacker group has been under NSA surveillance for years, and the Justice Department in May indicted five of its members.

Alexander may have sold his potash company shares too soon. The company's stock surged into the summer of that year, reaching a high in June 2008 of $76.70 per share, more than $30 higher than the price at which Alexander had sold his shares five months earlier....MORE 
Some of the headlines of stories we decided against posting:

Sleezeball General Alexander
Here's Why the NSA's Keith Alexander Thinks He's Worth a Million Dollars Per Month
Lying Sleeze General Alexander

And one we did post:
Should You Attend The FT Alphaville Conference at £199 per cap or the Vanity Fair Conference for $5,000?

"WTI Crude Slides Below $81"

Following up on yesterday's "Oil Sell-off, the Goldman View (XLE; ERY)" wherein we said:
We are seeing a lot of recommendations to buy hydrocarbon companies and want to note:

It's Too Early
More to come.
Even after oil bottoms there is going to be damage done to the equities.
And it's probable oil has not bottomed.

From ZeroHedge:
It appears some of the 'fundamental' legs of the face-ripping ramp in stocks are fading. Broken Markets - nope; Fed Speakers - nope (blackout period); Crude rising - nope (WTI back under $81)

Why it matters...


Kids, This Is How You Write a Poopy Pants Story

For no reason in particular other than it's been sitting in the "post when the market isn't psychotic" pile.
From Johnny Vagabond:

Three Mistakes on a Hot Day in Bangkok
 Post image for Three Mistakes on a Hot Day in Bangkok
I think I’m finally adapting to the heat and humidity here. By adapting, I mean that my entire body has transformed itself into a single, massive sweat gland.

Yesterday morning, as I dressed for my visit to the Amulet Market, I made the first mistake. I’d run out of clean underwear and decided to just go commando. I do it all the time at home, right? What could possibly go wrong?

My second mistake was wearing a fancy shirt I’d purchased from REI right before I left home. It was a high-dollar, high-tech, water-resistant short sleeve with an SPF of 30 (huh?). I think it even spoke Spanish. What it did not do, alas, was ventilate. At all. Wandering about the market in 96 degree temps and 100% humidity, I felt like I was wearing a $50 garbage bag.

I was soon drenched, with sweat running down my back and soaking my pants — I looked like I’d been bobbing for apples with my ass. Eventually making my way onto the grounds of a quiet university, I found a bench in the shade, and sat awhile to cool off — setting the scene for my third mistake.

Without even thinking, I leaned to the side to sneak a fart and… well, you probably can guess where this is going. I immediately lept up from the bench — dear God, had I caught it in time? Some cautious shifting of my cheeks told me nothing — everything was soaked and slippery.

This is when I realized that no matter how you turn and twist, you really can’t see your own ass. At least I can’t (and don’t bother writing to tell me you can, hippie). I didn’t have a mirror and I sure as hell wasn’t going to put my hand down there. The only solution I could think of was to find a bathroom where I could drop my pants and assess the situation. (no pun intended)

I set off for the Banglampoo district — with its tourist-oriented restaurants — hoping to catch a tuk tuk. For the first time ever, there were no tuk tuks to be found. Not a one. Dropping my backpack as low as possible to hide my hypothetical badge of shame, I did a crazy Charlie Chaplin duck-walk for over a kilometer, my stomach protesting and my butt cheeks clenched. A sped-up video of this with a Yakety Sax soundtrack would have been a YouTube sensation....MORE

China May Launch A Moonshot as Soon as Tomorrow

From CriEnglish:

New Lunar Mission to Test Chang'e-5 Technology
China will launch a new lunar mission this week to test technology likely to be used in Chang'e-5, a future lunar probe with the ability to return to Earth.

The experimental spacecraft launched this week is expected to reach a location near the moon and return to Earth, according to the State Administration of Science, Technology and Industry for National Defense on Wednesday.

The test model is currently ready and scheduled to be launched between Friday and Sunday from the Xichang Satellite Launch Center in southwest China, with the whole mission taking about eight days.
"The meteorological condition will meet the requirements for the launch," said Tao Zhongshan, chief engineer of the center.

It is the first time China has conducted a test involving a half-orbit around the moon at a height of 380,000 kilometers before having the craft return to Earth.

The return mission will involve the spacecraft entering, exiting, and re-entering Earth's atmosphere and landing, said the administration....MORE
This is a precursor to a 2017 sample-and-return mission:

A 3D illustration of Chang'e-5 lunar probe. [Photo:]

Minneapolis Fed: "Interview with Michael Woodford"

One of the big dogs.
From the Federal Reserve Bank of Minneapolis' The Region:
Interview with Michael Woodford
Columbia University economist on Fed mandates, effective forward guidance and cognitive limits in human decision making
Interview conducted July 23, 2014
Michael Woodford
Though pundits suggested otherwise, there was no straight-line causality from Michael Woodford’s presentation at the Fed’s August 2012 Jackson Hole conference to the FOMC’s December 2012 adoption of inflation and unemployment thresholds. While both involved “forward guidance” and stressed clear communication about a credible policy path, the timing was doubtless coincidental.

But there is also little question that Fed leaders were already well-steeped in Woodford theory, and quite familiar with the arguments he made in August. For nearly two decades, the New Keynesian model*—of which Woodford is a leading architect—has been a key framework for academic research in monetary economics, and bedrock for research and policymaking at central banks worldwide.

With this framework, Woodford and his co-authors have explored and explained the mechanisms by which monetary policy affects employment and production, as well as interest rates and prices, and because his work has such practical utility and intellectual power, the way policymakers think about policy—and arguably, design it—has shifted fundamentally. His insights into policymaking when nominal interest rates can go no lower have been particularly useful.

Woodford’s 2003 Interest and Prices—called a “bible for central banks” by some economists—discussed these ideas at length. “Immensely influential,” said Princeton economist Lars E. O. Svensson of the book, in awarding the 2007 Deutsche Bank Prize to Woodford for establishing “foundations for … models now being developed by the most advanced central banks [and] also providing central bankers with a practical framework [for thinking about] monetary policy, in particular the fundamental role of expectations and transparency.”

The Deutsche Bank award is one of many Woodford has received. While still a graduate student at MIT, he was selected by the MacArthur Foundation for its inaugural class of “geniuses” in 1981. He’s been recognized with fellowships from the Guggenheim Foundation, Econometric Society and American Academy of Arts and Sciences, and awards from numerous other institutions.

Woodford’s intellectual interests are unusually broad. He went to the University of Chicago initially to study physics, then majored in cognitive science, got a law degree at Yale and later chose economics—drawn by both its theoretical rigor and concrete application. “Central banking,” he observes, “is one of the human activities where I think there is some real use to relatively abstract theoretical contributions.”

* Developed in response to the potent 1970s rational expectations/flexible prices critique of then-dominant Keynesian theory and policy, the New Keynesian model accepted some of the critique but argued that rigidities in pricing caused markets to adjust slowly and could result in undesirable fluctuations in employment and production. Stimulative fiscal and monetary policy—if well-designed and implemented—could therefore be effective in counteracting economic downturns.

Region: I’d like to start with some questions about policy, in particular, forward guidance. In August 2012 at the Fed’s Jackson Hole symposium, you gave a very influential speech in which you compared two options for monetary policy when at the zero interest rate bound: forward guidance and quantitative easing (balance sheet) policies.

You argued that essentially both theory and data suggest that forward guidance is likely to be the more effective of the two, and you further recommended that policymakers should make “advance commitment to definite criteria for future policy decisions.”

Four months later, at the December Federal Open Market Committee meeting, the Fed did adopt forward guidance—in the form of thresholds for unemployment and inflation—along with continued quantitative easing. Did that approach meet the standards you would advocate in terms of definite criteria?

Woodford: It was certainly a step in that direction. Not only was it an attempt to shape expectations by making official statements about future policy, but it was in line with what I had been arguing for in at least one important respect, which is that it was saying something about criteria for making a future decision as opposed to trying to announce the future policy settings themselves in advance.

The Fed had already been using statements about future policy as an important part of its efforts to stimulate the economy, particularly dramatically since the previous summer, when it had begun making quite unprecedented statements about specific dates, as far as two years in the future, until which the FOMC anticipated being able to maintain its current unusually accommodative policy. But that approach didn’t involve stating criteria for making a future decision; instead, it only offered a guess about where the federal funds rate would be at specific future dates.

There are various reasons why I think such “date-based guidance” is a less satisfactory way to try to shape expectations about future policy. The most important problem is that it’s unlikely that a central bank would really be making a promise or declaring an intention about future policy and make it in this very specific form of saying where the instrument will be two years in the future.

And, of course, the FOMC wasn’t really making such a promise. If you looked at the fine print of what they said, they hadn’t said we intend to do this. They hadn’t said we will do this. They had said we currently anticipate that future conditions will warrant our doing it....MORE
Previously on the Woodford channel:

Goldman Sachs' Allison Nathan Interview with Economist Michael Woodford
Marginal Revolution's Tyler Cowen: "...Kaminska Wins"
Let's Just Proclaim Jubilee: "Quantitative easing should be used to write off government debt"
Evans-Pritchard: 'BIS and IMF attacks on quantitative easing deeply misguided warn monetarists'
Helicopter money as a policy option

Also Alphaville's Woodford and the QE tradeoffs, revisited.

Riding the Liquidity Premium: Liquidity As An Investment Style

"Liquidity is expensive but illiquidity is much more so, because it destroys the very existence of a firm"
I don't remember if it was Johannes or Ernst, it was a long time ago that I read Manchester, quoting one of the Schroeder boys on the insolvency of Krupp. That line has stuck with me. Here's the book.

Swedroe: Targeting Liquidity As A Style
During the financial crisis of 2008, even sophisticated investors such as the Yale Endowment fund learned just how expensive liquidity can be when you need it most. So it should come as no surprise that less liquid stocks have outperformed more liquid ones.

There’s a logical, risk-based explanation for that outperformance. Investors demand a premium for taking liquidity risk. Less liquid stocks not only take longer to trade, but transaction costs are likely to be higher as well. That’s especially true if you must purchase liquidity during times of stress in the markets. Thus, investors with long horizons, who are also willing to trade less frequently, can earn an expected risk premium.
Roger G. Ibbotson and Daniel Y.-J. Kim—authors of the July 2014 study “Liquidity as an Investment Style: 2014 Update”—examined whether liquidity as an investment style meets the four criteria set down in 1992 by Nobel Prize winner William Sharpe.

According to those criteria, a benchmark investment style must be: identifiable before the fact; not easily beaten; a viable alternative; and low in cost. Using stock turnover as a measure of liquidity, the study analyzed the top 3,500 U.S. stocks from 1971 through 2013. Following is a summary of the authors’ findings:
  • First, the previous year’s turnover of stocks is identifiable before the fact. It’s also simple, easy to measure and has a significant impact on returns.
  • Second, liquidity is a distinct and viable alternative to the factors of size, value and momentum, because its impact is additive to each of them.
  • Third, first-quartile portfolios constructed using liquidity, momentum, size and value investment styles outperform the equally weighted universe portfolio.
  1. The low-liquidity quartile portfolio outperforms both the smallest-cap portfolio and the high-momentum portfolio, producing returns that are indeed “hard to beat.”
  2. The low-liquidity portfolios also generate statistically significant alphas in Fama-French four-factor models. The authors also found that as less liquid stocks become more liquid, their returns increase dramatically, and vice versa.
  3. However, migration cannot be known ex-ante. They write: “Nevertheless, these results demonstrate that changes in liquidity strongly correlate with changes in valuation.”
  • Fourth, forming portfolios once a year resulted in 78 percent of the high-performing, low-liquidity quartile of stocks remaining in that quartile. Thus, the liquidity portfolio doesn’t exhibit high turnover, helping to keep costs low. That’s especially true if one is a patient trader and refrains from forcing trades, such as index funds do on reconstitution dates.
Interestingly, the authors also found that there’s “little evidence that styles are related to risk, at least as measured by standard deviation.” For example, for value and momentum, the first quartile is less risky than the fourth-quartile portfolio....MORE
HT: Abnormal Returns

"Top 6 Happiest Countries In The World"

From AFNS:
SlideshowWorldLifestyle ISSUE 50•40 Oct 7, 2014

  • Bhutan
Population: 750,000 people who are one with all
National Anthem: 3 minutes of children laughing
Education: 97% of residents know the sound of one hand clapping
Economy: Mostly service industry jobs of either taking people up mountains or carrying their corpses down mountains
Demographics: 65% National Geographic freelance photographers, 35% ethnic Bhutanese
Geography: Once beautiful, diverse landscape destroyed by monastery construction boom over past few centuries
Main Source Of Happiness: Watching Western backpackers think they’re having spiritual epiphanies
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     Population: 750,000 people who are one with all

    National Anthem: 3 minutes of children laughing

    Education: 97% of residents know the sound of one hand clapping

    Economy: Mostly service industry jobs of either taking people up mountains or carrying their corpses down mountains

    Demographics: 65% National Geographic freelance photographers, 35% ethnic Bhutanese

    Geography: Once beautiful, diverse landscape destroyed by monastery construction boom over past few centuries

    Main Source Of Happiness: Watching Western backpackers think they’re having spiritual epiphanies