Wednesday, April 26, 2017

"What Do Germans Think of the Juicero?"

It's come to this, the Germans are making jokes, JOKES, at Silicon Valley's expense.

From The Awl:

Deutschland über us (now almost as strong as two human hands).
Despite the recently accepted honor of most important country in the world, Germany is a small place. Geographically, it is not even the size of Montana; its population (80 million very stern people) is about twice the size of California. At the same time, German speakers are very obsessed with the news: in parts of Germany and all of Austria, for example, the $7 price of a cup of coffee at a Kaffeehaus is justified because patrons can sit and nurse that coffee for ten hours while they read literally every single page of every single newspaper to which the Kaffeehaus subscribes precisely for that purpose. The result? When they run out of their own news (which they always do), Germans and Austrians keep up with news from all over the world — even when (prepare to spit out your breakfast cupcakes, Amis) that news doesn’t necessarily concern them.

And this means that even in a week when the Head Debutante of the West Wing shows up at a German women’s event and touts her daddy’s agenda (and gets reacted to extremely appropriately), there is still space in the German press for the most pressing issue in the world. (That was a pun, which is a German’s favorite method of humor, which is why Heidegger is so hilarious.) And the reason for the employment of that pun (explaining jokes is a German’s second-favorite method of humor) is that the German press still managed to weigh in on a certain American press…a juice press, that is. (GET IT? TWO USES OF THE WORD “PRESS.”)

What, pray tell, does the Teutonic media have to say about a certain $400 wifi-enabled kitchen gadget, one that squeezes juice out of pre-packaged packages of slightly thicker juice, with a unit of force that only people in Silicon Valley are meant to understand (despite it sharing a name with an actual unit of scientific measurement that measures something entirely unrelated to fruit juice) — a unit that, it turns out, is roughly equivalent to slightly less than the gripping power of two journalist hands? HAS THE JUICERO MADE THE GERMAN NEWS? HAS IT? HAS IT? HAS IT?
The answer is ja! First let’s check out jetzt (“now”), a Cool Young People’s Blog operated by the Süddeutsche Zeitung, aka the New York Times of Germany.
https://cdn-images-1.medium.com/max/800/1*ezfszFlWTwc1vM0QxG4Xjg.png
Screengrab: JETZT
This headline translates, loosely, thus: “The hipster juice press is all out of juice,” with juice having the same double meaning here that it does in English, GET IT? Why they didn’t go with the double meaning of press, which is also the same in their language and given our own media’s evisceration of the contraption, don’t know, but there you have it. Literally what it says is closer to “[With] the hipster juice press, the juice is turned off,” which, if you say it to yourself in a thick German accent, is indeed very funny. The piece itself is, as German humor tends to be when not punning, sandpaper-dry:
Anyone who quickly checks their pocket calculator to see just how much a glass of this juice costs will probably come to the conclusion that even Til Schweiger’s Hamburg tap water (at EUR 4,20 a liter) is almost a bargain. On the other hand: Normal juice presses don’t have WiFi — the end-all be-all argument of the Juicero’s adherents.
The best things about this paragraph, other than its reference to a pocket calculator and sick burns on Tils, the ill-fated bottled water venture of sexy German actor-man Til Schweiger, is lost in translation: the German word for “juicer,” Entsafter (ent-ZOFT-ur) literally means “de-juicer,” which, of course, is much more accurate; and, even better, the German expression I’ve translated to “end-all be-all” is Totschlag-Argument (TOTE-shlog-ar-goo-MENT), the first word of which literally means “death blow,” something I am betting Juicero founder Doug Evans would like to deal to the valiant hand-squeezers at Bloomberg that first broke this story.

Meanwhile, the Osnabrücker Zeitung — the functioning local newspaper out of the small Saxon town of Osnabrück — dispenses with both subtlety and puns, and wonders, simply:...MUCH MORE
All i can say in response is: Rocket Internet.
(note the subtlety symbolic use of red ink)

"The Statistics of Coin Tosses for Theater Geeks"

From JSTOR Daily:
Heads. Heads. Heads. Heads. Heads. Heads. Heads. Heads. Heads. Heads. Heads, again.

Tom Stoppard’s classic play Rosencrantz and Guildenstern Are Dead opens with two Elizabethan players, some well-stocked prop moneybags, and the flip of a coin that lands as heads. Again. And again. And again.

In Stoppard’s scene, the bit actors Rosencrantz and Guildenstern kill time during a production of Shakespeare’s Hamlet by betting on coin tosses. Guildenstern flips a florin and Rosencrantz predicts that it will land as heads. It does. Guildenstern spins another coin and it lands as heads again. After Rosencrantz has successfully bet heads 77 times in a row, Guildenstern proclaims that, “A weaker man might be moved to re-examine his faith, if in nothing else at least in the law of probability.” He ends up flipping heads 92 times in a row. Forsooth, what are the odds?

The likelihood of Rosencrantz and Guildenstern’s scenario actually happening is 1 in 5 octillion, a probability so small that it is practically impossible to imagine. According to NOAA’s website, it is more likely that a person in the United States will be struck by lightning four times in one year than repeat the results of Guildenstern’s coin tossing. The 92 heads in a row is, however, more likely to happen than randomly shuffling a deck of cards and discovering that they appear sorted.
More interesting than sussing out precise odds, however, are the premises of the scene. What makes it so absurd? What do we “know” about the probable outcome of tossing a coin that lets us “get” Stoppard’s joke? We know that the odds of a coin toss ought to be a 50/50, split between heads and tails, so surely there must be something wrong with the universe—something unfair?—for Rosencrantz and Guildenstern’s scenario to play out.

The Mystique of the Biased Coin
The toss of the coin functions as cultural shorthand. A flipped coin is assumed to be an unbiased way to pick between two possible outcomes, since both parties involved in the toss have an equal chance of winning.

So long as the coin is a fair coin, that is. A fair coin is one where either side of the disk has an equal chance of turning up, according to the probabilities worked out by the seventeenth-century Swiss mathematician Jakob Bernoulli. It means that one side can’t be favored, whether it’s inadvertent (say, the manufacture of the coin adds weight to one side, favoring a flip to one side over the other) or intentional (a two-headed coin). When an unfair coin is tossed, it conveys an unfair manipulation of the world to shift the odds in someone’s favor.

In other words, Guildenstern and other flippers of coins have a profound faith that odds of a coin toss are split 50/50, between heads and tails. Part of what makes Stoppard’s scene so compelling is that it plays to the audience’s skepticism that someone could win 92 tosses in a row by betting heads. Sure, Rosencrantz and Guildenstern’s epic coin tossing demonstrates that such a thing is possible, we tell ourselves—it’s just not very probable.

A Short History of Coin Flips 

https://daily.jstor.org/wp-content/uploads/2017/04/Roman_coin_2.jpg
Roman coin depicts the head of Emperor Caracalla (via Wikimedia Commons)
Tossing a coin to decide an outcome is nothing new. Since the Roman Empire and throughout the Middle Ages of Europe, a coin toss has offered a way to decide between two alternatives. Known as “heads or ships,” in reference to the images that appeared on the Roman sestertii, the coin toss was a children’s game of chance as well as a gambling game among the patrician elite. Legend has it that Julius Caesar would settle legal disputes with a coin toss.

A medieval variant called “cross and pile” was a favored game for children (and even young apprentices) during the Middle Ages. In the late thirteenth-century, King Edward II’s own exchequer records the royal losses of “cross and pile” when the king played against domestic servants.

In more recent eras, the coin became linked to probability, statistics, and mathematical modeling. In the eighteenth century, for example, famed mathematician and naturalist Georges-Louis Leclerc, count de Buffon, tossed a coin 4,040 times, which resulted in 2,048 heads, or very close to half the throws. (The relative frequency was ~.5069.) In the early twentieth century, the English mathematician Karl Pearson tossed a coin 24,000 times, with 12,012 of the throws coming up heads. (The relative frequency of Pearson’s experiment was ~.5005, even closer to the 50/50 odds we associate with a fair coin. Following such demonstrations, the coin became, in essence, the smallest random number generator available....MUCH MORE
Previously:
Think a coin toss has a 50-50 chance? Think again.
Gamblers Take Note: The Odds in a Coin Flip Aren't Quite 50/50

Oil: "WTI/RBOB Jump On Largest Crude Draw In 2017 Offset By Major Product Build, Rising Production "

WTI up 34 cents at $49.90.

From ZeroHedge:
WTI/RBOB prices were at the lows of the day after last night's huge surprise inventory data from API, but kneejerked higher after DOE reported a surprisingly large crude draw (the biggest since Dec 2016. However, it's clear that refineries are on fire as gasoline and distillates inventories surged by the most in at least 3 months. US crude production rose once again to its highest since August 2015.
API
  • Crude +897k (-1.75mm exp)
  • Cushing -1.971mm - largest since Feb 2014
  • Gasoline +4.445mm (+500k exp) - largest since Jan 2016
  • Distillates -36k
DOE
  • Crude -3.64mm (-1.75mm exp) - biggest since 2016
  • Cushing -1.203mm
  • Gasoline +3.369mm (+500k exp) - biggest in 3 months
  • Distillates +2.651mm (-1mm exp) - biggest since first week of Jan
As Bloomberg notes, the U.S. refining system is absolutely on fire: up another 347,000 barrels a day last week to 17.3 million barrels a day processing. It's huge. And that explains the major builds in products (gasoline/distilates) and surprise draw in crude...
...MORE

Waymo vs. Uber: 8 Things I Learned From Anthony Levandowski Taking the 5th

As noted in April 1's "Uber: Judge Says He May Grant Waymo's Request For An Injunction Against Uber's Self Driving Efforts":
From the introduction to yesterday's "In Waymo v. Uber, honing the craft of litigation gamesmanship" (GOOG):
I was going to put something together on Anthony Levandowski's use of the 5th amendment in a civil matter and some of the implications of doing so but didn't get to it. In the meantime here is a look at some high-buck lawyering and tactics of litigators...
I was thinking more along the lines of inferring guilt--in a criminal proceeding an inference from the assertion of the 5th amendment right is strictly verboten and judges so instruct the jury, whereas in most state courts (California being a notable exception) and U.S. federal court,  a civil pleading of the 5th may be assumed to be an admission of guilt.

But yeah, another implication is: if you piss off a tech savvy* federal judge you've got a problem....
Here's today's headline story from the brainiacs at IEEE Spectrum:
In February, Google’s self-driving car spin-out Waymo accused Anthony Levandowski of stealing 14,000 confidential files about the laser-ranging lidars developed while he was working there and taking them to Uber. On Friday 14 April, the engineer sat down in the San Francisco office of Waymo’s lawyers to face six hours of hard questioning.

When asked what his current responsibilities were at Uber, Levandowski took the 5th, citing his right under the U.S. Constitution’s Fifth Amendment not to answer questions that might incriminate him. He plead it again to questions about whether he stole the files, and again when asked if he subsequently used the files to build lidars for Uber. In fact, he took the 5th over 400 times in the course of the day.

The transcript of the deposition, released on Friday, is predictably repetitious. Despite that, it is one of the most illuminating documents to emerge from the lawsuit so far, revealing Google’s early suspicions of Levandowski, details about key suppliers, previously secret code-names, and technical details of the lidars in question. Here’s what I learned, and how:

1. Questions can be just as informative as answers
Although Levandowski’s answers were identical, I learned a lot from Waymo’s questions. It seems Waymo now thinks that Levandowski was deceiving Google almost from the moment it hired him to work on Street View maps project back in 2007. Google first had concerns when it found out that Levandowski was working with his own start-ups, 510 Systems and Anthony’s Robots, to build a self-driving car, as first revealed in IEEE Spectrum.

“When Google discovered that you were involved in 510 Systems and Anthony’s Robots, it was concerned about potential conflicts,” said Waymo’s lawyer, David Perlson. “You used confidential information from Google to help develop technology at 510 Systems; correct?” He went on to accuse Levandowski of using Street View code to calibrate 510’s Velodyne lidar, and in the start-up’s self-driving car technology.

2. Levandowski names his lidars after mountains
Perlson said that the lidar Levandowski built at 510 Systems was called Little Bear, after a mountain in Colorado. “The Fuji system at Uber is named after Mount Fuji,” he went on. “And the reason that the Fuji system at Uber is named after Mount Fuji is that it is derived from Google technology that was also code named with names of mountains.” Perlson revealed Google’s lidars are all named Grizzly Bear, probably after Grizzly Peak in Berkeley, where 510 Systems was based. The latest Waymo lidar is called Grizzly Bear 3 or GBR3.

3. The side hustles kept coming
Perlson accused Levandowski of controlling a company called Dogwood Leasing that hired ex-Google contractor and 510 Systems engineer Asheem Linaval to use Google’s secrets to develop self-driving car technology. Linaval was eventually hired to Levandowski’s autonomous truck start-up Otto, which Uber bought in 2016.

Waymo also accused Levandowski of founding yet another start-up, Odin Wave and feeding it confidential lidar technology. In 2013, one of Google’s suppliers called Google because it had received an order from Odin Wave that was similar to parts used by the technology giant. Perlson accused Levandowski of then moving Odin Wave and renaming the company Tyto, to hide his involvement....
...MORE

"Oil focus on EIA inventory report following slump"

From Saxo Bank's Head of Commodity Strategy:
  • EIA inventories report to be published at 1430 GMT
  • Tuesday's API print showed a near 1-million barrel build in stocks
  • Market still feeling the effects of last week's surprise gasoline build
  • WTI support at $48.80/b key to keeping door locked on $45.80/b move
Crude oil's latest 8% selloff was accelerated by a surprisingly bearish US inventory report last Wednesday. One week later and the 'Weekly Petroleum Status Report' from the EIA is once again the sole focus in the market. The weekly industry report from the American Petroleum Institute, released one day in advance of the official EIA report, once again cast some doubts on the outcome.

The API last night reported that US crude oil stocks rose by 897,000 barrels last week while gasoline jumped by 4.45 million barrels to the highest since January 20. A Bloomberg survey ahead of today's official EIA report has pinned expectations on a 1.75 million decline in crude oil stocks together with a small 500,000 barrel increase in gasoline.

WTI crude oil is holding above key support at $48.80/b ahead of the report. Failure to hold could see the market targeting $45.80/b. A move back above $50/b is likely to confirm our overall view that the market remains rangebound for now.
https://www.tradingfloor.com/images/article/max608w/5d8461ad-1615-4189-8ffe-6f621307d50a.png

The latest surveys carried out by Bloomberg shows the previous two results together with the price reaction following last week's bearish report (see below). The estimate on the weekly change in production slowed to 17,000 b/d last compared with an average increase of 30,000 b/d since last October....MORE
Front (June) futures $49.15 down 41 cents.

“All the best people left banking years ago”

I'm not sure why it does but the headline reminds me of some 1920's socialite coming in to work from Long Island on their commuter yacht. Here's a later vision/version of the species, 1937's "POSH":

https://indianrivertoday.files.wordpress.com/2013/04/iv-042213-wheels-6.jpg

From eFinancialCareers:
If you’re a young person starting in banking now, you might expect to find an industry replete with the wisdom amassed from various financial crises and filled with brilliant battle-worn managers. You could be disappointed. The way a lot of senior bankers tell it, the best people are long gone. All that remain are journey-men going about their business with neither fire nor flair.

“A lot of people who had successful careers – the most talented people of my generation – have left the industry to do other things,” said Kerim Derhalli, the ex-Deutsche MD who himself has exited banking to run Invstr, a social network for amateur investors, when we spoke to him earlier this year. “The people who are hanging on are getting paid less every year as margins and volumes collapse. Their incomes are falling and their lifestyles are having to adjust, but they stay because they’re still getting paid much more than they would doing a comparable job in a different industry.”

It’s a harsh appraisal and one that some say applies more to European than to U.S. banks. At Goldman Sachs, for example, the argument runs slightly differently – there are complaints that the three co-heads of the securities division, Pablo Salame, Isabel Ealet and Ashok Varadhan, became partners long before the financial crisis and should cede to new blood. By comparison, at the European banks which were burned by events in 2008, departing bankers complain that a generation of bureaucrats has taken control.

“European banks today don’t like entrepreneurs,” says a managing director who recently left Credit Suisse’s equities business after a career spanning two decades. “The people in charge are the chief operating officers and the accountants, not the dealmakers and the traders.” He says John Cryan, CEO of Deutsche Bank and a former CFO of UBS, is typical of this new regime: “It’s all about a safe pair of hands. Banks are being run by the people who were historically in the number two positions.”

Years of cost cutting haven’t helped. In their zeal for extracting expenses from the industry banks stand accused of mindlessly hacking the senior ranks. At Credit Suisse, Tim O’Hara, the former head of the markets business and an ex-COO of the fixed income division, allegedly had a policy of ditching 25% of the most senior people and cutting the balance sheet by a similar proportion. “This doesn’t work,” argues the ex-MD. “It makes more sense to keep the productive senior staff and to maximize profits for the growing regulatory cost base.”

To make matters worse, departing bankers argue that today’s junior recruits are less capable than yesterday’s. “When I went into banking [in 2000] my graduate class was comprised of the best students from the best universities in the world,” said Chris Yoshida, the former global head of rates sales at Deutsche Bank who’s now promoting the Kairos Society, an organization that helps young entrepreneurs change the world. “This is no longer the case – the very top students now want to work for Google and Facebook. Banks are attracting the students who are in the top 50% to 75% [instead of the top 25%].”...MORE

First Quarter Returns On U.S. Farmland Lowest In 25 Years

From Agrimoney:

California farmland returns shrink - even as rains return
The end of California's drought has not answered all its farmers' problems.

Returns for US farmland owners in 2017 made their weakest start to a year on records going back to 1992, according to data from Ncreif, the National Council of Real Estate Investment Fiduciaries.
At 0.49%, total returns for the January-to-March period undershot the 0.65% reported for the first three months of 2002 which had represented the lowest reading for a first quarter.

Declining Q1 returns on US farmland
2017: +0.49%
2016: +1.38%
2015: +2.08%
2014: +2.31%
2013: +5.44%
Source: Ncreif. Returns comprise both  price change and income

And the weak start to 2017 reflected a rare negative return in the Pacific West, which is centred on California and has been a star performer, helped by strong returns to the state's almond and tree fruit farmers.
"The Pacific West was the only region with a negative total return in the first quarter as permanent cropland lagged, which accounts for 179 of the 220 farmland properties [surveyed] in the region," Ncreif said.
Steep decline
The Pacific West's performance represents a marked turnaround on that in the last three months of 2016, when it offered the best returns of all eight regions in which Ncreif divides the US.
Indeed, the region has been a leading performer for the past five years, thanks to its focus on permanent crops such as apricots, avocados and peaches, rather than the annual produce, such as corn and soybeans, grown in the likes of the Midwest.
The state is responsible for two-thirds of US fruit and nut output, as well as more than one-third of vegetables output, according to official data.
Ncreif flagged an "extended divergence in total farmland returns by property type since 2012", with permanent cropland outperforming in a way "unique to this cycle" in the landmarket.
"Historically, total returns for these two categories are much closer as shown by the since-inception [1992] return for permanent cropland of 12.40% versus 10.60% for annual cropland."...
...MORE

Tuesday, April 25, 2017

Hemingway the Investor

From the Paris Review, March 24:

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

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

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

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

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

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

HT: Arts & Letters Daily
On blogroll at right

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

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

"The Untenable Case for Perpetual Dual-Class Stock"

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

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

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

Below is a more detailed summary of our analysis:

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

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

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

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

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

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

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

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

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

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

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

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

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

The Coming Opportunity From The Shift To Passive Investment Management

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

Soooooon, passive vs active edition
At some point in the next nine months a historic milestone will be passed. More than half of managed equity assets in the US will be run on a passive basis (for global equities the figure is 38%). At the current rate we forecast that this will happen sometime in January 2018. We don’t think that there will ever be any reversion back past this point, so from here on the majority of equity AUM in the US will be passive. In this short note we consider what this means.
That’s from Bernstein’s Inigo Fraser Jenkins and team. The charted version looks like this:
https://www.ft.com/__origami/service/image/v2/images/raw/https%3A%2F%2Fftalphaville-cdn.ft.com%2Fwp-content%2Fuploads%2F2017%2F04%2F25110209%2FScreen-Shot-2017-04-25-at-15.24.10-590x340.png?source=Alphaville
While the less intimidating version points out that when other holders of equities — retail, corporates holding their own stocks, SWFs etc — are taken into account, expressed as a share of market cap, passive is “only” 14.5 per cent, according to Bernstein.
And yes, this is the same Bernstein team which previously suggested that passive investing was worse than Marxism and ranked capital markets thus:
  1. Capitalist society with functioning capital markets
  2. Marxism
  3. Capitalist society with predominantly passive capital markets
Their argument is/was that markets exist to allocate capital and passively dominated markets won’t allocate it very well since there won’t be active managers doing the necessary fundamental legwork. Or: “In a Marxist society at least someone is doing the planning of capital allocation, but in a predominantly passive market then the capital allocation process is done by a marginal participant.”
There are numerous potential problems with this which have already been raised. For one, there is an argument, put forward by Credit Suisse’s Mauboussin earlier this year, that the shift away from active might actually be good for market efficiency:
Investors are shifting their investment allocations from active to passive management. This trend has accelerated in recent years. The investors who are shifting from active to passive are less informed than those who stay. This is equivalent to the weak players leaving the poker table. Since the winners need losers, this can make the market even more efficient, and hence less attractive, for those who remain. If you can’t identify the patsy, or weak player, it’s probably you…
Small and unsophisticated investors should build passive portfolios, with an emphasis on asset allocation and low cost. Sophisticated investors should seek active managers in asset classes with high dispersion. There are ways to assess money managers beyond past performance that may shade the odds in your favor
But even if you buy Bernstein’s side, their operative word is “predominantly” since the argument is that at some advanced level of passive domination the capital allocation function of the market will be damaged. It’s an argument that makes logical sense for an undefined level of passive domination.

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

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




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

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

Monday, April 24, 2017

Deliver Us From Traffic

From CityLab, April 20:

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

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

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

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

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

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

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

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

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

It didn’t used to be like this.

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

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

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

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

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

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

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

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

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

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

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

From the New York Post:

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

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

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

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

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

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

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

https://thenypost.files.wordpress.com/2017/04/unnamed.jpg?quality=90&strip=all&w=664&h=441&crop=1
Ralph Lauren's Fifth Avenue store is some white elephant - the lease 
isn't up for about 13 years at an eye-popping rate of $68,500 a day.
Ouch.

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

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

Liechtenstein for hire at $70,000 a night
Liechtenstein rental scheme includes customised street signs, temporary currency and accommodation for 150
https://i.guim.co.uk/img/static/sys-images/Guardian/Pix/pictures/2011/4/15/1302891784266/Vaduz-castle-in-Liechtens-007.jpg?w=620&q=55&auto=format&usm=12&fit=max&s=0617eafdb8ece8b81fa7f658fdd9b301
Vaduz castle in Liechtenstein. Photograph: Paul Trummer/Getty Images 
Executives with cash to burn traditionally hire luxury yachts, secluded villas or expensive hotel suites to impress clients. Now they can take corporate hospitality to a new level by hiring an entire country, albeit a small one.

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

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

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

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

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

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

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


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

So, why is everyone so bullish?

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

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

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

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

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

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

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

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

Capital Markets: "Dramatic Response to French Election"

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

https://finviz.com/fut_chart.ashx?t=6E&cot=099741&p=h1&rev=636286153626555243
$1.0891 last.

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

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

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

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

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

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

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

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

Crispin Odey: "It Feels Lonely Being Bearish"

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

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

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

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

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

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

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

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

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

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

Sunday, April 23, 2017

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

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

Here's another one.

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

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

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

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

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

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

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

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

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

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