Tuesday, May 23, 2017

Think You Can Guess/Forecast Notional GDP? Here's The new Hypermind NGDP Futures Market

Was it just a couple years ago NGDP targeting was on every commentator's  lips?
(I can never see that word without thinking of the old potato pun-must try to get out more)

From the Library of Economic Liberty:

The new Hypermind NGDP futures market
I am pleased to announce that a new Hypermind NGDP market is up and running. Back in 2015, we ran an annual NGDP prediction market and 4 quarterly markets. Because only the annual forecast has much macroeconomic significance, this time around we are only running that one market. Traders will forecast the NGDP growth rate from 2017 Q1 to 2018 Q1.

Last time we had about $5000 in prize money for the annual market, and that is what we are starting off with this time. However I expect the prize money to rise dramatically before the contract expires, as we are involved in a major fundraising operation. If you want to contribute, there is information over at my post at TheMoneyIllusion:

Emile Servan-Schreiber at Hypermind has provided me with some useful information for those who want to participate in the Hypermind NGDP market, or just watch the action:
To follow the market's prediction in real time, go here: https://hypermind.com/dash/ngdp/dash.html
(Note that the initial price in the history chart is all wrong, but that will matter less and less as time goes on.)
To participate, one just needs to register to Hypermind at http://www.hypermind.com

And finally, a quick review of my current views on NGDP futures: 
1. This is not a policy market. For policy, I propose 3% and 5% "guardrails", where the central bank promises to buy unlimited NGDP futures at 3% growth and sell unlimited futures at 5% growth. That policy does not even require the creation of an NGDP prediction market; the central bank can create the contracts....MORE
HT: Marginal Revolution

"Whisky Dividends Anyone?" Constellation Brands Made An Offer to Buy the Jack Daniel's Distiller Brown-Forman (BFA; BFB)

The stock is down $0.60 (-1.05%) at $56.32. UPDATE: Make that $54.69 down $2.23 (-3.92%) That dividend idea is looking better by the minute.
From CNBC:
Constellation Brands made offer to buy Jack Daniel's owner Brown-Forman
  • Constellation Brands has made an approach to acquire Jack Daniels' owner Brown-Forman
  • The Brown family owns a majority of the voting power and has indicated historically that they do not want to sell their company
Constellation Brands, the owner of Corona and Svedka Vodka, has made an approach to acquire Jack Daniel's owner Brown-Forman, people with knowledge of the matter said.

Brown-Forman said it was not interested in selling, but informed the board of Constellation Brands' interest, said the people, who asked not to be named discussing private information.

Terms of any potential offer could not be learned, but Brown-Forman's market cap is hovering around $22 billion. There are no ongoing talks, one of the people said. But Constellation remains interested in a potential merger.

The Brown family, who are fifth-generation owners of Brown-Forman, own a majority of the voting power and have indicated historically that they do not want to sell their company....MORE
Yesterday the stock was the #1 gainer in the S&P 500 and Barron's Ben Levisohn was as puzzled as I:
The Hot Stock: Brown-Forman Flies 7.5%
...I wish I could tell you what's going on, but I have no clue. All I can offer is this chart, which shows you strong Brown-Forman has been this month:... 
I checked Modern Drunkard for comment but saw nothing. However we can guess what their reaction will be, they want nothing to change. When Brown-Forman lowered the alcohol content of their flagship booze Modern Drunkard accused them of watering the whisky.

Jack Daniel’s: A Legacy Betrayed 
"Jack Daniel’s Old No. 7 is a simple reminder that some things just never change. And shouldn’t. This is the old-time whiskey made as our fathers made it. Remaining true to Jack Daniel’s original recipe and charcoal-mellowed character means folks today enjoy the same sipping whiskey awarded seven international gold medals."
So says Jack’s Daniel’s web site. Rather inspiring, isn’t it? Such noble sentiments should warm the cockles of the most cynical drunkard’s heart.

Unfortunately, not a word of it is true. For the second time since the Brown-Forman Corporation acquired the distillery in 1956, they have lowered the proof of Jack Daniel’s Black Label Tennessee Whiskey. Fifteen years ago they dropped its original 90 proof to 86, and very recently, and might I say with zero fanfare, they degraded it to 80 proof.

Alert drunkard Chris Sharp brought this unfathomable blasphemy to my attention and I feel it my sworn duty to bring it to yours.

“I was outraged,” says Sharp, a once avid Jack drinker. “They continue to claim in their ads that they stick to tradition. Tradition, my ass. If they think that people will take this sitting down they are sadly mistaken.”...MORE
Oh, and the whisky divi idea?
A repost from 2013:

"Whisky Dividends Anyone?" 
From Global Financial Data (we are fans):
In 1933, a precedent was set for paying whisky as a dividend on common stock.  As I have discussed in an earlier blog, entitled The Famous Whiskey Dividend, companies can invent creative ways to pay out dividends.  In fact, when the going gets tough, the tough go drinking.

After Prohibition was repealed in 1933, National Distillers Products Corporation distributed a dividend of one case of whiskey for each five shares that were owned. This pulled out the stops with paying dividends.  Twenty years later, Park & Tilford provided a more sobering saga.

Originally founded in 1840, Park & Tilford had a long history of being a family-owned operation run by the Schulte’s.  For decades, the company produced a broad line of whiskey and related products until it formally incorporated in 1923 in order to list on the NYSE.

In 1943, in the middle of World War II, whiskey was scarce.  Most companies that produced whiskey had their factories diverted to manufacturing more important goods – in the opinion of some folks – making whisky a hot product to the public.  Since Park & Tilford owned a drug store in New York and went public during prohibition; the company diversified into cosmetics, perfumes and other drug sundries.  Though Prohibition had been repealed in 1933, the diversion of resources to the production of war materiel had some people worried that Prohibition was being reintroduced de facto if not de jure.

On December 15, 1943, D.A. Schulte, the President of Park & Tilford announced that the company was contemplating a distribution of whiskey to its shareholders.    The announcement by Schulte had its effect.  Based on these rumors, the stock advanced roughly 40 points over the next five months, as new shareholders tried to get access to scarce whisky to sell on the black market.  This advance was an aggressive move in any market....MORE 
Another oddball dividend story last seen in Living La Vida Cocoa: Warren Buffett, Berkshire Hathaway and the Chocolate Wars (BRK.A; BRK.B; CBY; KFT; HSY):

...*Copied out of the 1988 Annual Report for our November 2007 post "How Buffett Made a Killing in Chocolate, And Warren's Letters to Shareholders":

Warren on arbitrage:

Some offbeat opportunities occasionally arise in the
arbitrage field. I participated in one of these when I was
24 and working in New York for Graham-Newman Corp.
Rockwood & Co., a Brooklyn based chocolate products
of limited profitability, had adopted LIFO
valuation in 1941 when cocoa was selling for
50 cents per

In 1954 a temporary shortage of cocoa caused the price to
soar to over 60 cents. Consequently Rockwood wished to
unload its valuable inventory - quickly, before the price
dropped. But if the cocoa had simply been sold off, the
company would have owed close to a 50% tax on the proceeds.

The 1954 Tax Code came to the rescue....MORE

El Niño: Where We're At and What's Forecast

A quick note on terminology for normal people who don't obsess about this stuff:
  • ENSO = the El Niño/Southern Oscillation
  • ENSO Neutral = the ocean surface temperature anomaly in the ENSO 3.4 region is between +0.5°C and -0.5°C.
  • El Niño/La Niña conditions exist when the anomaly is greater than (Niño) or less than (Niña) the half-degree cut-off for neutral.
  • A full blown El Niño/La Niña is declared when the conditions persist for three overlapping three-month periods i.e. five consecutive months.
From IRI/Columbia University:
IRI ENSO Forecast
2017 May Quick Look
Published: May 18, 2017

A monthly summary of the status of El Niño, La Niña, and the Southern Oscillation, or ENSO, based on the NINO3.4 index (120-170W, 5S-5N)

Use the navigation menu on the right to navigate to the different forecast sections
By mid-May 2017, the tropical Pacific remained in an ENSO-neutral state, with above-average SSTs present in the eastern Pacific Ocean, and near-average SSTs across the central and east-central part of the basin. The collection of ENSO prediction models indicates increasing chances of El Niño into the summer and fall of 2017....MORE

Historically Speaking

    El Niño and La Niña events tend to develop during the period Apr-Jun and they
  • Tend to reach their maximum strength during October - February
  • Typically persist for 9-12 months, though occasionally persisting for up to 2 years
  • Typically recur every 2 to 7 years

"Farming the World: China’s Epic Race to Avoid a Food Crisis"

From Bloomberg, May 22:
But China’s efforts to buy or lease agricultural land in developing nations show that building farms and ranches abroad won’t be enough. Ballooning populations in Asia, Africa and South America will add another 2 billion people within a generation and they too will need more food.

That leaves China with a stark ultimatum: If it is to have enough affordable food for its population in the second half of this century, it will need to make sure the world grows food for 9 billion people.
Its answer is technology.

China’s agriculture industry, from the tiny rice plots tended by 70-year-old grandfathers to the giant companies that are beginning to challenge global players like Nestle SA and Danone SA, is undergoing a revolution that may be every bit as influential as the industrial transformation that rewrote global trade.

The change started four decades ago when the country began to recast its systems of production and private enterprise. Those reforms precipitated an economic boom, driven by factories, investment and exports, but the changes down on the farm were just as dramatic.

Land reforms lifted production of grains like rice and wheat, and millions joined a newly wealthy middle class that ate more vegetables and pork and wanted rare luxuries like beef and milk.

When Du Chunmei was a little girl, pork was a precious gift only for the elders of her village in Sichuan during the Lunar New Year holiday. The family pig would be slaughtered, and relatives and neighbors would pack their house for a feast.

“Meat used to be such a rarity,” said Du, now 47 and an employee of state oil company PetroChina Co. whose family celebrated the holiday this year at a restaurant. “Now it’s so common we try to cut back to stay healthy.”

But the breakneck pace of the country’s development brought some nasty side effects. Tracts of prime land were swallowed by factories. Fields were polluted by waste, or by farmers soaking the soil in chemicals. The country became a byword for tainted food, from mercury-laced rice to melamine-infused milk powder.

So how can China produce enough safe food for its growing population if they all start eating like Americans?

The simple answer is it can’t.

It takes about 1 acre (half a hectare) to feed the average U.S. consumer. China only has about 0.2 acres of arable land per citizen, including fields degraded by pollution.

So China’s Communist government has increasingly shifted its focus to reforming agriculture, and its approach divides into four parts: market controls; improving farm efficiency; curbing land loss; and imports.

In each case, technology is the key to balancing the food equation. The nation is spending billions on water systems, seeds, robots and data science to roll back some of the ravages of industry and develop sustainable, high-yield farms.

It needs to succeed quickly, because China’s chief tool during the past decade for boosting domestic production is backfiring.

China has a goal of being self-sufficient in staple foods like rice, corn and wheat. To ensure farmers grew those crops, it paid a minimum price for the grains and then stored the excess in government silos.

Farmers responded, saturating their small plots with fertilizers and pesticides to reap bumper crops that filled government reserves to bursting....MUCH MORE

"Vegetable oil markets hold secret to crude oil values, says CME expert"

From Agrimoney:
Want to know what is going to happen to crude oil prices?
Just look at values of the likes of palm oil and soyoil, according to Erik Norland, senior economist at CME Group.
While crude has a reputation for being a leader of raw materials, the commodities queen, it is actually a follower in prices terms of what goes on in markets for edible oils, from which biodiesel is made.
'People have it backwards'
Comparison of price charts shows that soyoil "peaked before crude oil in 2008, it bottomed out before crude in 2009," Mr Norland said.
"It peaked again before crude oil in 2011, and preceded the collapse more recently."
"I think people have it backwards," Mr Norland told Agrimoney LIVE.
"I think crude oil traders should be looking at biofuel markets, rather than the other way round."
Reason behind the dynamic
And there is a fundamental reason why edible oil markets, via biodiesel, might be price leaders, Mr Norland added.
"It is fairly simple. When markets perceive there is too much fuel around, the first thing they push back on is biofuel.
"When crude is scarce, they become very enthusiastic for biofuels....

Monday, May 22, 2017

Italy is giving away over 100 castles for free – there’s only one catch

Over the years we've gathered a few tips for castle buyers, some of those links after the jump.
From CNBC:
Italy is giving away more than 100 historic castles, farmhouses and monasteries for free in an effort to breathe new life into its disused public buildings.

Under a new scheme unveiled by the country's government run State Property Agency, 103 ancient buildings will be up for grabs to entrepreneurs who promise to transform the locations into tourist destinations.

The disused properties are situated along eight historic routes running the breadth of the country and the nearby islands of Sicily and Sardinia. It is hoped that the initiative will create a series of new facilities for the hundreds of hikers, cyclists and pilgrims who use the routes each year.

"The project will promote and support the development of the slow tourism sector," Roberto Reggi from the State Property Agency told The Local Italy. "The goal is for private and public buildings which are no longer used to be transformed into facilities for pilgrims, hikers, tourists, and cyclists."
The scheme, which is backed by Italy's Ministry of Tourism, calls on applicants to submit a proposal outlining how they intend to transform their preferred building into a tourist attraction. Specific preference will be given to those aged under 40.

Successful applications will then be awarded rights to the property for nine years, with the option to extend for an additional nine years.

The deadline for applications is June 26 and work will be expected to commence next summer....MORE, including application information
The first thing to look for in your new castle are crenels.

This building in County Wicklow from March 2017's "You Can Either Buy A Round of Guinness For Four Million Of Your Pals Or You Can Buy A Guinness 'Castle' and 5000 Acres", despite obviously not being a real castle (note garden level windows allowing too-easy access to wannabe pillagers, has its value enhanced by crenelated battlements:


The 5000 acres probably bump the price a bit as well.

We made the same points regarding another Irish place, Lismore Castle:

Despite the crenelated battlements, and although the central keep looks real enough, the windows set into what should be curtainwall give away the fact that this is less castle and more comfy house.
This is what happens when upstarts like the Cavendish clan get their hands on stuff.  
(just kidding Your Grace)
The next thing to pay attention to is verticality.

This is from last June's "For Sale: English Tower That Rich Guy Built to Imprison Wife":

Again. not a true castle but as noted at the time:
And a fine tower it is.
Very vertical. 
The linked pictures lead to our third consideration, your spiral stairs. From the (maybe) adulterous wife tower above:


The first thing you notice is the spiral is correct.
Your men-at-arms retreating from the attackers will have their right hand free to thrust, parry and chop while the swing of the interlopers is impeded by the outer wall.

On newel-post spiral stairs the tactics are different:
And then there's the whole issue of the left-handers who can ruin your day:


Anyhoo, here's a snappy little (62 page) monograph from the Castle Studies Group Journal, no. 25 that says this may all be moot:
The Rise of the Anti-clockwise Newel Stair
The traditional castle story dictates that all winding, newel, turnpike or spiral staircases in medieval great towers, keep-gatehouses, tower houses and mural wall towers ascended clockwise. This orthodoxy has it that it offered a real functional military advantage to the defender; a persistent theory that those defending the stair from above had the greatest space in which to use their right-handed sword arm. Conversely, attackers mounting an upward assault in a clockwise or right-handed stair rotation would not have unfettered use of their weaponry or have good visibility of their intended victim, as their right sword hand would be too close to the central newel.

Whilst there may be other good reasons for clockwise (CW) stairs, the oft-repeated thesis sup-porting a military determinism for clockwise stairs is here challenged. The paper presents a corpus of more than 85 examples of anticlockwise (ACW) spiral stairs found in medieval castles in England and Wales dating from the 1070s through to the 1500s...MUCH MORE
Moving on to a couple of the Italian offerings.

Castello di Montefiore has pretty much everything you are looking for in a castle including machicolations under the battlements at the top of the towers for dropping your flaming pitch or whatever on the besiegers:


Castello di Blera on the other hand is what is known in the trade as a "fixer-upper":


Either way try to remember the lessons from March 2013's "Heartache: Owning a Castle Can Be Such a Hassle":


Andreessen-Horowitz-backed 21 Inc Introduced 21.Co Lists

It's not just the financing ($116 mil from A-H, Khosla et al), one of the A16Z partners, Balaji Srinivasan is actually the CEO of this one.
A bit late getting to this (May 1) but here goes. First up, EconoTimes:

Bitcoin startup 21 introduces ’21.co lists’ to earn money online
21, a San Francisco-based bitcoin startup, has come up with a new feature ‘21.co Lists’, where individuals can join lists of people with similar skills in order to start receiving targeted, paid microtasks.

Users have to apply to one of the lists and if selected, they will receive a stream of list-specific tasks sent by businesses that can be completed to earn money or fund charities, the blog post stated. In addition to the basic concepts of joining or creating 21.co lists to make money online, the company has developed several useful features to make the process of making money from lists even easier.

“As for the “Join lists” feature, it is self-explanatory: 21.co will maximize your income by adding you to the lists that fit your skills most directly. Each new list you join or are added to is, then displayed on your profile page,” it added.

21 also announced bitcoin email platform that enables users to send surveys, tasks and requests to specific categories of people or professionals, incentivizing those actions with small bitcoin payments....MORE
Nigeria Today also has the story, putting the "microconsulting" in quotation marks:
21 Inc Launches Lists Allowing Anyone to Earn Bitcoin for ‘Microconsulting’
Possibly because one of the tasks 21.Co promotes as doable on the platform is "mass e-mailing".

For the life of me, the microconsulting sounds less like consulting and more like Amazon's 'Mechanical Turk' operation. From last December:

How Half a Million People are Being Paid Pennies to Train Amazon's Artificial Intelligence (AMZN)
This sounds like a good business to be CEO of.
Training your replacement, AI, for pennies?
Not so much.

From TechRepublic:
Inside Amazon's clickworker platform: How half a million people are being paid pennies to train AI 

Internet platforms like Amazon Mechanical Turk let companies break jobs into smaller tasks and offer them to people across the globe. But, do they democratize work or exploit the disempowered?
Each morning when she wakes up, Kristy Milland powers up her home computer in Toronto, logs into Amazon Mechanical Turk, and waits for her computer to ding.

Amazon Mechanical Turk (AMT), which has been around for over a decade, is an online platform where people can perform small tasks for pay....MORE

America’s Cities Are Running Out of Room

Following up on Saturday's "Transportation: Affordable Proximity and the Dilemma for Planners":
...The core urban challenge of our time is ‘affordable proximity’: how can ever larger numbers of people live and interact economically with each other while keeping the cost of living – especially housing – affordable? In decentralized, post-WW2 Sunbelt cities built around the car, commuter rail solutions don’t work and an alternative is needed, especially as we see autonomous vehicles on the horizon.... 
From Bloomberg, May 22:

Everyone wants to live downtown, but only the rich can afford it. And it’s getting worse.
A shortage of homes for sale has bedeviled U.S. house hunters in recent years, so why don’t builders build more? One problem is that they’re running out of lots to build on—at least in the places that people want to live.

Cities that were sprawling before the Great Recession have begun to sprawl again. Space-constrained cities, meanwhile, have run out of room to build. That reality has spurred developers to focus on center-city neighborhoods where high-density building is allowed—and new units command exceedingly high prices.

At some point, said Issi Romem, chief economist at BuildZoom, vacant lots in desirable urban neighborhoods will run out. “If you have three days of rations left, you’ll be fine on day one, two, three,” said Romem, author of new research demonstrating home construction patterns. “On day 4, you have a problem.”

Historically, cities grew outward, as builders developed tracts on the periphery—then filled in the land between various developments over time. When these so-called expansive cities of the South and Southwest run out of infill land on which to build, developers simply pushed out further.

Some of these cities, like Austin and Nashville, have seen downtown boomlets. But more broadly, the building trends in those metros looks more like Dallas: Inside a 30-mile radius from the center of the city, new home sales decreased from 2000 to 2015. Outside the radius, though, sales are up by more than 50 percent. The same trend has played out to varying degrees in Phoenix, Atlanta, and San Antonio, among other cities.

In America’s most expensive cities, however, that dynamic has been turned inside out (or perhaps outside in). New construction trends in places like New York City have been tightly focused on downtown clusters where zoning rules permit high-density construction. These cities stopped expanding their geographic footprint decades ago, leaving builders to concentrate on finding buildable lots inside existing boundaries. As those lots became harder to find, land prices increase, reducing options for builders hoping to turn a profit....MORE, including a couple interesting charts

Is Environmental/Social/Governance (ESG) Investing Integration a Fad, or Does It Have Alpha Potential?

Following up on this morning's "AQR Capital's Cliff Asness on Environmental/Social/Governance (ESG) Investing".

From the CFA Institute's Market Integrity Insights, May 22:
In Asia, the subject of environmental, social and governance (ESG) investing has been a very trendy topic. For many years, many investors have tried to incorporate elements of values and social responsibility into their investment strategies.  However, the return on these strategies has in the past left a lot to be desired. It is natural to wonder why a rational investor would be willing to compromise the chances of superior performance in return for moral gratification.

Well, past performance is not always a guide to future performance, and change is in the air. More and more investors and asset owners are now placing increasing focus on ESG. As an example, California State Teachers Retirement System, one of the largest asset owners in the world, has asked their fund managers to evaluate and assess 21 risk factors in each of their holdings, including, among others regulation, human rights, environmental and governance.

What is Bringing this On?
On 27 April 2017, CFA Institute hosted a Green Finance Forum in Hong Kong to explore this issue. The event was organised in conjunction with HKU SPACE and the Financial Services Development Council (“FSDC”), an advisory body that conducts policy research for the formulation of proposals to the Hong Kong government. This is the second event in the series and we were fortunate to have several industry veterans join us as speakers.

Martina Macpherson, Global Head of Sustainability Indices, S&P Dow Jones Indices, kicked off the evening’s proceedings with a keynote speech, during which she presented the milestones of sustainable investment over the last decade as well as the growing demand of “green” instruments by investors.

As an indicator, global labelled green bond issuance in 2016 was US$93 billion — more than double the amount of US$41 billion in 2015 — and approximately US$36 billion were issued by China alone. Furthermore, there have been concrete actions from the corporate sector in their commitment to create long term shareholder value in terms of reporting, tracking and measurement of sustainable development goals.

In time, the value chain will move from “green” instruments to sustainable finance, and with improved data and metrics, investors should be able to make better investment decisions on the elements that are most relevant and investable.

The Growth of the ESG “Phenomenon”
Ms. Macpherson’s presentation was followed by a panel discussion in which she was joined by industry veterans in professional advisory, investment banking, and asset management, whose work give them different perspectives of the ESG “phenomenon.” During the panel discussion, we explored some of the reasons behind the growth in sustainability investments, the importance of aligning definitions and standards, the evidence of a positive correlation between ESG and investment performance, and how integrating ESG issues into investment decisions may be more natural and instinctive than most people assume....MORE

"U.S. Public Pensions System: Insolvent to the Core"

We usually focus on CalPERS, simply because it is the largest U.S. public employee pension plan but here's a look at the rest of the frauds.
From True Economics:
 A truly worrying view of the U.S. public sector pensions deficits has been revealed in a new study by Joshua D. Raugh for Hoover Institution. Titled “Hidden Debt, Hidden Deficits” (see http://www.hoover.org/sites/default/files/research/docs/rauh_debtdeficits_36pp_final_digital_v2revised4-11.pdf) the study opens up with a dire warning we all have been aware of for some years now (emphasis is mine):  “Most state and local governments in the United States offer retirement benefits to their employees in the form of guaranteed pensions. To fund these promises, the governments contribute taxpayer money to public systems. Even under states’ own disclosures and optimistic assumptions about future investment returns, assets in the pension systems will be insufficient to pay for the pensions of current public employees and retirees. Taxpayer resources will eventually have to make up the difference.”

Some details: “most public pension systems across the United States still calculate both their pension costs and liabilities under the assumption that their contributed assets will achieve returns of 7.5–8 percent per year. This practice obscures the true extent of public sector liabilities.” In other words, public pension funds produce outright lies when it comes to the investment returns they promise to generate. This, in turn, generates delayed liabilities that are carried into the future, when realised returns come in at some 3-4 percent per annum, instead of promised 7.5-8 percent.

How big is the hole? “In aggregate, the 564 state and local systems in the United States covered in this study reported $1.191 trillion in unfunded pension liabilities (net pension liabilities) under GASB 67 in FY 2014. This reflects total pension liabilities of $4.798 trillion and total pension assets (or fiduciary net position) of $3.607 trillion.” This accounts for roughly 97% of all public pension funds in the U.S. Taking into the account the pension funds’ penchant for manipulating (in their favor) the discount rates, the unfunded public sector pensions liabilities rise to $4.738 trillion.

“What is in fact going on is that the governments are borrowing from workers and promising to repay that debt when they retire. The accounting standards allow the bulk of this debt to go unreported due to the assumption of high rates of return.”

Actually, what is really going on is that the governments create a binding contract with their employees to loot - at some point in the future - the general taxation funds to cover the shortfalls on these contracts. How much looting is on the pensions liabilities? Take the unfunded liability estimate of $4.738 trillion. And consider that in 2014, total revenues collected by state and local governments stood at $1.487 trillion. Pensions deficits alone amount to 3.2 times the underwriters’ income. In household comparative terms, this is like having a full 100% mortgage on a second home, while still running a full 100% mortgage on primary residence (day-to-day expenses).

Or, put more cogently, the entire system is insolvent. And is getting more insolvent, the longer the local and state governments refuse to use more honest accounting models.

Couple of charts to illustrate...

... CHART 2: State Contributions: Actual vs Required to Prevent Rise in Unfunded Liability

What happened when VC Fred Wilson met Uber's Travis Kalanick: 'We just didn't like each other'

From CNBC, May 17:
  • Union Square Ventures investor Fred Wilson had harsh words for Uber on stage at the Techonomy NYC conference.
  • He criticized CEO Travis Kalanick's "win at all costs" strategy and says it "didn't actually work."
  • But he acknowledged that one big insight at Uber, that the economy is shifting toward more gig-based freelance work, is right.

Venture capitalist Fred Wilson said he met with Uber boss Travis Kalanick about investing in the ride-hailing company — but it didn't go well.

"We didn't like each other," Wilson said Wednesday at the Techonomy NYC conference.
Wilson is a partner at Union Square Ventures, an early investor in internet companies like Stripe, Twilio, LendingClub, Etsy, Tumblr, Twitter and Indeed.

Uber has been under pressure amid an internal investigation into sexism claims, a trade secret dispute with Alphabet and allegations that the company evaded regulators. Wilson said Uber's "win-at-all-costs" strategy assumed that drivers and consumers would be loyal — rather than adopting multiple platforms to compare prices.
"I think Uber had a strategy that didn't actually work, which was that they were going to run the table on the ride-sharing industry, and they were going to put everybody out of business by raising more money than anybody else," Wilson said. "They thought that they were going to do in ride-sharing what Google has done in search ... and it just didn't work."
Uber's valuation, though, has exploded — it was valued at over $68 billion in its last funding round, according to reports. Union Square Ventures invested in Sidecar Technologies, acquired by General Motors, which collaborates with Uber's rival, Lyft.

But Wilson said because the Kalanick tightly controlled the way the company was financed, most of the money from Uber's business is "only on paper."

"No one has made any money in reality," Wilson said. "Everything that's gone wrong is a function of their strategy to control everything and go very aggressively."...

AQR Capital's Cliff Asness on Environmental/Social/Governance (ESG) Investing

The footnotes are pretty interesting and a possible threat to Matt Levine's hitherto unchallenged fn dominance.

From AQR's Cliff's Notes Perspective, May 18:

Virtue is its Own Reward: Or, One Man’s Ceiling is Another Man’s Floor
Negative screening is a common application of Environmental/Social/Governance (ESG) investing. It avoids “sin stocks” and divests from industries or firms deemed immoral or having poor or undesirable standards along one of the three E, S or G dimensions.1 It’s promoted largely on the fact that it’s virtuous. While we may all define virtue differently, advocating for it in this way is fair and appropriate. However, employing these constraints is also often promoted as enhancing expected returns. That is, if you avoid certain companies, industries, and even countries, that are deemed non-virtuous, you should expect to make more money over time.2 Do good and make the same return or more! This is mostly wrong and, more the point here, actually at odds with the very point of ESG investing. Pursuing virtue should hurt expected returns. Some have discussed this fact.3 But, it’s still not widely understood or broadly accepted. This seems to arise from investment managers selling virtue as a free lunch, and from investors who very much want to believe in that story. In particular, and my focus here, accepting a lower expected return is not just an unfortunate ancillary consequence to ESG investing, it’s precisely the point (though its necessity may indeed be unfortunate). As an ESG investor this lower expected return is exactly what you want to happen and really the only way you can affect the change you seek.4,5

First there’s the very basic thing. Constraints can never help you ex ante and only sometimes ex post through luck. Why? Because if they help they aren’t constraints, they are what you want to do anyway. So, if you say your portfolio is better with a negative screen, you are saying that the old evil you who didn’t care about ESG issues also didn’t like more money.6 Many commentators do indeed seem to (implicitly and sometimes explicitly) say that constrained portfolios are ex ante better. The opposite, that judged purely on return and risk constrained is always ex ante less than or equal to unconstrained, is really an important concept and still surprisingly often misunderstood. Constraints are needed to push you to do things you otherwise would not do, not to do things you’d do anyway out of self-interest.7,8

Put simply, if two investors approach an asset manager, one who says “just maximize my return for the risk taken” and the other who says “do that but subject to the following constraints,” it is simply false and irresponsible for the asset manager to assert that the second investor should expect to do as well as the first, except in the case where those constraints are non-binding (and therefore not relevant). Even in that case, it’s still irresponsible to say that the second investor should expect to do better (again, if this is just a trade it’s a consistent view but the ESG negative screening program has zero to do with it as you’re doing what you’d do otherwise out of greed!).

But, while important and sometimes misunderstood, the argument that ex ante constrained is less than or equal to unconstrained is actually rather trivial. The more interesting thing is precisely how ESG investing really makes an impact. It turns out that the ESG investor making less and the slimy sin investor making more, than they all would in the absence of the ESG investor’s self-imposed constraints, is precisely what the ESG investor wants to happen. That’s kind of cool in a math-econ-geek sense (as we’ll soon see as a human it’s kind of annoying).

What happens when one group of investors, call them the virtuous, simply won’t own a segment of the market (the sin stocks)? Well, in economist terms the market still has to “clear.” In English, everything still gets owned by someone. So, clearly the group without such qualms, call them the sinners, have to own more than they otherwise would of the sin stocks. How does a market get anyone, perhaps particularly a sinner, to own more of something? Well it pays them! In this case through a higher expected return on the segment in question. This may be unpleasant but it is just math (like math could ever be unpleasant). In the absence of extra expected return the sinners would own X of the market segment in question. The only way to get them to own X+Y is to pay them something more. Now, assuming nothing else changed, how does the market assign this sinful segment a higher expected return? Well by according it a lower price. That is, if the virtuous decide they won’t own something, the sinners then have to, and they have to be induced to through getting a higher expected return than otherwise. This in turn is achieved through a lower than otherwise price.9,10

Now for the fun part. How do the virtuous actually make the world a better place? Well to make the world a better place you want the sinning companies to sin less not just to suffer in the stock market. Does the above deliver this desired effect? Yep. Imagine a sinful company is considering a new investment project. How does it analyze this project? Well, as many of us were forced to learn in business school, it forecasts out cash flows, both positive and negative, and discounts those cash flows back to the present. If the final number is positive (a positive “NPV” in the parlance), and simplifying a bit for other complications like mutually exclusive projects, it undertakes the venture. Now I snuck in the assumption that the company knew the forecasted cash flows and the discount rate. I’m going to stick with the first assumption, that the actions of our virtuous and sinful investors don’t affect the forecasted cash flows of this potential project.11,12,13 But we can’t make this assumption for the discount rate as we know it is false and we know in which direction it’s false. Discount rates are in fact expected returns (and this is where we get our essay’s sub-title cut from Rhymin' Simon as one man’s discount rate is another expected return). Earlier we showed that investors will demand a higher expected return from the sinful companies, due to shunning by the virtuous and the necessity to bribe the sinners to hold more of them.

It also directly follows that the sinful companies will have to use a higher discount rate (or, perhaps more clearly in this case, “cost of capital”) in their “should we undertake this project?” calculations. This is truly Finance 101.14 That means quite simply that fewer sinful projects will show positive NPVs and fewer will be undertaken.

Put simply, if the virtuous are not raising the cost of capital to sinful projects, what are they doing? How are they actually affecting the world as they wish to? If the cost of capital isn’t also an expected return, what is it?...

From April 2007 (hey, we're nothing if not patient):

Moral Judgment On 'Sin Stocks' Means Higher Returns For Vice-Friendly Investors

That's the headline of a press release from the University of British Columbia's Sauder School of Business announcing the release of a draft paper by the school's Prof. Marcin Kacperczyk and Princeton Economics Prof. Harrison Hong.

Prof. Hong lists his research interests as:
 "Asset pricing with less-than-fully-rational investors; differences of opinion, short-sales constraints and asset prices; social interaction and financial markets; career concerns, biased forecasts and security analysts; organization, performance and mutual funds; asset pricing with asymmetric information and other market imperfections."
Hey! Mine too!

FX: "Dollar Pushes Back" (a little)

From Marc to Market:
After being shellacked last week, the US dollar is trading with a firmer bias against all the major currencies, but the euro and New Zealand dollar. To be sure, it is not that a new development has emerged to take investors' minds from intensifying political uncertainty in the US.

Rather it seems to be simply the absence of more negative developments that is allowing the greenback to post corrective gains. The deals with Saudi Arabia announced were very much seen as the strength of the transactional orientation of the Trump Administration. However, impact on US employment or the US trade balance may not be particularly significant.

There also seem to be a sense that the markets may have gone too far too fast last week. Asian shares got the ball rolling today. The MSCI Asia-Pacific Index gapped higher today, and the 0.7% gain was the most in two weeks. The Nikkei had gapped lower last Thursday and left a potential island top in its wake. Today's 0.5% gain saw the index enter but not close the gap. The Hong Kong Enterprise Index (H-shares) snapped a four-day slide to close a little more than 1% higher, while mainland shares (A-shares) in Shanghai and Shenzhen fell. Korea's Kospi rose almost 0.7% and set a record closing high.

European equities are mixed, but the Dow Jones Stoxx 600 is up marginally in late morning turnover. Real estate and telecoms are leading the advance. Utilities, information technology, and utilities are providing drags. Recall; that week's little more than 1% decline was the worst performance since last November and ended a three-week rally. Spain and Italian share are trading lower

Some are linking Spain's losses to the Sanchez re-capturing the Socialist Party's leadership post from the party establishment. Spanish bonds are also underperforming in the periphery. The 10-year yield is up a little more than two basis points, while Italy's 10-year yield is off two basis points as is a similar yield in Portugal. Core yields in Germany, the Netherlands, and France are up 1-2 bp.

There are three notable developments. First, Japan'\s April trade surplus was a little smaller than expected at JPY481.7 bln. Exports rose 7.5% compared with the median forecast in the Bloomberg survey for an 8% year-over-year gain after a 12% in March. Imports held in better, rising 15.1% after a 15.8% gain in March. Exports of auto parts, electronic parts, and motors were strong, while the imports featured crude and partly refined oil and communication equipment. Exports to the US rose 2.6% year-over-year, while exports to the EU were up 2.2%. However, exports to China, its biggest trading partner rose 14.8%...MORE
Here's two weeks of the dollar index, currently at 96.83 down 0.20:


"The Barbarians Are at Etsy’s Hand-Hewn, Responsibly Sourced Gates" (ETSY)

Here's the last year's price action via FinViz:

ETSY Etsy, Inc. daily Stock Chart
$13.31 at the close Friday. As noted a week ago:
The IPO priced at $16 back in April 2015 so it is still a bit underwater but is suddenly interesting, I mean beyond the ongoing availability of witches curses at the platform, despite the ban.... 
From Bloomberg:
“There is one and only one social responsibility of business,” the economist Milton Friedman famously wrote in 1962. And that is “to use its resources and engage in activities designed to increase its profits.” Those words helped establish the now pervasive idea that companies are exclusively responsible, within the limits of the law, to the people who own them. Even the most soft-hearted public-company chief executive treats the idea with a measure of respect. In March, at his final annual meeting, Starbucks Corp. CEO Howard Schultz declared that, notwithstanding his plans to hire refugees and open stores in poor neighborhoods, the company’s commitment to shareholder value remained “absolute.”

But there are exceptions. “You’re all free to hiss,” Chad Dickerson said after quoting Friedman in a speech at a corporate social responsibility conference in late 2014. Dickerson, then the 42-year-old chairman and CEO of Etsy Inc., paused for a moment, as the audience hissed and laughed. Then, for good measure, he hissed himself.

At the time of the speech, Dickerson, a former journalist with soft features and a laid-back demeanor, was preparing to take Etsy public. Founded in 2005, the Brooklyn-based online marketplace hosts 1.8 million small merchants who sell vintage and handmade goods and takes a cut of every transaction. Its sellers traffic in the one-off items usually found in antique stores and boutiques: pineapple-motif throw pillows, succulent-shaped jewelry, tote bags with birds on them. The fast-growing market is often mocked as a kind of twee EBay—TweeBay, if you will. But by early 2015 the company was selling close to $2 billion in merchandise a year and generating revenue of $196 million—figures that had more than doubled from two years earlier.
Under Dickerson’s leadership, Etsy had not only grown quickly, it had also won a reputation as an ethical company, becoming a certified B Corporation in 2012. The do-gooder seal of approval, given out by the nonprofit B Lab, requires a business to meet standards related to the environment, workers, and suppliers. Some 2,000 companies are B Corps—including Patagonia, Warby Parker, and Kickstarter—but almost all are privately held. Today there are just a handful of public B Corps; Etsy is one of only two traded on a major U.S. exchange.

Public-market B Corps are rare because investors hate them. As part of the certification, a company must reject the shareholder valuation model and, eventually, reincorporate as a “public-benefit corporation.” (To keep its B Corp seal, Etsy will have to commit to reincorporating this summer. Dickerson said in a 2016 interview that this was unlikely.) Benefit corporations are structured so managers and board members have a legal obligation to worry about more than just their fiduciary duty to shareholders. A public-benefit corporation can get sued for wasting shareholder money just like a normal public company can, but it can also be sued for being a poor steward of the environment or for failing to pay a fair wage.

When Etsy filed for an initial public offering, it limited the value of the shares retail investors could buy to $2,500 per person. The idea was to make sure shares were available to Etsy sellers and to create a shareholder base that would be sympathetic to Dickerson’s vision of a more conscientious brand of capitalism. But Dickerson also believed that big institutional investors, who make up most of its shareholder base, could be convinced that Etsy’s community focus and B Corp status weren’t incompatible with growth and profitability. “We understand the concern, but reject the premise,” he wrote in a blog post published the day of the IPO in April 2015. “Etsy’s strength as a business and community comes from its uniqueness in the world and we intend to preserve it. We don’t believe that people and profit are mutually exclusive.”

For about 24 hours, Dickerson’s comments looked prescient. In Etsy’s first day as a Nasdaq-listed company, its market value doubled, to more than $3 billion. But in the two years that followed, the stock fell 63 percent. Whatever investors thought about Dickerson’s take on capitalism, they also felt strongly about accelerating revenue growth, and they got the opposite: It fell from 44 percent in the first quarter of 2015 to 25 percent in the last quarter of 2016.

Late last year the company’s struggles caught the attention of Seth Wunder, a tech investor and hedge fund manager based in Los Angeles. In Etsy, Wunder saw a business that was fundamentally sound. A similar model had worked spectacularly well for EBay Inc., which had made money for 21 straight years—and Etsy arguably had a much better brand. It has more Instagram followers than EBay, Macy’s, and Home Depot, and more website traffic than Target. How, Wunder asked, was Etsy not making more money?...

Today In Artisanal: Etsy is Up 22% (ETSY)
Signposts: "Etsy Pivots From Crunchy Hipster To Gordon Gekko In One Afternoon" (ETSY)
Etsy Drops 7.77% On News It's Still Etsy (ETSY)

We actually have quite a bit on this one including the older, never-to-be-topped DealBreaker headline:
"Etsy’s Stock Is A Découpage of Market Schadenfreude" (ETSY)

Sunday, May 21, 2017

Natural Gas: Is This One Of Them "Head-and-Shoulders" I've Heard About?

Always remember Betteridge's law of headlines which states that when you see a question posed in a headline that can be answered with a binary yes/no, go with "no".

But this looks so symmetrical I thought I should post the pretty picture.

From FinViz:


$3.2460 at the settle on Friday.

The Mad King of Juice: Inside the Dysfunctional Origins of Juicero

From Gizmodo:
Juicero began in secret. The startup, a sort of Keurig for cold-pressed plant-water—which made headlines for the $120 million in venture capital it secured from the likes of Google and Kleiner-Perkins between 2013 and 2015, and again when it announced its wi-fi-connected countertop appliance would cost a jaw-dropping $700 on launch—intended to keep its business free from prying eyes, either because it feared corporate espionage, mockery, or both. Was it the future of convenient health food, or an overfunded subscription service for bags of chopped up plants?

Founded in 2013 by Doug Evans, former CEO of New York juice company Organic Avenue, Juicero coupled a bizarre set of interests: a curdled, monopolized tech industry which has run dry on useful new ideas; the medically-vague but burgeoning wellness industry’s promise to fill a physical and spiritual void, stripped away at least in part by tech itself. Two types of snake oil, expertly blended to suit their flavor profiles—and true to the spirit of both industries, accessible only to the wealthy.

Juicero has by any measure gotten the public comeuppance it richly deserved since launching at the end of last March. The company slashed its press’s sale price nearly in half in January, and had its juice press torn down in April as “hopelessly expensive to manufacture and assemble,” not long after a Bloomberg expose revealed the press itself was made redundant by the simple human hand, which can squeeze the produce bags well enough. But these darkly comic gaffes are a only keyhole view into the kingdom of dysfunction Juicero’s employees have been living in.

Gizmodo spoke to eight past and current Juicero employees and contractors, representing a wide swath of the company’s functions, all on condition of anonymity. Their stories reveal a business with deeply skewed priorities, where every warning sign along the path to its own undoing was cavalierly ignored at the behest of its autocratic founder. “[Evans] was actually genuinely surprised with [the backlash],” a team member who departed after the product launch last year told Gizmodo. “I don’t think that was the case for the other employees.” 

The mad king
In its infant stages, Juicero set its sights on changing the world. Small local farms and “ugly” produce—unfit for grocery stores but no less nutritious—would fuel a revolution to bring increasingly fat, malnourished Americans the fresh fruits and vegetables they’d forgone for junk food. And all in a convenient system that delivered liquid vitamins and minerals in delicious combinations. Evans loves to recount his own story of abandoning “hamburgers and fries” for “raw, organic fruits and vegetables, seeds, nuts and seaweed” after his parents’ untimely deaths....MORE
HT: A.V. Club whose sense of betrayal comes through in their headline:
Read This: Juicero wasn’t just stupid, it was a lie 

The indignation (and vaguely Teutonic-sounding "Read This") echo my own response to the German response to Juicero:

"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....MORE
For handy (schadenfreude) reference here's the CrunchBase page on who funded this thing:

Funding Rounds (4) - $118.5M

DateAmount / RoundValuationLead InvestorInvestors
Apr, 2016$28M / Series C0
Mar, 2016$70M / Series B17
Apr, 2014$16.5M / Series A0
Oct, 2013$4M / Seed0

Investors (17)

Series B
Series B-
Series B-
Series B (Lead)
Series B-
Series B-
Series B-
Series B-
Series B-
Series B-
Series B-
Series B-
Series B-
Series B-
Series B-
Series B-
Series B

"Neural net invents new paint colors (and names!)"

It's not very good at the names bit yet.

From Lewis and Quark (Postcards from the Frontiers of Science)

New paint colors invented by neural network
So if you’ve ever picked out paint, you know that every infinitesimally different shade of blue, beige, and gray has its own descriptive, attractive name. Tuscan sunrise, blushing pear, Tradewind, etc… There are in fact people who invent these names for a living. But given that the human eye can see millions of distinct colors, sooner or later we’re going to run out of good names. Can AI help?
For this experiment, I gave the neural network a list of about 7,700 Sherwin-Williams paint colors along with their RGB values. (RGB = red, green, and blue color values) Could the neural network learn to invent new paint colors and give them attractive names?
One way I have of checking on the neural network’s progress during training is to ask it to produce some output using the lowest-creativity setting. Then the neural network plays it safe, and we can get an idea of what it has learned for sure.
By the first checkpoint, the neural network has learned to produce valid RGB values - these are colors, all right, and you could technically paint your walls with them. It’s a little farther behind the curve on the names, although it does seem to be attempting a combination of the colors brown, blue, and gray.
By the second checkpoint, the neural network can properly spell green and gray. It doesn’t seem to actually know what color they are, however.
Let’s check in with what the more-creative setting is producing.
…oh, okay.

Later in the training process, the neural network is about as well-trained as it’s going to be (perhaps with different parameters, it could have done a bit better - a lot of neural network training involves choosing the right training parameters)....MUCH MORE
HT: Firstly FT Alphaville's Friday Further Reading post where Mr. Keohane directed our attention to the newfound name "Pubic Gray" and then MetaFilter whose comments section begins:
Wltlttf Bzt is one of my favorite colors.
posted by The otter lady at 9:32 PM on May 18 [3 favorites]

Burble Simp and Stanky Pink is where I lost it.
posted by EmpressCallipygos at 9:33 PM on May 18 [8 favorites]

Uber Starts Charging As Much As It Thinks You’re Willing to Pay

Differential pricing, it's all the rage.

From Bloomberg, May 19:
The ride-hailing giant is using data science to engineer a more sustainable business model, but it’s cutting drivers out from some gains.

Uber drivers have been complaining that the gap between the fare a rider pays and what the driver receives is getting wider. After months of unsatisfying answers, Uber Technologies Inc. is providing an explanation: It’s charging some passengers more because it needs the extra cash.

The company detailed for the first time in an interview with Bloomberg a new pricing system that’s been in testing for months in certain cities. On Friday, Uber acknowledged to drivers the discrepancy between their compensation and what riders pay. The new fare system is called “route-based pricing,” and it charges customers based on what it predicts they’re willing to pay. It’s a break from the past, when Uber calculated fares using a combination of mileage, time and multipliers based on geographic demand.

Daniel Graf, Uber’s head of product, said the company applies machine-learning techniques to estimate how much groups of customers are willing to shell out for a ride. Uber calculates riders’ propensity for paying a higher price for a particular route at a certain time of day. For instance, someone traveling from a wealthy neighborhood to another tony spot might be asked to pay more than another person heading to a poorer part of town, even if demand, traffic and distance are the same.

The change stems from a feature Uber introduced last year called upfront pricing. By guaranteeing customers a certain fare before they book, the company said it provides more transparency. But it hadn’t previously said how Uber was estimating those prices and continued paying drivers using the old model.

In an attempt to ease drivers’ concerns, Uber will start reporting the price a passenger pays on each ride, though it will stop breaking out the percentage Uber takes of the fare. The company will also send drivers an updated terms of service agreement reflecting the new fee system. Route-based pricing is currently limited to 14 U.S. cities where Uber offers its carpooling service.

The difference between the calculations of rider fares and driver pay could be the future of Uber’s business. The company said it pockets what’s leftover and could parlay this mathematical framework into moving closer to profitability.

Graf said Uber’s pricing techniques have grown incredibly sophisticated. He oversees a team called marketplace at headquarters in San Francisco that’s staffed with economists and statisticians. Graf, a former Google and Twitter Inc. executive, sees financial engineering as a competitive advantage, one way that Uber can stay ahead of Lyft Inc. and other ride-hailing operators. Uber said it began experimenting with route-based pricing late last year.

“Google search is very simple to do; it’s very complex what’s happening behind the scenes,” Graf said. “The same thing here. Taking a trip is easy. To make this all work in a whole market, and sustainable, is really, really hard.”

In the process, pricing became something of a black box for passengers and another source of tension with drivers. Drivers accused Uber of cutting them out of income they were entitled to and misleading them about what the company was up to....MUCH MORE