Sunday, March 26, 2017

"Who Owns Your Face?"

From The Atlantic:

Advertising companies, tech giants, data collectors, and the federal government, it turns out.
Updated on March 26 at 10:20 a.m. ET
It takes a feast of facial imagery to teach a machine how to recognize an individual person.
This is why computer scientists so often use the faces of Hollywood celebrities in their research. Tom Hanks, for example, is in so many publicly available photographs that it’s fairly easy to build a Hanks database for algorithm-training purposes.

Depending on a researcher’s needs, there are many other available databases of human faces—some featuring tens of thousands of images. These collections of faces draw from public records like mugshots, surveillance footage, news photos, Google images, and university studies.
It’s entirely possible that your face is in one of these databases. There’s no way to say for certain that it isn’t.

Your face is yours. It is a defining feature of your identity. But it’s also just another datapoint waiting to be collected. At a time when cameras are ubiquitous and individual data collection is baked into nearly every transaction a person can make, faces are increasingly up for grabs.

Data brokers already buy and sell detailed profiles that describe who you are. They track your public records and your online behavior to figure out your age, your gender, your relationship status, your exact location, how much money you make, which supermarket you shop at, and on and on and on. It’s entirely reasonable to wonder how companies are collecting and using images of you, too.

Facebook already uses facial recognition software to tag individual people in photos. Apple’s new app, Clips, recognizes individuals in the videos you take. Snap’s famous selfie filters work by mapping detailed points on individual users’ faces. (Snap says on its website that its technology doesn’t take the additional step of recognizing the faces it maps, and a spokesman told me the company does not retains images of users’ faces for any purpose.) That’s similar to how software by the Chinese startup Face++ works.  Its software maps dozens of points on a person’s face, then stores the data it collects. The idea is to be able to use facial recognition systems for keyless entry to office buildings and apartment complexes, for example. Jie Tang, an associate professor at Tsinghua University, described to MIT Technology Review how he uses his faceprint to pay for meals: “Not only can he pay for things this way, he says, but the staff in some coffee shops are now alerted by a facial recognition system when he walks in,” and they greet him by name.

It’s understandable, then, that as these technologies rapidly advance, they have become fodder for some conspiracy theories—like the unsubstantiated claim that Snap is building a secret facial recognition database with the images of people who use its popular Snapchat app.

But such conspiracies aren’t as outlandish as they’re made out to be. Experts have been warning against facial-recognition systems for decades. The F.B.I.’s latest facial recognition tools give the agency the ability to scan millions of photos of ordinary Americans. “To be clear, this is a database—or a network of databases—comprised primarily of law-abiding Americans,” said Congressman Jason Chaffetz, a Utah Republican, in a House Committee on Oversight and Government Reform hearing on Wednesday.  “Eighty percent of the photos in the F.B.I.’s facial recognition network are of non-criminal entries.” The F.B.I. is able to access images from driver’s licenses in at least 18 states, as well as millions of mugshots.

“Most people have no idea that this is happening,” said Alvaro Bedoya, the executive director of the Center on Privacy and Technology at Georgetown Law, in testimony at the hearing. “The latest generation of this technology will allow law enforcement to scan the face of every man, woman, and child walking in front of a street surveillance camera… Do you have the right to walk down the street without the government secretly scanning your face? Is it a good idea to give government so much power with so few limits?”...MORE
And relatedly, from 2012:

"Orwellian Irony in the Extreme"

Publishing Platform Medium Would Like You To Become A Member; There's Just One Catch

From The Register:

Pure Silicon Valley: Medium asks $5 a month for absolutely nothing
Think of it as being your own mini-VC without shares
Silicon Valley prides itself on disrupting industries – but it has bitten off more than it can chew by trying to take on an already highly competitive market suffering from major money woes.
Fancy blog platform Medium has been burning through VC money at the rate of $50m a year trying to take on the world of publishers. It has certainly succeeded in getting hits – at least within the confines of the Bay Area, where it has become the go-to site for tech musings written by unpaid people who can't be bothered to set up their own blogs. It claims 60 million monthly readers.
But the site has yet to show a cent in revenue and having publicly decried the use of ads to fund itself, it's in a bit of a tight spot. The solution? A Guardian-style membership scheme. For just $5 a month you can become a Medium member!

Before you rush to hand over your money, however, you may want to consider what you get for that $60 a year: absolutely nothing.

It's safe to say that the pitch to VCs – who have given the website $132m in the past three years – must have been better than the one given to readers for becoming a member.

"We started Medium in 2012 to create a better place to find and share important ideas that deserve to be heard," it begins. "Since then, over seven million stories have been published on Medium, influencing hundreds of millions of readers. But today, the precariousness of our media ecosystem has never been more obvious – nor has our need for depth, truth-seeking, and understanding."
That laughing you can hear? That is every publisher and journalist since the dawn of time.

Get with the program
By insisting on standing outside the traditional publishing industry, the folks at Medium seem to have failed to notice that there is actually a degree of understanding about the future of journalism emerging.

The idea of quantity over quality is long gone. There was a period when more stories equaled more hits equaled more income, but that has long since passed. There are only two games in town right now, and they both require quality and originality of content combined with intelligent curation and editing. In other words, journalism.

There is the ad-funded model, like El Reg: we produce words that people want to read, and we let vendors run adverts alongside them. In our case it works due to a number of factors: we cover a specific niche; we dig in a little deeper; we tend to know what we're talking about; we're independently owned and thus have no corporate investors to please; and we are irreverent. Millions of readers like it. And companies like our readers.

And there is the subscription model, like The New York Times, Financial Times, Washington Post, et al. These are big respected names with huge resources that have hit on a specific model: offer a few free articles a month and then prompt for subscription. It has finally started working after a decade of hard times.

In part thanks to the election of Donald Trump, these news organizations have seen their subscriber levels jump and they are even tentatively looking at hiring more people after years of layoffs. Much more interestingly, it seems that, psychologically, people are getting used to the idea again of paying for content. It's like a switch. And once you pay for Netflix, Spotify and Amazon Prime, it seems perfectly reasonable to pay for quality news.

Both of these models share a key feature: they hire and pay professional journalists to produce content. Because journalism, like any other profession, requires a certain set of skills.

 Medium doesn't fit in this world in any way. It has rejected the ad model, and it can't afford to do the subscription model because no one is going to pay to get access to what are basically people's blog posts – the vast majority of which are, let's be honest, pretty terrible....MORE

"U.S. charges Lithuanian man with $100 million email fraud"

Please wire $100 Million
Thank you.

From Reuters, March 21:
U.S. prosecutors have charged a Lithuanian man with engaging in an email fraud scheme in which he bilked two U.S.-based companies out of more than $100 million by posing as an Asian hardware vendor.

Evaldas Rimasauskas, 48, was arrested late last week by Lithuanian authorities, Manhattan federal prosecutors said Tuesday. Rimasauskas does not yet have legal counsel, a spokesman for the prosecutors said.

The alleged scheme is an example of a growing type of fraud called "business email compromise," in which fraudsters ask for money using emails targeted at companies that work with foreign suppliers or regularly make wire transfers.

The Federal Bureau of Investigation said last June that since October 2013, U.S. and foreign victims have made 22,143 complaints about business email compromise scams involving requests for almost $3.1 billion in transfers.

In an indictment unsealed Tuesday, prosecutors said that to carry out his scheme, which they said began around 2013 or earlier, Rimasauskas registered a company in Latvia with the same name as an Asian computer hardware manufacturer.

He then sent emails to employees of the two unnamed victim companies asking them to wire money that they actually owed to the Asian company to the sham Latvian company's accounts, prosecutors said.

The victim companies are described as a multinational technology company and a multinational social media company....MORE
Here's the Department of Justice press release and the grand jury indictment.

"Q&A With Bloomberg View's Matt Levine"

From Legal Nomads, March 17:

Thrillable Hours: Matt Levine, Financial Journalist
Welcome back to Thrillable Hours, my interview series about alternative jobs for lawyers
I first came across Matt Levine’s writing over at Dealbreaker in 2012, as I was traveling and eating. While I wasn’t wistful for my former corporate law career, I still wanted to keep up with financial news. Matt’s writing style — funny, intelligent, and thoroughly able to see the forest through the trees — was why I started reading Dealbreaker. It’s also why I moved with him to Bloomberg when he started blogging for them in 2013.
His pieces are approachable and interesting while tackling extremely complex topics. A former lawyer and finance guy, he is able to provide important background to the current news. He delights in sarcastic footnotes. And he’s even got his own Twitter bot that someone created, who is learning to talk by reading everything Matt Levine writes. You know you’ve made it when…?
I realize that not all my readers enjoy reading about credit-default swaps or Argentina’s sovereign debt saga, but I think anyone can learn from the skill of taking complex problems and dissecting them to make them less opaque. This is what Matt Taibbi is known for with US politics and the financial crisis, and why I enjoy Matt Levine’s writing regardless of where he’s employed.
His answers about jobs for lawyers, leaving the law, and advice for those who want to do the same, all below.
What made you decide to follow a less conventional path than typical law school graduates? Was there a particular moment that catalyzed the decision for you?
It was all pretty path-dependent for me. I went to work as a corporate lawyer in 2005, and at the time corporate lawyers all wanted to be investment bankers. (Do they still?) So after about a year and a half, a former colleague who had left to be an investment banker called and asked if I wanted a job. And I said “is it better than this job?,” and he said “it’s a little better than that job,” so I took it. And I was an investment banker for four years. I guess that is actually a pretty typical path for a law school graduate, or was in 2007.

But then I got sick of investment banking too. I had always vaguely imagined myself as a writer, without doing anything about it. And a random combination of factors — I was trying to quit banking, the financial blog Dealbreaker had a job opening, and I knew some people there — led me to fall into financial blogging. And I turned out to be okay at it, and after about two years I was hired at Bloomberg View and have been here ever since.

So I am sort of a terrible story: A lot of luck was involved in each of my career moves, and honestly the “particular moment that catalyzed the decision for me” probably occurred months after I started at Dealbreaker. I went into that job thinking “well this will be a weird experiment and maybe it will work!” And my first weeks there were just abjectly terrifying. And then after a while I was like “oh wait this kind of does work,” and it became unbelievably fun.

What do you find most fulfilling about your current job?
I get to think and write about things that I think are fun! That’s the main thing. Unlike in law and banking, I don’t really get assignments or have tasks or whatever. I just wake up and try to find things that interest me, and that I think will interest my readers. In a weird way that feels more high-pressure than my law and banking jobs: I can never fall back on just checking off a list of tasks; I have to come up with something new every day. But it’s definitely the most fulfilling part of the job.

Also having readers — knowing that strangers are interested in what I have to say — is very fulfilling. I am constantly amazed when I write something that I think will amuse only me, that appeals only to my narrow weird combination of interests, and someone will email me to say “I loved that part.” I love when I find out that important financial-industry people read my column, but I also love when random people email to say “I don’t work in finance but I read your column every day because it’s fun.” It’s always incredibly gratifying to hear....MORE, including some interesting links

What do you have to say to those who tell me lawyers can’t have fun?
That strikes me as mostly accurate, yeah.
HT: Abnormal Returns March 20 which leads off with Izabella Kaminska's piece on Starbucks' experiment in time-shifting coffee ordering.

Here's Matt's home at Bloomberg including the hit article "Bond Quotes and Performance Art" which skirts close to some of our current thinking on incorporating interpretive dance into the analysis of Brownian motion in finance.

"Customer Service Chatbots Are About to Become Frighteningly Realistic"

From MIT's Technology Review:
A startup gives chatbots and virtual assistants realistic facial expressions and the ability to read yours.
ould your banking experience be more satisfying if you could gaze into the eyes of the bank’s customer service chatbot and know it sees you frowning at your overdraft fees? Professor and entrepreneur Mark Sagar thinks so.

Sagar won two Academy Awards for novel digital animation techniques for faces used on movies including Avatar and King Kong. He’s now an associate professor at the University of Auckland, in New Zealand, and CEO of a startup called Soul Machines, which is developing expressive digital faces for customer service chatbots.

He says that will make them more useful and powerful, in the same way that meeting someone in person allows for richer communication than chatting via text. “It’s much easier to interact with a complex system in a face-to-face conversation,” says Sagar.

Soul Machines has already created an assistant avatar called Nadia for the Australian government. It’s voiced by actor Cate Blanchett and powered by IBM’s Watson software. It helps people get information about government services for the disabled. IBM has prototyped another avatar, Rachel, that helps with banking.

The movements of Soul Machines’s digital faces are produced by simulating the anatomy and mechanics of muscles and other tissues of the human face. The avatars can read the facial expressions of a person talking to them, using a device’s front-facing camera. Sagar says people talking to something that looks human are more likely to be open about their thoughts and be expressive with their own face, allowing a company to pick up information about what vexes or confuses customers....MORE, including video.
Related and quite amazing:

September 2016
Computer Generated Imagery Is Crossing the Uncanny Valley
...We’ve become pretty good at making CGI look like it’s almost real, but the real challenge is making it seem like its normal.

Japanese artists Teruyuki Ishikawa & Yuka Ishikawa — otherwise known as Telyuka — started a project in 2015 to create an extremely realistic computer-generated schoolgirl. Her name is Saya, and she has been improved on since then.

This is the 2016 version (click to enlarge):

And these are some pictures of the 2015 version...


Saturday, March 25, 2017

"It’s very likely we don’t understand probabilities"

From the WaPo's Joel Achenbach:

Pit Manager Nicole Mavromatis uses a level to check the balance of a roulette wheel at Maryland Live Casino in 2013. (Photo by Linda Davidson / The Washington Post)
If there’s one thing I know absolutely, irrefutably, 100 percent for certain, it’s that people don’t understand probabilities.

This is on my mind because of March Madness, and this new feature at 538 where they not only tell you who is most likely to win but also update the probabilities as the game goes on. While watching the game on TV, you can follow the changing odds on your computer screen while you simultaneously live-tweet the event and text your friends on your smartphone. Ideally, you will do this while switching channels between CBS and TBS, except when the networks show both games on a split screen. Also you should make calls to your bookie. And your psychiatrist.

According to 538, my Gators have a 54 percent win probability Friday night. But Neil Greenberg’s fancy stats column gives the Gators a 62 percent chance of winning. Is that a contradiction? No: Just two different estimates of something innately uncertain and involving multiple metrics of imprecise significance.

That’s my guess, at least.
This shifting-probabilities gimmick at 538 reminds us that probabilities aren’t the same things as predictions. We don’t know how the probability cloud will collapse into a singular reality (sorry to go all quantum physics on you). We live in a world that at both micro and macro levels is chaotic, fluid, and fundamentally — if I may use another highly technical term — squirrelly.

Unfortunately, it’s pretty much impossible to live a normal, emotionally stable life without finding various perches of certainty, belief, faith, conviction, etc. You can’t go around in a probabilistic daze.
Evolution rewards snap judgments. Sometimes you just have to take off running. But we make mental errors all the time. For example, we typically fail to see how low-probability outcomes will become far more likely, if not a certainty, given enough opportunities. We also overestimate the extent to which our direct experience predicts future probabilities. Anecdotes mislead. So do statistical studies with very small data sets. (Here in the science pod we keep on the lookout for studies that turn out to be based on the thoughts of three guys on bar stools.)

My friend Michael Lewis has published a book, “The Undoing Project,” that explores the long collaboration of Amos Tversky and Daniel Kahneman. The Tversky-Kahneman research showed that people are not rational when it comes to probabilities. Consider the “Linda problem.” (Wikipedia has an article on this, titled the Conjunction fallacy.) Tversky and Kahneman ran an experiment in which students were given the characteristics and background of someone named Linda (majored in philosophy, concerned about justice) and then were asked to identify which sentence most likely describes her. “Linda is a bank teller and is active in the feminist movement” was considered by a majority of students to be more probable than “Linda is a bank teller” — even though you can clearly see that the first has to be a subset of, and thus less probable than, the second.

We struggle with probabilities embedded in a low-confidence framework — such as a snow forecast. Earlier this month we prepared for a big snowstorm here on the East Coast. Early computer modeling showed it might be historic — with one model showing 20 inches for the District. Our ace weather bloggers at the Capital Weather Gang wrote a series of posts in which they clearly explained that there were many uncertainties. Then the storm hit and the heaviest snow was out in the middle of nowhere and not in the big cities along the East Coast, and, sure enough, some people complained bitterly that the forecast was wrong. My colleagues acknowledged that it wasn’t a perfect forecast, but was pretty darn good, and in fact I think they did a bang-up job, as always.

Marshall Shepherd published a blog post this week defending the forecast community in general:
Hurricane track forecasts by NOAA’s National Hurricane Center (see below) have significantly improved in the last several decades, and tornado warning lead-times are on the order of 13 minutes. Even with such positive metrics, forecasts will never be perfect. There will be challenges with uncertainty, probabilistic forecasts, inadequate data, coarse model resolution, and non-linearities associated with trying to predict how a fluid on a rotating body changes in time....

Because uncertainty multiplies over time we end up with track forecasts that look like this:

And are called the Cone of Uncertainty.

Deloitte Canada Turning Into Chuck E. Cheese

A more accurate, but still wildly figurative headline would be "Chuck E. Cheese passes the token torch to Deloitte."

Or something. You decide.

From Going Concern, your source for the accounting news you won't find elsewhere:

Accounting News Roundup: PCAOB Transparency and a Deloitte Cafeteria Accepts Bitcoin | 03.22.17
... Bitcoin
Here’s an actual press release from Deloitte Canada boasting about their employees are using the bitcoin ATM the firm installed last fall.
Since the installation of the BTM in the fall of 2016, Deloitte’s Toronto office has seen tremendous adoption and understanding of the cryptocurrency, and its underlying technology blockchain.
“After placing a BTM in our offices and seeing Deloitte personnel downloading a wallet and buying their first fraction of a bitcoin, it seemed natural to enable the next step of the use case under our own roof,” said Ian Chan, Partner, Deloitte.
Yes, “Deloitte Canada has announced that it is now accepting bitcoin at Bistro 1858, the Toronto office’s internal restaurant.”

This sounds just like a carnival. You take regular money to obtain this mysterious other currency that you have to spend on delicious, overpriced food. I really hope the next thing at Deloitte Toronto that accepts bitcoin is a Skee-Ball machine. I would seriously consider getting some bitcoin for that....MORE weirdness
The reason for my confusion on the proper headline was because of this Bloomberg story from last October: 

Chuck E. Cheese’s Embraces a New Form of Cheddar
The decision to swap tokens for rewards cards could roil the collectors’ currency market—which, yes, is a thing. 
Chuck E. Cheese’s—the pizzeria-slash-video-game-arcade that bills itself as the place “where a kid can be a kid”—has been making some changes of late aimed at appealing to millennial moms and dads. Thin-crust and gluten-free pizza have been added to the menu, along with wraps and an expanded beer and wine selection. Some locations have free Wi-Fi. Chuck himself, the chain’s guitar-playing mascot, has even grown up a little, exchanging his skater look for a pair of well-fitted jeans.

Its most sweeping change is yet on the horizon: After 39 years, it’s phasing out tokens in favor of rewards cards. Christelle Dupont, a spokeswoman for the restaurant’s parent company, CEC Entertainment, says the cards “will be easier for everyone.” Easier, of course, for Chuck E. Cheese’s to collect data on customers’ gaming habits and easier for gamers to track their scores and recover points if they lose their cards....

"Google’s Plan to Engineer the Next Silicon Valleys" (GOOG)

From Backchannel:

The tech giant is quietly grooming companies overseas in a strategic move to bring the next billion online.
Vu Van is a CEO in San Francisco. Born in Vietnam, she is a member of the auspicious class of Silicon Valley founders who are immigrants — among US startups valued above $1 billion, 51 percent have a foreign-born founder. Van earned her MBA at Stanford, locking herself into a network of hatchling executives. She had a pain point, realized that others shared her problem, and built a company to solve it. She debuted her app, Elsa Speak, at SXSW last year and promptly won an award. On paper, everything was Silicon Valley perfect.

Except that in every other way, Van doesn’t fit the American startup mold. She’s the only member of her company based in the US. She geared up to build her app, an AI assistant for English learners to improve their accents, by returning to Vietnam and immersing herself in the needs of her initial target users. Almost two years later, her seven employees are split between Vietnam and Portugal.

Van doesn’t hesitate to call San Francisco home, but she also stays for a business reason, which is that the networking is second to none. “Vietnam is all about first-generation startups,” Van explains. “Everyone is still figuring out what they’re doing, and no one’s in a good place to mentor.” So she’s planted herself in the one place on Earth where you can’t do your dry cleaning without running into a potential advisor, expert, investor, or future hire. For her company, that edge makes the time zone patchwork worth the sacrifice of sleep and sanity.

So when Van first heard about Google’s new Launchpad Accelerator, she was skeptical. The company was in effect promising mature startups from emerging markets the most epic networking service on the planet: For every hiccup Elsa was facing, Google would match her and two colleagues with a top expert — sometimes the top expert — in that area. For free, with no catch, no quid pro quo. Van decided to give it a shot. Despite her Bay Area bonafides, launching a product in Vietnam had still been a slog.

Elsa is one of the rising stars of The Rest of the World—and Google has a plan to get in the door of companies like Van’s and shape them in its image. It wants to educate them on the best practices of product development and speed up their learning curves. Think of it as strategic philanthropy: In exchange for helping these companies grow, Google gets to scrutinize their books, observe how its own products are being used (or not) in less familiar markets, and spread its gospel to the far reaches of the globe. Eventually, these companies will play an enormous role in getting millions more people to conduct their lives online, and Google will be there as well, ready to scoop up new users.

“The one thing emerging markets are missing is success stories,” says Roy Glasberg, Launchpad’s global manager. “You need an ecosystem.” A wiry Israeli sporting close-cropped hair and performance-wear chic, Glasberg is articulating an ideology percolating inside Google about why so few big companies emerge from outside Silicon Valley. He and his colleagues say the word “ecosystem” a lot. It’s a subtle, unstated way of contrasting the rich environment of the Bay Area, where investors, board members, competitors, and talented workers swirl in a self-pollinating bubble, with the relative deserts of countries such as Indonesia, Mexico, or even bigger players like Brazil. In the ecosystem view, the Bay Area is the goldilocks planet, and the rest of the world has the inhospitable climate of Mars or Mercury.

Google’s theory is that until some company — any company! — has produced a massive IPO or engineered itself an eye-popping acquisition, a developing region won’t amass the resources it needs to support entrepreneurship. Venture capitalists are uneasy, or simply absent. The talent pool is shallow, with few local technologists who have first-hand experience transforming small companies into large ones. When you wonder where to find a good data scientist, or how to negotiate better terms in your series A, or what to fix in your app to get a better conversion rate, no one around you has the answers.

So a delta force within Google, led by Glasberg, set out to see if it could do what countless governments, regional technology parks, and grant programs have failed to do before it: fire up startup kilns around the world that then take on a life of their own. They would do so by picking the sharpest, most proven startups, and showering them with unconditional support for six months (and $50,000, but who’s counting)— essentially treating them as integrated wings of Google for the duration.

To earn that kind of access, these startups have to be much more than a Gucci knockoff. They’re not just the Postmates of the Philippines, or the Tesla of Thailand. They are fiercely unique, tackling unsolved problems and producing code that rivals anything emerging from San Francisco or the South Bay. These are the brightest minds of elsewhere. And Google’s now giving them a jolt of adrenaline straight from the planet’s entrepreneurial mothership: itself.
Transporting the magic of Silicon Valley to other cities is a trope so old, and so beloved by government bureaucrats, that these days it hardly quickens the pulse. Silicon Alley. Silicon Glen. Silicon Wadi. Silicon Fen....MUCH MORE

Asness et al: "Contrarian Factor Timing is Deceptively Difficult"

You don't say.
Following up on Thursday's "Investing: Cliff Asness Blasts Rob Arnott".

From the Social Science Research Network:

Contrarian Factor Timing is Deceptively Difficult
Date Written: March 7, 2017
 Clifford S. Asness 
AQR Capital Management, LLC 
Swati Chandra  
AQR Capital Management, LLC 
Antti Ilmanen  
AQR Capital Management 
Ronen Israel  
AQR Capital Management, LLC
The increasing popularity of factor investing has led to valuation concerns among some contrarian-minded investors, and fears of imminent mean-reversion and underperformance. In this paper, the authors find that despite their recent popularity the most common factors or styles, namely the value, momentum and defensive styles, are not, in general, markedly over-valued as measured by their value spreads.

More broadly, tactical timing, whether of markets or factors, always seems to hold appeal for many. The authors look at the general efficacy of value spreads in predicting future returns to styles. At first glance, valuation-based timing of styles appears promising. This is not surprising as it is a simple consequence of the efficacy of the value strategy itself. Yet when the authors implement value timing in a multi-style framework that already includes the value style, they find somewhat disappointing results. As value timing of factors is correlated to the standard value factor, it adds further value exposure, but as compared to an explicit risk-targeted strategic allocation to value, value timing provides an intermittent and sub-optimal amount of value exposure. Thus, according to the authors, tactical value timing can reduce diversification and detract from the performance of a multi-style strategy that already includes value. Finally, the authors explore whether value timing works better at longer holding periods or at extremes, still finding fairly weak results.

Contrarian value timing of factors is, generally, a weak addition for long-term investors holding well-diversified factors including value and, specifically, not sending a strong signal on stretched valuations today.
SSRN download page

Friday, March 24, 2017

"Uber’s largest Southeast Asian rival looks to raise another US$1.5 billion"

I still can't get the picture of Didi Chuxing's President, Liu Quing (anglicized to Jean Liu), commenting on Travis Kalanick and Uber's efforts in China as cute. Then when Uber proclaimed the $3.5 billion investment from the Saudis she laughed and said she had more than that on the way.
Didi then announced the completion of a $7.3 billion fundraising.

Uber better be on top of their game in Southeast Asia because they weren't in China and got run out of the country.

From Bloomberg via Asia  Unhedged and the Asia Times:

The financing would crush the region's previous record
 In an all-out race with Uber and Go-Jek Indonesia PT to take hold of the Southeast Asian market, Grab has hopes to raise an additional US$1.5 billion in a new funding round backed by Japanese Softbank Group.

Bloomberg reports that Softbank is pledging around US$1 billion, according to anonymous sources familiar with the matter. Still unclear, is whether or not the funding will come from Softbank’s Vision Fund, which has not been finalized yet.

The funding round would break the previous record for the region of US$750 million, set by Grab last September. The company announced this week plans to expand to a seventh Southeast Asian country.

"Steve Cohen Is Trying to Teach Computers to Think Like Top Traders"

Substance abusing, egomaniac computers.

From Bloomberg, March 15:
Steven A. Cohen got rich by going with his gut on big trades. Now the billionaire trader is experimenting with another path: automating the decisions of his best money managers.

Cohen’s Point72 Asset Management, which oversees his $11 billion fortune, is parsing troves of data from its portfolio managers and testing models that mimic their trades, according to people familiar with the matter.

The wave of automation that’s sweeping finance, initially relegated to taking over mundane tasks, is starting to encroach the ranks of prized money managers who are among the industry’s highest paid. Cohen is pursuing this effort after producing his second-worst year as a trader and as he prepares to return to the hedge fund industry at a time of intense investor pressure on fees.

Unabashed in his view that the industry is short of talent, Cohen has ramped up the project over the past year or so, said the people, who asked not to be named discussing internal matters.

Using analyst recommendations as an input, the effort involves examining the DNA of trades: the size of positions; the level of risk and leverage; and whether an investment was hedged, said one of the people. It also entails looking at the timing of trades, assessing pricing and liquidity in the market, and the duration over which managers build positions.

The model will identify patterns and relationships based on those analytics and seek to replicate bets, the people said. Point72 is also experimenting with automating the work of its execution traders, who place buy and sell orders with brokers on behalf of money managers.
Machines will never get the big paychecks Cohen has doled out. At his former hedge fund, SAC Capital Advisors, portfolio managers earned about 15 percent to 25 percent of profits they generated. Top performers took home as much as 30 percent -- which routinely translated into eight-figure payouts annually. Last year, Cohen changed the bonus structure with Point72 managers earning as much as 25 percent but only on the money they make above a market benchmark, or so-called alpha....MORE
Probably related:
A Major Flaw: "Ethical Trap: Robot Paralyzed by Choice of Who to Save"
You don't want hesitation in your robotrader....

...At the same time you want the computer to discriminate between the command "Execute the trade" and the command "Execute the trader". 
And dozens more.

Nvidia's Stock Is Not Yet Out Of The Woods (NVDA)

Readers who have been with us for a while may have noticed we haven't had much to say about NVIDIA in 2017. Harking back to a December 29 post "Goldman Sachs Says Nice Things About NVIDIA Ahead of Next Week's Consumer Electronics Show (NVDA)":
Before the headline story a quick note on the stock price.

When we posted "As NVIDIA Notches Its 10th Straight Daily Gain, Lots Of People Say Nice Things...HOWEVER (NVDA)" on Tuesday at $116.49 up $6.71:
...We agree and start to lighten up right here, right now.
And any weakness in the overall market means lighten up some more.
We didn't have any special insight or anything, just pattern recognition.
The stock price had achieved verticality on the charts, so much so that four minutes after the close Tuesday the usually sober folks at Barron's posted "The Hot Stock: Nvidia Soars 6.9%" with this as their illustration:
We didn't have the advantage of seeing that, our post came out at fifty minutes before the close but if we had our declarative "right here, right now" (which they really caution against in junior analyst school) would have been even more emphatic. A picture really is worth a thousand words, or a few millions of dollars....
We focus on the stock, not the company. The company should be fine for at least the next couple years until the artificial intelligence biz catches up to NVIDIA and either takes a different approach or a really different approach and goes quantum computer.

First up, Investopedia March 22:

Nvidia Not Out Of The Woods Yet (NVDA)
Nvidia Corp. is trading up about 1%, gaining back some of its losses from yesterday. Shares fell yesterday from around $110 to around $106. Certainly, the $110 level has been a problem for the stock over the last couple of days. The bigger problem is, where do shares go from here? In a stock like NVDA, just getting the direction right is a challenge, let alone figuring out what the market thinks it could be worth.

As we wrote earlier this week, the stock would not be out of the woods until it was able to break over $110, and to this point, it has not been able to do that. The stock tried to get over that hurdle all day on Monday and Tuesday morning, but was unsuccessful in its attempts. (See also: Did Nvidia Just Break Out?)

The morning shares of NVDA gapped lower on February 22nd; momentum shifted, and until it can get back above $110, the momentum is downward.
(Interactive Brokers TWS, Hourly Chart)
One can easily see how the stock has clearly entrenched itself with some positive momentum and ran into a wall of selling just below $110....MORE
On March 21st Slope of Hope had made a similar point:

Gap and Crap
It’s been an, ummm, busy morning. This is the most profitable day I’ve had in a LOOOOOOOOOOONG time, and every single one of my 71 short positions (even the ones I opened today) are in the green.

Every. Single One.

I’ve got to update my stops, but in the meantime, here’s NVidia, which I just shorted today. It covered its gap, and it’s insanely overvalued. See ya later, Slopers.

We have a couple points of difference with Slope of Hope:

1) Premier growth stocks always look overvalued.
2) Shorting NVDA is a risky little game. When we said lighten up, we were talking to folks who owned it in the '20's form late 2015, not a short.

That said, his point about the resistance at $110 is sound for a very sharp, very short-term trader.
The next resistance of course is the double all-time-high top at $119-120 so $111-120 should be tradable to the upside but in the meantime just be aware of the areas the stock petered out.
$108.42 last, up $1.33.

NVDA NVIDIA Corporation daily Stock Chart

"Why active managers are praying for reflation"

As noted in the intro to  a 2012 post:
A subject near and dear. The sweet spot for P/E ratios is 1.00- 2.00% annual CPI inflation. As you move away from that in either direction multiples drop off pretty fast, to the point that equities are not an optimal investment. You won't believe what the best investments for inflation in the 8-12% and greater than 100% ranges are. I'll write about them if we ever go Weimar....

Granted that's just P/E's and it will matter if corporate management wants to show phantom earnings during ongoing inflation and chooses FIFO accounting or wants to shelter more real earnings from the tax-man and uses LIFO and then there's... some day I'll get around to posting on it. Look for a clickbaity headline with part of the above paragraph:

"You won't believe what the best investments for inflation..."

From Fund Strategy:
Investors will be well aware of the reflationary narrative in markets, with growth and inflation having picked up over the past few months. Yet recognition of this change has not been universal.

While fund managers have been going long oil, hoovering up cyclical stocks and increasing active exposure, asset owners have shown little inclination to do so. They remain uninterested in commodities and equities, still favour fixed income and prefer bond proxies
like infrastructure.

This is an interesting divergence of opinion, especially as asset owners have had the best of it over the last few years. Fund managers who positioned themselves for an environment of higher yields and rising inflation in 2013 and again in 2015 were stung badly as a slowing global economy prompted renewed policy intervention. Reflation hopes quickly faded and bond yields fell sharply; so much so that by mid-2016 more than $13trn-worth of government bonds traded with a negative yield. They were then rightly lampooned for misreading the market.

Against this backdrop, it is tempting to recall the proverb “fool me once, shame on you; fool me twice, shame on me”. Asset owners’ ever tighter embrace of passive strategies suggests they may be thinking just that.

Yet history also offers examples of fund managers eventually being proven right. The so-called “nifty 50” stocks drove US indices during the early 1970s. Many active managers shunned these quality growth stocks, underperforming the wider market for several years. But when the 1973 oil shock kicked in, the proportion of active managers who beat their benchmarks jumped from 10 per cent to well over 90 per cent.

There are some reasons to believe a more reflationary environment may once again lead to sustained outperformance by active funds. The global economy picked up speed over 2016, with indices of economic surprises running at multi-year highs. Tighter labour markets, cuts to oil production and US tariffs could all drive inflation higher, which has already picked up some speed after several years in the doldrums.

This is not confined to just one region; it is everywhere. With output gaps closing even in laggard economies like the eurozone, conditions are ripe for more sustained price pressures. Interestingly, as these developments have unfolded, the proportion of active managers beating their benchmarks is picking up.

Bond bulls will argue that even if this is all true, central banks will eventually step in and tighten policy and, in any case, structural forces like ageing populations and high indebtedness will outweigh transitory cyclical developments. But will central banks tighten?

Haunted by the 1930s, they have spent years coming up with reasons to loosen policy, rather than tighten it.....MORE

Meanwhile, In Florida

There seems to be a theme emerging at Florida Man:

"The Revenge of Analog"

From The Art of Manliness, March 23:

Podcast #289: The Revenge of Analog
“Software is eating the world,” or so we’re told. Products that once took up physical space can be contained in our smartphones and held in the palms of our hands. Instead of having a record collection, now we can stream any music any where and any time we want. Instead of shelves and shelves of books, we can have access to thousands of volumes in our Kindle app. Instead of stacks of photo albums, we can store a virtually unlimited collection of pictures in the digital cloud. 

But in the cultural background to this digital shift, there’s been a silent rebellion brewing. 
My guest tracks that rebellion in his book, The Revenge of Analog. Today on the show, David Sax and I talk about why we’re seeing a return to analog products like vinyl records, hardcopy books, and pen and paper — and it’s not because of nostalgia. David goes into detail about the sudden revival of vinyl and turntables and why it’s more than just some hipster fad, why hardcopy book sales are going up while ebook sales are declining, and why writing with pen and paper unleashes creativity compared to typing or writing on a screen. He then gets into how the internet is counterintuitively driving this upsurge of interest in tangible products and the benefits we get psychologically, culturally, and economically by living in an analog world. 

Show Highlights

  • When it was that David noticed “real” stuff was making a comeback
  • Why “the old thing is rendered obsolete by the new thing” isn’t quite accurate
  • What is it that’s fueling the “revenge of the analog”?
  • How people are “maturing” with their technology use and finding ways to balance their tech use with tangible items
  • The irony of the internet helping drive the revenge of the analog

...MORE, including the podcast

"Why low-tech living is back"
"Mugger To Victim With Flip Phone: ‘What The F*** Is This?'" 

Norwegians Buying Oil Assets, Clocking Big Percentage Gains

From Bloomberg, March 23: 

Hedge Fund Run by Former 'Big Wolf' Trader Delivers 46% Return
Two former associates of billionaire shipping and rig tycoon John Fredriksen are delivering out-sized returns by snapping up distressed and shunned oil-related assets. And they say it’s a bet that has plenty of room to run.

Titan Opportunities Fund, set up by Espen Westeren and Fredrik Halvorsen, has returned 46 percent in its first nine months. Now, they want to step up their bets by raising as much as $175 million. The goal: double or even triple the money in the next three to five years, with an annual return of at least 30 percent, before returning it to investors.

“The opportunity is now,” Westeren, the fund’s chief investment officer, said in a phone interview. “We’ve had an almost unprecedented down-cycle, which has been very brutal. We believe we will see an upturn that will last a few years.”

Battered by the a collapse in crude prices due to a global glut, oil companies reduced investments by more than 40 percent from 2014 to 2016, dragging the industry into the deepest downturn in a generation. Valuations dropped for both producers and the companies that provide them services ranging from engineering to drilling, and forced many to the brink of bankruptcy or beyond.

The crash laid the ground for Titan, which Westeren, 38, and Halvorsen, 43, started in June with almost $50 million. By the end of February, the fund had grown to more than $72 million, according to the latest monthly report.

“We believe we’ve just passed the bottom and that 2017 will be the first year of rising activity,” Westeren said. “We’re investing in the companies that will benefit from a recovery in oil investments.”
Besides picking cheap energy stocks and bonds, the London-based investment team will rely on its network to gain access to private placements and other deals.

Westeren, a Norwegian, worked for Fredriksen -- known as “Big Wolf” in the industry -- from early 2010 to late 2015, managing the billionaire’s private investments from the group’s Sloan Square offices in London. He now heads an investment team of four that includes John Dellanoce, who worked with distressed investing at Goldman Sachs Group Inc. for 10 years to August 2015....

Thursday, March 23, 2017

"Peak Cash? Goldman Ponders A Cashless Society And The Benefits For Government"

Major caveat: Mr. Heisenberg provides no link to his source and I see no other references on the interwebs to the bit that follows after the "Via Goldman".
Close cover before striking, your mileage may vary etc, etc.

From the Heisenberg Report:
Much has been made over the past several years about the so-called “death of cash”.

How many articles have you seen circulating (pun fully intended) with titles that contain the words “cashless” and “society”?

Indeed, the notion that “society” is on the fast track to becoming “cashless” has become almost ubiquitous and although we here at HR have a deeply ingrained aversion to conspiracy theories (it’s a “once bitten, twice shy” kind of thing), we have to admit that the prime beneficiary of a move away from hard currency is government. Or, perhaps more precisely, policy makers.

First of all, a fully digitized system means there’s an accessible transaction ledger. The benefits of that for government are clear: tax collection is easier and oversight of citizens’ economic activities is streamlined.

But beyond that, think about it from the perspective of policy makers constrained by the zero lower bound. If you’re a central banker operating in a ZIRP or NIRP regime, cash is a real pain in the ass. Why? Well, because it constrains your ability to cut rates. At a certain point, savers will simply put their money under the proverbial mattress if they believe they are being penalized for keeping it in the bank. Importantly, the effective lower bound isn’t zero. There’s a risk to holding your life savings in cash and storing it in the closet. That risk means savers will likely put up with interest rates at or even below zero before they’ll pull everything out of the bank. But that patience starts to wear thin beyond a certain point.

Well, if you do away with cash, there is no effective lower bound for rates. If you’re a policy maker you can centrally plan the whole damn economy. Consumer spending too low? No problem. Just make rates negative 20% and force people to either spend or take a haircut. Economy running too hot? Again, no problem. Raise rates to +20% and force people to choose between spending and earning a huge return on their digital wealth. If there’s no cash, those are choices consumers would have to make because physical bank notes would no longer exist.

Now clearly, that’s a gross oversimplification that ignores pretty much all nuance, but that’s on purpose. We’re just trying to frame the debate.

Well with all of the above in mind, consider the following out Thursday afternoon from Goldman.

Via Goldman
Have we reached peak cash? Technology has been an important catalyst for shrinking cash usage, but it is by no means a new phenomenon. As we wrote in 2012, the first technological step-change in the payments arena was the shift from cash to plastic money, i.e. credit and debit cards, which happened in the 1960s.

There are many parallels to be drawn between that period and the ongoing shift to digital money: an initial period of an increasing number of providers was followed by a consolidation stage that established a few players (Visa and MasterCard primarily) as the industry standards, eventually accelerating the adoption of plastic money.

However, the availability of technology alone has not ensured the demise of cash. As the following chart shows, there are several advanced economies in which it is still the dominant mode of payment in volume terms (surprisingly quite a few European countries are in the bottom left quadrant)....
Scandinavian countries are on the cusp of becoming some of the first cashless societies, as a result of industry-co-ordinated steps and government initiatives. Swish, a payment app developed jointly by the major Swedish banks, has been adopted by nearly half the Swedish population, and is now used to make over nine million payments a month. About 900 of Sweden’s 1,600 bank branches no longer keep cash on hand or take cash deposits and many, especially in rural areas, no longer have ATMs. In conjunction with that, cash transactions were just c.2% of the value and 20% of the volume of all payments made last year (down from 40% five years ago).

Denmark’s move to a cashless society is a deliberate result of policy, with the government removing the obligation for some retailers to accept payment in cash. (MobilePay, a Danish app, was used by half the population to make 90 million transactions in 2015)....

Shorting Silicon Valley: "Unicorn Swaps and Falling Complacency"

From M. Levine at BloombergView:

People want new ways to worry about unicorns.
We talk from time to time around here about how to short unicorns. There is a popular view that many large private tech companies are overvalued; that this overvaluation is caused in part by the structure of the market, which encourages long investors but doesn't allow short selling; and that if you could just sell those companies short, you'd make a lot of money. Themes of our past discussions include:
  1. Really if you believe all of that, the right move is to start a dumb private tech company, get dumb venture-capital funding, pay yourself a big dumb salary, and laugh maniacally when the bubble bursts.
  2. Failing that, you could just find someone -- a friend, or a bank -- to take your bet against unicorns, but it's complicated. A bank will probably demand the sort of formalities -- collateral, ISDA agreements, limiting bets to big "eligible contract participants" -- that will limit the reach of the Unicorn Failure Swaps market.
  3. Also the bank will probably want a natural counterparty on the other side. Lots of people want to short unicorns, but who would take the other side of the bet? I mean, lots of people want to go long unicorns too. But if you want to go long unicorns, and you're the sort of accredited investor who could write Unicorn Failure Swaps, you should probably just invest in unicorns instead. They keep raising money!
  4. In any case, don't try to do this on the cheap in some sort of unregistered blockchain-based unicorn swap exchange; that will not end well.
So much for the theory. Here is a Medium post from Avish Bhama of Mirror, who is actually trying to make unicorn swaps happen. His team met with 65 potential counterparties, got a sense of the market appetite, drew up an ISDA and "partnered with a valuation firm to help us mark these illiquid swap positions on their books." But he didn't find much of a natural two-sided market in most names, though interestingly the one-sidedness is not all on the short side...MORE
HT: FT Alphaville's David Keohane who noted the Medium article in today's Further Reading post, which eventually led us to this piece.

"Ethical Theories Spotted in Silicon Valley"

From Communications of the ACM:
Ethics may be the study most popularly associated with philosophy. What does ethics in the philosophy of computer science tell us about current issues in high tech? My post last month on fake news in social media [Hill 2017] was applied ethics, an attempt at reasoning toward what should be done, rather than an examination of general principles. Traditional philosophical ethics does not tell us what decisions to make; rather, it offers ways to figure out what decisions to make. Let's mark out some of the best-known approaches, in a sketchy way. They are not expressed in parallel terms, because they do not represent a partition of choices; each takes a slightly different perspective on the Right Thing, and they overlap.

Utilitarianism: The state of affairs to strive for is that which contributes the most to overall welfare.
This appeals to our sense of fairness. But it leads to problems including aggregation, in which individual interests can be trampled. It seems unsatisfactory, for instance, when a action might benefit rich people a great deal at the expense of a couple of struggling poor people.

Deontology: We find the best thing to do in predetermined standards of right and wrong applied to people's actions, that is, duties.
This appeals because it focuses on responsibility, as we think ethics should. But adherence to duty can lead to actions and outcomes that we abhor, because it ignores the particular circumstances; for example, a duty to tell the truth does not allow for deception that would save feelings or even lives.

Virtue ethics: Each of us should strive to be a good person, according to some ideal; doing right will follow from striving toward that standard.
The trouble here is that the smooth execution of the Right Thing from the securing of virtues seems tenuous; no guidance on particular action is given and outcomes do not get much attention.

Consequentialism: Whether an act is right or wrong is given by the value of the resulting state of affairs.
But this often means sacrificing someone, in medical research, for example, in order to cure other patients' conditions. In other words, the ends justify the means. This instrument strikes us as too blunt.

Contractualism: Moral prescriptions or proscriptions are rationally constructed by society and imposed via a social compact with its members, even if implicit or involuntary.
This obviates many objections to the other theories, but seems to ignore beneficence and other "natural" qualities that many would consider to bear active moral worth.

There is more, much more. Quick online references include the Internet Encyclopedia of Philosophy entry on "Ethics," [IEP] and various entries in the Stanford Encyclopedia of Philosophy [SEP]. Naturally, the interested reader can learn more about ethical theories from any philosophy textbook or in a philosophy class at a local college.

Now let's spot the glints of these theories in the sunny landscape of Silicon Valley. Take consequentialism, for instance: The very problem of the spread of fake news and its influence presents bad consequences such as ill-informed decisions and misguided actions, the downside of a practice that we would, on the theory of consequentialism as defined above, adjudge to be wrong. That practice is social media's support for the wanton creation and sharing of fake news. A full analysis would require us to measure all the consequences, of course, bad and good (including protection of free speech), and assess the action in terms of the total picture.

The perspective of contractualism might help determine our stance toward new arrangements that burst forth from the tech world without public review: software licenses, Google Earth surveillance, cars without drivers. Certainly any ethical theory could address issues raised by these developments; contractualism gives the view of the people more immediate prominence than do the others. We would first have to determine whether these arrangements violate principles that are reasonable to, and justifiable by, those in our society. That may not seem like progress, but at least it poses a question for investigation.

The most intriguing case here—the most entangled in the culture of Silicon Valley—is the manifestation of a different theory, virtue ethics, which we can trace through the development of social networking, as well as other high-tech enterprises. In the beginning, entrepreneurs assumed that the virtues of sharing, open communication, assistance to humans, and connection would ensure the triumph of the Good—that those values, embedded in people and projects, would bring about the Right Thing. Facebook, through Mark Zuckerberg, has explicitly adopted this chain of reasoning [Levy 2013]. Others have made similar statements: "Being digital is an egalitarian phenomenon. It makes people more accessible and allows the small, lonely voice to be heard in this otherwise large, empty space" [Bass 1995]. Yet the result has not been the triumph of the Good. The results have been mixed, with the bad effects verging on the horrifying.....MORE
The author, University of Wyoming adjunct professor Robin K. Hill seems to be a bit of a vagabond, both geographically and intellectually.

She also posted "Fact Versus Frivolity in Facebook" for the CACM last month on news/fake news.

Chicago Booth: “Our Efforts to Deal With Tech Firms’ Market Dominance in the U.S. Have Been an Abject Failure”

"Competition Is for Losers"
-Peter Thiel
Wall Street Journal essay, Sept. 12, 2014

From The Booth School of Business' ProMarket blog, March 22:
In this installment of ProMarket’s new interview series, Harvard economist F.M. Scherer answers questions about concentration, antitrust, tech giants, and inequality. “Antitrust agencies have not taken sufficient measures to remedy abuses of network externalities.”

Does America have a concentration problem? On March 27-29, the Stigler Center will host a first-of-its-kind, three-day conference in Chicago that will focus on this very question.

The conference will bring together dozens of top academics from law, economics, history, and political science, policymakers, journalists, and public intellectuals, including two keynote speakers: Margrethe Vestager, the European Commissioner for Competition, and Judge Richard A. Posner of the U.S. Court of Appeals for the 7th Circuit in Chicago and the University of Chicago Law School.

Ahead of this conference, we decided to present influential scholars and intellectuals with some questions on concentration, market power, and bigness—and their potential effects on the U.S. economy. You can find previous installments here.

F. M. Scherer is the Aetna Professor Emeritus in the John F. Kennedy School of Government at Harvard University. From 1974 to 1976, he was chief economist at the Federal Trade Commission. Since 1963, the year he received his Ph.D. in business economics from Harvard University, Scherer has authored numerous publications and books on industrial economics and the economics of technological change, including the forthcoming Monopoly, Mergers, and Competition Policy, which will be published in May. 

In an interview with ProMarket, Scherer answered questions about concentration, antitrust, and inequality.

Q: The discourse on concentration, market power, and bigness in many U.S. industries has increased dramatically in the last year. Do you believe that we have enough empirical evidence to show that concentration is on the rise and having adverse effects on the economy?

I have not worked on the data directly for 30 years, except for the banking industry, so I have to rely on published sources for an answer. Before 1990, I personally documented evidence that the shares of assets and value added assets held by largest 100 manufacturing firms was rising. But that’s not the key criterion: leading firms’ shares within individual, well-defined industries are key. I’ve seen second-hand reports from several sources documenting risking shares, and I find them persuasive. But you should query those who have been processing the source data (from the Census Bureau) directly.

Q: In your opinion, what are the main reasons for the rise in concentration?

There appear to be several reasons. Merger activity, always cyclical, has been at peak levels in recent decades. It was predominantly conglomerate during the 1960s and 1970s, but those mergers proved to be efficiency-reducing on average, so it has shifted toward concentration-increasing horizontal mergers in more recent decades. Antitrust efforts to suppress those waves have been insufficient. 

Also, technological changes have shifted consumer demand toward industries in which patent protection and other aspects of product differentiation sustain relatively high levels of monopoly power, sometimes but not always reflected in bare concentration statistics. Antitrust has also failed to deal with parallel pricing (i.e., conscious parallelism) in such industries. On the other hand (we need President Truman’s one-armed economist!), increased international trade has been a force restraining monopolistic pricing, but not fully. 

Q: Which industries should we be concerned with when we look at questions of concentration? Do we have evidence of excessive market power, reduction in quality or investment, or growing political influence?

There are so many, it’s hard to single out particular industries. If I had to, I would emphasize banking, pharmaceuticals, broadband information transmission, and several of the so-called information technology industries.

Q: Has consolidation in the financial industry played a role in concentration or antitrust issues in the U.S.?

Absolutely. Let me provide an anecdote for my answer. Back in 2012, I obtained data on the concentration of activity in narrowly-defined segments of the banking industry. I opined in reviewing the statistics that many fields were ripe for outright collusion. Sure enough, since then, important conspiracies have been detected in several fields, e.g., LIBOR rate-setting, currency exchange rate setting, crude oil futures, aluminum futures, and bidding on new private equity acquisition deals.

Q: The five largest internet and tech companies—Apple, Google, Amazon, Facebook, and Microsoft—have outstanding market share in their markets. Are current antitrust policies and theories able to deal with the potential problems that arise from the dominant positions of these companies and the vast data they collect on users?

Our efforts to deal with the problems in the United States have been an abject failure. I refer in particular to the failed efforts against Microsoft and Intel, in both of which I played some active role.....

If interested here are chapters 3-5 of Mr. Thiel's book "Zero to One" wherein he writes about his thinking on monopoly.

Investing: Cliff Asness Blasts Rob Arnott

From Institutional Investor, March 16, 2017:

"The AQR founder takes issue with white papers published by Research Affiliates CEO Rob Arnott.
Cliff Asness, founder of AQR Capital Management, is back again arguing that factor timing is “deceptively difficult” despite what you may have heard from Research Affiliates chief executive officer Rob Arnott.

In a research report and March 15 blog post, Asness takes issue with a series of white papers published by Arnott and his colleagues, which presented evidence in favor of a contrarian approach to factor timing based on what Asness called a “plethora of mostly inapplicable, exaggerated, and poorly designed tests that also flout research norms.”

For several years now, a debate has raged over whether risk premia factors – such as value, momentum, growth, and volatility – have become overvalued as a result of the rising popularity of smart beta and factor investing strategies. While some, like Research Affiliates and founder Arnott, believe factors can become expensive and that investors should time their exposures to buy low and sell high, others, like Asness, argue that diversification, not timing, is the best way to achieve returns through factor exposures.

Together with three AQR co-authors – Swati Chandra, Antti Ilmanen, and Ronen Israel – Asness put Research Affiliates’ conclusions to the test this month, first by evaluating whether any factors are overvalued and then by applying a value-based timing strategy to a multi-factor portfolio. The first question was dismissed fairly quickly.

“While, not surprisingly, some of these factors are cheaper and some are richer compared to historical norms, none are near bubble-level extremes and collectively they do not paint a picture of very stretched valuations in either direction,” the authors wrote in the research report....MORE

Professors Anne Case and Angus Deaton's Follow-up Paper, “Mortality and morbidity in the 21st Century”, Is Out in Draft

From Brookings:
In “Mortality and morbidity in the 21st Century,” Princeton Professors Anne Case and Angus Deaton follow up on their groundbreaking 2015 paper that revealed a shocking increase in midlife mortality among white non-Hispanic Americans, exploring patterns and contributing factors to the troubling trend.

Case and Deaton find that while midlife mortality rates continue to fall among all education classes in most of the rich world, middle-aged non-Hispanic whites in the U.S. with a high school diploma or less have experienced increasing midlife mortality since the late 1990s. This is due to both rises in the number of “deaths of despair”—death by drugs, alcohol and suicide—and to a slowdown in progress against mortality from heart disease and cancer, the two largest killers in middle age.

The combined effect means that mortality rates of whites with no more than a high school degree, which were around 30 percent lower than mortality rates of blacks in 1999, grew to be 30 percent higher than blacks by 2015.

Case and Deaton find that deaths of despair are rising in parallel for both men and women without a high school degree, and they[sic] deaths of despair have increased in all parts of the country and at every level of urbanization....
...MORE, including download,  (60 page PDF)

Today In Fedspeak: Three Speeches

Continuing to draw on the list Amey Stone at Barron's posted last week:
  • 03/23 08:00 Fed’s Yellen Speaks at Community Development Conference
  • 03/23 12:30 Fed’s Kashkari Speaks on U.S. Education Outcomes in D.C.
  • 03/23 19:00 Dallas Fed’s Kaplan Speaks on Economy in Chicago
Despite the Chair's being one of today's talks it's actually tomorrow's lineup that could throw a match into the fireworks factory:
  • 03/24 08:00 Fed’s Evans Speaks at Community Development Event
  • 03/24 09:05 Fed’s Bullard to Speak to Economic Club of Memphis
  • 03/24 10:00 Fed’s Dudley Speaks in New York at York College

March 19 "Risk: 'Fed Talk Could Get a Lot More Hawkish Next Week'"
March 20 ditto.

Foreign Exchange: Marc Chandler Has "Some Thoughts about the Recent Price Action" (DXY)

The charts are not helpful at this juncture, here's the last two weeks of the hourly:

While it appears the dollar may have seen a short term low at ~99.35 yesterday, pulling back to the daily view over the last year shows there's no "reason" for the decline to stop right here:

That early February low is not especially strong support, the November and March 2016 resistance just above 98.00 make more sense.
Both charts via FinViz, 99.60 up 0.13 last.

From Marc to Market:
(greetings from Tokyo.  Speaking at the CFA Society of Japan tonight)

The gains the US dollar scored last month have been largely unwound against the major currencies.  The dollar's losses against the yen are a bit greater, and it returned to levels not seen late last November. 

The down draft in the dollar appears part of a larger development in the capital markets that has also seen the US 10-year yield slide 25 bp in less than two weeks.   The two-year yield is off 17 bp.  The yield of 1.25% is 25 bp on top of the upper end of the Fed funds target range.  

A few forces are at work.  First, is the reaction to the less aggressive stance at recent FOMC meeting.  Second, the Dutch election outcome and poll still pointing to a defeat of Le Pen in the second round of the French presidential election has seen some unwind of safe haven demand.  Third, oil prices have fallen.  Consider that as recently as March 7, light sweet crude was near $54 a barrel. On March 22, it reached almost $47, the lowest level since the end of November.  Fourth, President's Trump draft budget for the remainder of the fiscal year and the drawn out process over his temporary travel ban and the replacement of the Affordable Care Act (Obamacare) warn that tax reform and infrastructure efforts will also be delayed.  

There is much focus on the scheduled Thursday vote in the House of Representatives on the replacement for the Affordable Care Act.  We suspect that if it does not appear to have the votes, the vote will be delayed.  In some ways, there is much riding on it.  A defeat would be seen as jeopardizing President Trump's agenda.   It would be a defeat for Speaker Ryan by the same forces that brought down his predecessor (the Freedom Caucus).  

In other ways, there is less riding on the particulars of the bill at this juncture.   The Senate has opposed views, and it will likely pass its own version.  Then the two differences are hammered out in the reconciliation process.   It is there that the bill ultimately is shaped into law.   Trump and Ryan can compromise on much to get any bill passed, which can be heralded as a success.  We suspect this will be the case before the weekend, and this could help support the dollar and stocks, while interest rates may also rise in response. ...MORE