The bank and the casino

source: Save Needham Bank on Facebook.

The bank

In my hometown the bank building had a plaque on it, honoring Forbes McLeod, a policeman killed on Friday, Feb 2, 1934 in a gunfight with men robbing the bank.  This bank robbery was considered of minor historical note as it was one of the first to involve machine guns.  

The robbing of banks with guns has formed a theme of American movies possibly culminating in Heat (1995).  What was the last good bank robbery movie?  Before The Devil Knows You’re Dead (2007)?  The Town (2010)?  Has there been a good bank robbery movie in the last ten years? Who knows, maybe there will be another one soon. 

The bank as “the place where the money is” has become less and less true.  The bank buildings aren’t even impressive anymore.  The bank as a physical place has become less significant.  

If you have extra money, you have a good problem.  What should you do with it*?  “Put it in the bank” used to be a good answer.   The money would be safe there.  Even if the robbers took it, it would be covered.  Right around the time Patrolman McLeod was killed, the Federal Deposit Insurance Corporation, FDIC, was formed.  

Your money would be safe at the bank, and not only that, it would grow as it gained interest.  Compounding interest is a powerful force, and this would be good.  It was certainly better to put your money in the bank than to, say, take it to the casino.  

However, many changes have happened since I was a kid being taken to the bank on a round of errands. These changes have happened very fast. 

One change is that interest rates went down.  And kept going down.  This begins with the Federal Reserve Bank, and trickles down to your bank.  The Federal Reserve is keeping interest rates down because it adds fuel (money) to the economy.  Keeping money in the bank is a less good option as interest rates go down, so people don’t put money there, so more money flows around.  

Another change that happened is that banks got deregulated**.  

Restrictions on the opening of bank branches in different states that had been in place since the McFadden Act of 1927 were removed under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. 

for instance.  Conglomeration, mergers, big national and international banks could expand.  

Deregulation also meant that banks got more and more freedom to take their deposit money and make all kinds of risky trades, hedges, and hedges of hedges with it.  What the bank does now is bundle up money and take it over to the casino.  

Sensibly enough, you may wonder if you should stop putting your extra money in the bank, and instead put it in the casino yourself.  

Monte Carlo Casino. Source: Piponwa for Wikipedia.

The casino

Imagine a casino. Grand and intimidating.  No one robs the casino, except Danny Ocean, and only when he has exactly the right ten for the crew, and that’s just in the movies.  You don’t rob the casino because the casino is not screwing around.  The casino might look funny on the outside, but that’s a trick. The casino is a machine to get as much money flowing through it as possible, and take some of the money.

The casino may look kind of appealing, especially when you keep seeing rich people walking out of it.  But the casino is deadly serious.  They wear suits in this casino. To even be allowed into the casino, you have to talk to a guy, maybe pay a fee.

Once you are inside, the casino is full of sharps. Some of the sharps are very, very rich. The players in the casino speak in sophisticated language that’s hard for you to understand. But if you can figure out the terms, you can place a bet on almost anything.

To place a bet in this casino is not free. The fee for a bet is about $8.95. Not only that, but many of the bets themselves are in significant amounts. There are bets you can make for a dollar or pennies (plus the fee). But some of the most popular bets are in minimum amounts of a hundred or even a thousand dollars.

These rules made this casino seem like something more serious and significant than like a casino casino, a Las Vegas casino. But just because this casino is on Wall Street doesn’t mean it’s not a casino.

Then, pretty rapidly, the rules of the casino change.

First, they get rid of the guy you need to talk to just to walk in. Now, you don’t need to talk to anybody. And there’s no cover. You don’t need to talk to anybody to place a bet. First they let you do that on your computer, and then when phones got good enough, they let you do it on your phone. There’s still a physical casino, but it’s sort of just for stock photos and background footage now. The casino is now totally online.

Next, the casino gets rid of the cost to place a bet. Now, there is no fee. Placing a bet is free.

Not only that, the casino starts marketing itself to young people, with colors and buttons. The online betting interface gets easier and easier. You can play in the casino as if it’s just another app on your phone, as easy to use as Instagram.

Just to eliminate one last hurdle the casino gets rid of the idea of minimum bet amounts. Now, you can do fractional bets, with however much money you have.

Very fast, the once grand and intimidating casino has changed, and now is more or less just an app where anybody place a bet on anything in any amount with no fee.

What happens to the casino, after these changes?

I don’t know, I’m trying to figure it out.

Are the old casino sharps inside happy? Or sad?

Maybe they’re happy at first – hey, lots of dumb money. But then they are overwhelmed. The dumb money changes the logic of the casino.

Do the sharps take their money to a new casino? Maybe even a secret casino? Do they band together and create alliances, even if this is technically against casino rules? Do they come up with new side games and bets?

I truly don’t know.

The friction that kept money from the casino and steered it to the bank has been eliminated. The safe and steady returns that lured money to the bank and away from the casino have been reduced. The bank and the casino are in business together now. Have the bank and the casino merged? They certainly flow together.  Money is flowing from the bank to the casino, sure as sun follows moon.

It cannot be an accident that our outgoing president is a former casino operator. The president before him and the president before him and the president before him (who was raised in a casino town) were all surrounded, advised, and funded by leaders of the effort to merge the bank and the casino.

The incoming president was a senator from Delaware for almost forty years. Delaware is actually a real place: it has a population a little less than half that of San Bernardino County, 1/39th that of California. But legally what Delaware is is a jurisdiction for favorable rules for large-scale bank, casino, and bank-casino corporations.

Over half of publicly traded corporations listed in the New York Stock Exchange (including its owner, Intercontinental Exchange) and 60% of the Fortune 500 are incorporated (and therefore domiciled) in the state.

The bank and the casino may physically exist, somewhere, in a strip mall or a tall anonymous building, on Wall Street or in Delaware or in one of many downtown streets with big anonymous buildings, but it doesn’t matter.  The bank and casino are all on your phone now.  

What happens now?  

I don’t know, I’m trying to figure it out. 

My second-best speculation is to bet on the casino itself, because the federal government has revealed that one of its major goal if not its only true goal is keeping the bank-casino’s business growing.  

My best speculation is that something totally unpredictable will happen. Rapidly growing complexity will have effects no one can predict, this is the lesson of both Jurassic Park and the Nicholas Nassem Taleb books. What happens when stuff like this starts happening?:

from the January 16, 2021 Economist

No one can predict, it cannot be modeled. After the fact there will be some sage identified who saw it all coming. If there are a million guesses, at least one will later appear kinda right. But it doesn’t really matter. No one can know with any confidence what will happen in such a system.

There could be a panic at the casino. Consider Larry McMurtry’s memory of a stampede he saw as a boy.  He was helping to drive about one hundred cattle down an asphalt road:

Men, horses, and cattle were all drowsy, the herd just barely plodding along, until one cow happened to drag her hoof on the rough asphalt, making a loud rasping sound.  In an instant that sleepy herd was in full flight, and our horses too.  A single sound on a summer afternoon produced a short but violent stampede.  The cattle and horses ran full-out for perhaps one hundred yards.  It was the only stampede I was ever in, and a dragging hoof caused it.

A dragging hoof can cause a stampede, on a Texas farm-to-market road, or at the bank-casino.  There doesn’t have to be a good reason.  

Disclaimer: not investment advice, duh. I’m an amateur musing here.

* Jesus had a simple answer that solves this problem.

** in The Uprising: On Poetry and Finance, by Franco “Bifo” Berardi (semiotext(e), 2012) it’s claimed that the word deregulation was “first proposed by poet Arthur Rimbaud, and later reculced as a metaphor by neoliberal idealogues. Dérèglement des sens et des mots is the spiritual skyline of late modern poetry.”


John Malone

source

A man worth study.  

At which point I discovered that there was a war about to explode on the scene for control of TelePrompTer between Cooke and Irving, and so I passed on the opportunity and Hub Schlafly ended up getting stuffed into that job for a while. Then I got an inquiry from Steve Ross at Warner and did I want to go do that? And unfortunately, the first thing I would have had to have done is have a difficult posture with the fellow that they had just bought a big company from and I didn’t really like that too much. Plus, the other issue there was New York headquarters. And while Steve said, “Well, you can live in Connecticut and have a limo” and all that kind of stuff, I didn’t think that was the life I was looking forward to. And then the third guy was Bob Magness, who was out here in Denver and Bob was just an intriguing kind of a guy and TCI was my kind of a company. They were so broke at the time that Bob used to say, “We’re so broke we’ve go to look up to see bottom. Lower than whale shit.” Very colorful expressions, but it was the opportunity I thought, in my mind, to get the family out of the New York metro and into clear and clean and beautiful Colorado, and so that’s the direction that… Oh, I took a 50% pay cut and agreed to buy a bunch of stock, which turned out to be underwater, very quickly, before I even got on the scene, but that brought me out to Denver. But they were guys that I had gotten to know over the prior couple of years – Sparkman and Bill Brazile and Carter Paige and Larry Romrell, Donne Fisher and I kind of liked them. I liked the attitude, it was a laid back kind of group.

from this conversation with Trgyve Myhren at The Cable Center

The first thing you learn is, once you make a guy rich, don’t expect them to work hard. Very unusual people do that.

How about this, from a 2012 lecture at the University of Denver:

I think the best example of vertical integration is, for instance, I get a phone call from Rupert Murdoch. He says, “CNN exists. I’ve got a company called News Corporation. I would love to have a cable television news channel in the United States. What do you think?” I say to him, “There’s probably room for another one, but you got to come down in terms of your political posture, a little bit to the right of center because CNN is going a little bit to the left of the center.” In the opinion of certainly people on the right [inaudible 00:19:32]. He says, “I think that’s great. Will you help me? i.e., will you invest with me?” and so we say, “Yes. What do you want us to do?” He said, “Why don’t you A, agreed to distribute our channel. B, I want you to go see if you can recruit Rush Limbaugh to be on my channel because I know him. C, how about 20% of this thing if it works?”

We launched Fox News Channel. We own 20% of it. We distribute it. He programs it. We take relatively little risk because we don’t put any money up. What we agreed to do was carry the channel, pay a fee per customer, an affiliate fee. It depends on him to do a good job of promoting it and creating. We end up owning 20% of what turns out to be a valuable asset. That’s the most no-brainer of the things you can do.

Or this:

There was a company called BlueMountain, traded for one and a half billion dollars, zero revenue. It was in the online greeting card business. You could go to BlueMountain and you could download a greeting card and you could send it off to your friends. It was free; had lots of traffic; never made the transition to economic viability. The Internet world was full of those bubble phenomenon, vaporware companies, we called them. They came and they went.

From a 2012 interview with Mark Robichaux at Multichannel News:

MCN: What about the threat of over-the-top players such as Netflix?

JM: I don’t know. I mean his (Netflix CEO Reed Hastings’) business model, of course, was to buy flat into the future and hope he grows into it. And if he doesn’t grow he’s got serious cash flow problems facing him. His stock has reflected debt, to some degree. I mean he’s got what, a couple-billion-dollar market cap? But that’s pretty low for 24 million subs.

I don’t see how Reed gets scale. That’s the curse for him. I mean he needs 40 million to 50 million households. I don’t see how he gets it if it’s split four ways.

MCN: Do you think Netflix, or any over-the-top player for that matter, can be a true competitor to cable?

JM: It all has to do with access to content. It really is about access to content.

The content that people care about, the content that will really move people, is pretty much controlled by big programmers like Disney, who are not about to shoot themselves in the foot. And so they are going to exploit it across all platforms in a very orderly and well thought through way. You know, right now cable has been a very effective monetization scheme for cable networks …

I was screaming at the Discovery [Communications] guys and the Starz guys about don’t shoot yourself in the foot with your Netflix thing. And ultimately, of course, Starz pulled back and Discovery was able to do a limited extension. Reed’s money is good, but I don’t know if he’s got a business model that really works for him.

 

 


Morgan Housel

In 1960 journalist Hugh Sidey attempted to gauge JFK’s economic credentials. “What do you remember about the Great Depression?” Sidey asked. Kennedy responded candidly:

I have no first-hand knowledge of the depression. My family had one of the great fortunes of the world and it was worth more than ever then. We had bigger houses, more servants, we traveled more. About the only thing that I saw directly was when my father hired some extra gardeners just to give them a job so they could eat. I really did not learn about the depression until I read about it at Harvard.

Morgan Housel, who writes this semi-regular column for The Collaborative Fund, has a great gift for historical anecdotes. How about this one:

The Battle of Stalingrad was the largest battle in history. With it came equally superlative stories of how people dealt with risk.

One came in late 1942, when a German tank unit sat in reserve on grasslands outside the city. When tanks were desperately needed on the front lines, something happened that surprised everyone: Almost none of the them worked.

Out of 104 tanks in the unit, fewer than 20 were operable. Engineers quickly found the issue, which, if I didn’t read this in a reputable history book, would defy belief. Historian William Craig writes: “During the weeks of inactivity behind the front lines, field mice had nested inside the vehicles and eaten away insulation covering the electrical systems.”

The Germans had the most sophisticated equipment in the world. Yet there they were, defeated by mice.

You can imagine their disbelief. This almost certainly never crossed their minds. What kind of tank designer thinks about mouse protection? Nobody planned this, nobody expected it.

But these things happen all the time.

“These things happen all the time” reminds me of the opening of the movie Magnolia.


Processing

SF: Most of our businesses have more in common than might meet the eye. We take some form of commodity and we’ll process it through a very, very large plant that requires sophisticated technology and analysis to ensure that we have a competitive advantage and a capability to go to market in scale. Then we’ll optimize around that processing or manufacturing process because there is raw material risk, commodity risk, and counterparty risk.

We also have the capability to be very efficient and effective from a cost perspective and the capability to constantly innovate because the technology changes in these big plants. We must be adaptable to ensure that we don’t fall from the first quartile to the second, third, or fourth quartile in cost advantage.

Our other core capabilities besides innovation and operations excellence are Market-Based Management®; trading; transaction excellence; and public sector, which encompasses legal, communication, community relations, and government relations.

So, whether it’s crude oil going into refined products, natural gas going into fertilizer, naphtha going into chemicals, trees going into pulp, metals going into our manufacturing businesses — each of these businesses fit the capabilities described above.

fascinated by this interview with Steve Feilmeier, CFO of Koch Industries (from Graham & Doddsville).

I don’t agree with the Kochs on politics but I have wiped my ass with their toilet paper.


Last week’s Economist (highlights)

stephencdickson for Wikipedia
  • A Royal Marine describes an encounter with Somali pirates:

The pirates misread the troops’ intentions, and thought they were about to be abandoned at sea; a few jumped into the water while the rest attacked Mr Tennant’s team.

Temporary chaos and confusion gave way to swift action:

His team acted that way, Mr Tennant argues, because they were used to working with each other and they had wargamed what might go wrong. In contrast, the pirates were suffering from fear, stress and fatigue and acted on gut instinct. “If you haven’t gone through the decision-making process in advance, then gut instinct tends to kick in,” Mr Tennant says.

I recall hearing once that you should actually practice moving your fingers on the phone to the buttons 9-1-1.

  • A profile of NextEra:

It is already the world’s top generator of wind and solar electricity… It was quick to take advantage of generous tax credits to build wind farms across the Midwest.

  • From a piece on millennial investors:

When most boomers began saving a handful of investment firms loomed large, offering high-fee mutual funds. But electronic trading makes it much easier and cheaper to buy and sell directly. The cost of investing $100 on a stock exchanged has fallen from $6 in 1975 to less than a thousandth of a penny today.

  • Consideration of Peter Turchin’s idea of “elite overproduction:

“The next decade is likely to be a period of growing instability in the United States and western Europe, he asserted, pointing in part to ‘overproduction of young graduates with advances degrees.’

Is that a supply problem or a demand problem? I’d expect The Economist to offer an answer. A price signalling breakdown for sure.

From the Declaration’s website:

Who initiated the Declaration? 

Dr Kulldorff invited Dr Bhattacharya and Dr Gupta to Massachusetts to record a video outlining an alternative to the current COVID-19 strategy. While meeting, the three spontaneously decided to also write a short Declaration to summarize the thinking.  

Why was the Declaration signed in Great Barrington? 

The Declaration was written and signed at the American Institute for Economic Research, located in Great Barrington, Massachusetts. The Institute kindly offered to help with the video recording, providing a location, equipment and a camera man pro bono.  

When you hear about an institute for economic research, look for the agenda of the rich far-right donors.

  • Studies of the unintended consequences of wildlife fences:

Pangolins curl up into a ball when endangered, in order to protect their soft underbellies. This is generally a wise move, but not when it causes them to embrace the wire of an electrified fence.

  • Review of Rod Dreher’s Live Not By Lies.

Visiting Russia, Mr Dreher learns how honest Soviet citizens tried to avoid having much to do with the system. Geology was a popular discipline among scientists, as it let researchers spend a good portion of their lives in far-fling and unsullied places.

From a piece on what Biden would mean for Britain:

Bill Clinton was annoyed with John Major because Conservative activists publicized his dope-smoking at Oxford.

(Shouldn’t we encourage prospective politicians to smoke dope? It might take them off the path of ambitious grasping, or at least chill them out a hair).

  • Similar topic, different article:

in 2018, ABCD, a German-marketing firm, estimated that Delhi and Mumbai are among the top six cannabis-consuming cities in th world, together burning more than 70 tonnes each year.

Alberto Bonadona, an economist in Bolivia:

There is no lithium industry. What we have is salt for a good barbecue.


What is Amazon? by Zack Kanter

First, what is Wal-Mart?

Few people outside of Walmart realize Walmart’s historical scope of innovation. It built the largest private satellite communications network, enabling unprecedented coordination at enormous scale. Computerized point of sale systems, a massive trucking fleet to enable best-in-class logistics, innovations in EDI, the Sam’s Club format. The list goes on. But all of these innovations were really just developed in order to optimize what was a very simple formula: that is, the selection, pricing, and inventory of SKUs in, say, a 30,000-200,000 square foot store.

from this essay here


there are enough of these guys

that you can always find one of them to say anything. (that one from Bloomberg but could’ve been Wall Street J)

Also, new (to me) term:

That from Joe Wallace in WSJ.


Stock market narratives

The invention of narratives to explain why there are more total sellers than buyers in particular stock indices can seem to me like an act as creative and fanciful as astrology or reading meaning from sheep entrails.

Maybe “the stock market” is down because people are starting to realize the holidays will be a bummer, or the election picture feels less clear than it did a week ago, or weather has turned in gloomy ways, or the elections in Chile and Bolivia indicate the left is on the march and the right is in retreat, or it’s foggy in New York City today, or instability in general is in the air when the President storms out of his 60 Minutes interview and the other guy is hardly at the top of his game.

Or just because October is spooky, to markets and in general.

Maybe it’s down because it’s been overinflated for a long time, and it doesn’t take much to make it turn. The market is a herd. Herds can turn on a sudden startle, on almost nothing, as Larry McMurtry tells us:

Long ago, when I was a young cowboy, I witnessed a herd reaction in a real herd – about one hundred cattle that some cowboys and I were moving from one pasture to another along a small asphalt farm-to-market road.  It was mid-afternoon in mid-summer.  Men, horses, and cattle were all drowsy, the herd just barely plodding along, until one cow happened to drag her hoof on the rough asphalt, making a loud rasping sound.  In an instant that sleepy herd was in full flight, and our horses too.  A single sound on a summer afternoon produced a short but violent stampede.  The cattle and horses ran full-out for perhaps one hundred yards.  It was the only stampede I was ever in, and a dragging hoof caused it.

Maybe the vibe is just off.

I’m not saying this headline is wrong, just that it might be. Words like “on” or “amidst” can be made to do more work than they ought to. The idea stock market study or business analysis is a hard science is silly. There’s absolutely room to consider the role of unquantifiable vibes. You might as fairly say Stocks Fall On Gloomy Animal Spirits.

Further, the human need to put a story on events is unstoppable. Narrative investing is kind of becoming a thing, but I still feel there’s a flawed sense that you can make a science of it.

intense sunset I saw


Intrigued by what was on TV in 1940

From Larry McMurtry’s review of Connie Bruck’s bio of Lew Wasserman, in the newly unlocked NYRofB archives.

From those same archives, Renata Adler’s savage attack on Pauline Kael drops a parenthetical on TV:


Trader Joe

Great interview with Joe Coloumbe, Trader Joe himself, from Coriolis Research (ht somebody or another on Twitter.

They have all kinds of great reports over there by the way. Should I grow mungbeans in Northwest Queensland??


beautiful poem


The illusion of choice

Cool graphic, from “Monopolies are Distorting the Stock Market” by Kai Wu of Sparkline Capital


Founding Documents

Note to readers: from time to time we accept submissions written by correspondents about topics they’re passionate about that fit into our frame of going to the source.  Reader Billy Ouska sent us a writeup of something he’s passionate about, the founding documents of Facebook, and we’re proud to present it here.  If you’d like to write for us, send us a pitch!  – SH, editor. 

The Social Network (now available to stream on Netflix) tells the story of the creation of Facebook through portrayals of the legal battles over its ownership. In a pivotal scene, cofounder Eduardo Saverin flies out to Facebook headquarters to sign some seemingly innocuous legal documents. Of course, the cut to Mark Zuckerberg watching furtively from afar tells the viewer that something is up. We later discover that Saverin has signed off on corporate restructuring that will significantly dilute his equity in the company, leading to the lawsuit whose depositions serve as a narrative device for the film. (Moral of the story: know what you’re signing! If you don’t, hire a lawyer! If there’s a lawyer in the room, ask him, “do you represent me?” If he says no, get your own guy! If he says yes, make him put it in writing!)

We learn that Facebook was originally formed as a Florida limited liability company and that, through legal maneuvering, another Facebook entity was created in Delaware that acquired its Florida counterpart, giving it the ability to restructure ownership. I’m not here to delve into the legal tricks that were played; other corners of the internet have already done so. Instead, I’m here to talk about something even less interesting: entity formation documents!

Formation documents (what you file with a state to create a corporation or limited liability company) are almost always available to the public. If you know the state where the entity was created, you can easily find its initial records. So, after entering “Florida entity search” into your search engine of choice, you’ll get here. With some persistence, you should be able to find information on whatever company you’re looking for, like the initial Articles of Organization of thefacebook LLC:

Maybe it’s just me, but seeing a copy of these Articles feels almost historic, and maybe a bit inspirational. Facebook is now worth hundreds of billions of dollars, but only sixteen years ago it was so green that its owners listed in a public document what look like their home addresses—no, even better, their parents’ home addresses—because they didn’t yet have an office. Mark’s address even has a typo: Dobbs Ferry is in New York, not Massachusetts. (Or, was this not a typo but rather the first of many times in which Zuckerberg would intentionally flout governmental authorities?!)

Even better is that the amended Articles of Organization are also available for viewing.

I don’t want to pull you even further into the weeds of corporate law (thanks for even making it this far!), but what I find cool here is that the amended Articles include an attachment laying out the reorganization that is signed by the man himself. Another slice of history! Think of how much impact, both positive and negative, that Facebook has had on the planet: the media industry, the outcome of the elections, the way we communicate. So much of that can be traced back to this document (and a thousand others not available for public viewing). Did Zuckerberg have any idea? Did he pause and contemplate before signing this? Did he scribble his signature without reading it, like Saverin would later do? If you squint hard enough, it can be fun to imagine the answers to these questions.

It looks like the first Articles of Organization were sent to the Florida secretary of state via fax. So, after it was run through the fax machine, the original was probably put in a file cabinet by the Organizer (Business Filings Incorporated) or thrown out. I’m guessing the amended Articles of Organization were prepared by a Palo Alto law firm, signed in Palo Alto, and then faxed or emailed to a third party in Tallahassee, which filed the documents with the Florida secretary of state. I would guess that the original in Palo Alto made its way into a client file somewhere.
Even I, a noted corporate records enthusiast, don’t think that these documents need or deserve the reverence afforded to the Constitution. But I do think there is value in making them public record. Every once in a while, they give a peek behind the curtain into the workings of the corporate world, which could probably benefit from some more transparency.

(PS: every state lets you access corporate records like these from the comfort of your home, though some states will require the creation of an account and/or the payment of a nominal fee to search. Just imagine what you could find!)

 


Ray Dalio

In a “Principles” app that takes its name and lessons from a bestselling memoir by Mr. Dalio, this week’s case study on meaningful work and relationships features a video from a 2013 “Family Reunion” for employees who had been at Bridgewater for at least a decade.

“Every one of these people here is, you know, my family,” Mr. Dalio said in the video. “I’ve watched them grow up, like, coming out of college and watching them get married and have their kids. You know, I didn’t behave any different to the people I work with than with my kids.”

Some of the employees who appeared in the video were among those laid off this month, said people familiar with the matter.

from Friday’s Wall Street Journal piece, “Bridgewater Associates Lays Off Several Dozen Employees,” by Juliet Chung.

Ray Dalio is a beloved figure here at Helytimes.  If you’ve read Principles, this behavior is not inconsistent, I’m sure he told these employees that to achieve success they must first face and accept harsh realities.


The statement is not only humorous, but also it is literally true

Tired: Buffett

Wired: Sir John Templeton

(Inspired: Charlie Munger)


Yes! Same!

from the WSJ’s obituary of James Sherwood (paywall, prob’ly)

His work with cargoes in France and England exposed Mr. Sherwood to the inefficiencies of loading goods at docks with rigid union work rules. That experience made him an early convert to the use of standardized steel containers, which could be loaded elsewhere and delivered to docks by train or truck.

In 1965, he founded London-based Sea Containers to buy containers and lease them to companies moving goods. His initial investment of $25,000 gave him a 50% stake. When the company went public in the late 1960s, he was suddenly rich, “free to move my life forward any way I wanted,” as he later put it.

Though I’ve thought much and even written about containerization, I never fully considered the union busting aspect.

Containerization is incredible.  That such a simple idea – use a standardized box – took so long to come up with.  That is was willed into reality by one man.  The amount that it changed the world.  Every port city in the world was changed.  The ports became charmless factory zones.  No more On The Waterfront.  Walmart could not exist without containerization.  The relationship of the United States and China is formed by what containerization did to shipping.  We send them empty boxes, they send us full boxes.

Must relocate my copy!


What is up with the stock market?

The US unemployment rate is 14.7%, the worst since the Depression.  Here in LA County it’s 24%.  We’re not supposed to leave our houses for non-essential purposes or go to the beach.  Every bar is closed, almost every store is closed.

And yet the “stock market” is not really down that much.  Here is a one year chart of the S&P 500, which The Wall Street Journal often uses as a standard benchmark for “the stock market.”

Actually a little higher than it was same time last year.

How can this be?

There are many explanations offered by people better informed than me.  Here is Gunjan Banerji’s take in WSJ, and Joe Weisenthal in Bloomberg.

Both point out:

  • the belief in a v-shaped or “Nike swoosh”* recovery
  • the Federal Reserve keeping interest rates at close to zero
  • the Federal Reserve buying $2.4 trillion in government debt, and indicating it would buy more, making it clear that the government can inject essentially infinite money into the economy, “backstopping” everything.

As an amateur enthusiast on this topic, I’d like to offer some additional explanations.

  • The stock market is rigged to go up.  This is just a sort of understood but rarely stated fact.  The stock market is one of the few measures the President cares about.  Every tool at the disposal of the administration and at the supposedly independent Fed is used to keep the stock market up.

 

  • The stock market by definition is big, public companies.  These are the S&P 500 companiesBig companies are benefitting from the demise of their various small competitors.  Big companies can survive by taking on debt in ways small businesses can’t.  They did a great job getting a chunk of the federal money made available.  Consider if I have Steve’s Burger Stand.  I just don’t have the bureaucratic ability, relationships, time, to get a loan the way Shake Shack did.  If anything, are huge companies are seeing their small scale competitors destroyed?
    • Kind of an addendum to the last one: the federal government gave out the free money via big banks like Wells Fargo, Bank of America, BlackRock which themselves are part of the S&P 500!  Big boys feed first!

 

  • Money has nowhere else to go.  The Fed’s actions reduce the benefits of alternative investments like bonds or just putting your money in the bank.

 

  • Trading has become free! I feel crazy that this never gets mentioned.  Starting with Schwab (I think?) last fall, and then flowing on to competitors, trading stocks became free.  Instead of $8 or $4 to trade stocks, it’s free!  You might think this might’ve just created more volatility, maybe it did, but once the barrier to entry for the retail investor is zero, it’s as easy to flow your extra money into the stock market as it is into the bank.  This is, in my opinion, a dangerous or at least explosive change that hasn’t really been reckoned with.  See what Robin Hood is up to.  It might be as easy to bet your money on Tesla or Amazon as it is to tuck it away in the bank.  It’s frictionless, it can be done on your phone.  That might be dangerous!

 

  • There’s nowhere else to gamble.  Again, I feel crazy that this is never acknowledged as a factor.  Consider that Americans spend something like $100 billion on gambling a year.  At the moment, there’s nowhere to do that!  Casinos are closed.  Sports are stopped.  I do not think it’s unreasonable to imagine there are billions of dollars in gambling money going into the stock market as simply a place to gamble and trade.  See Dave Portnoy of Barstool Sports, who personally injected half a million dollars.

I’m not here to make predictions.  It’s probably a cognitive bias to believe the stock market “deserves” to go down, but that’s what I believe.  Then again, when you think about the stock market, it’s not just rich assholes, it’s like the pensions of firefighters and teachers.

Is it possible that the stock market is not calculating the biggest risk, some kind of massive social upheaval coming from disgust at this system?  The stock market is not built to calculate “what if we ruin society, make things so unequal and so unfair and grotesque that this system no longer functions?”

Maybe that’s “baked in” as they say.

So said Warren Buffett at the annual meeting.  Happened to be reading this speech by Stanley Druckenmiller from 2015 which I found on Valuewalk:

Remember your competition:

This chart is illuminating:

It’s good for me to write about the stock market, because I’m guaranteed to get an email saying something like you stupid clown you don’t understand anything.  But the more I study the stock market, the more convinced I am that sometimes the experts, overwhelmed by information, become blind to the obvious.  Consider this case reported by Bloomberg as a representative example.  Do you really need to use a machine-reading program to determine that things are looking a bit grim?

There’s the famous story about Joe Kennedy knowing it was time to sell when the shoeshine boy gave him stock tips (bullshit, he was insider trading).  What if you’re the shoeshine boy?

* I don’t understand the Nike swoosh recovery idea.  Isn’t the long part of the swoosh roughly equal to the short part?  So in a swoosh recovery, wouldn’t we just take a very long time to get back to where we were?  and that’s the optimistic take!


Buffett bits (and Munger)

Did not watch, but read a transcript of this year’s Berkshire Annual Meeting. Even though he tends to repeat himself, especially once you’ve gone over a few of his letters, there’s something comforting and eternal about going over the wisdom again, like reading The Bible.

 

Is there simpler investment advice?

I would love to talk to Ajit Jain for a few minutes:

I didn’t know about this event:

from the National Archives:

The morning after was an archivist’s nightmare, with ankle-deep water covering records in many areas. Although the basement vault was considered fireproof and watertight, water seeped through a broken wired-glass panel in the door and under the floor, damaging some earlier and later census schedules on the lower tiers. The 1890 census, however, was stacked outside the vault and was, according to one source, “first in the path of the firemen.”(11)

Could be a good clue in a National Treasure style mystery.

Speculation and rumors about the cause of the blaze ran rampant. Some newspapers claimed, and many suspected, it was caused by a cigarette or a lighted match. Employees were keenly questioned about their smoking habits. Others believed the fire started among shavings in the carpenter shop or was the result of spontaneous combustion. At least one woman from Ohio felt certain the fire was part of a conspiracy to defraud her family of their rightful estate by destroying every vestige of evidence proving heirship.(15) Most seemed to agree that the fire could not have been burning long and had made quick and intense headway; shavings and debris in the carpenter shop, wooden shelving, and the paper records would have made for a fierce blaze. After all, a watchman and engineers had been in the basement as late as 4:35 and not detected any smoke.(16) Others, however, believed the fire had been burning for hours, considering its stubbornness. Although, once the firemen were finished, it was difficult to tell if one spot in the files had burned longer than any other, the fire’s point of origin was determined to have been in the northeastern portion of the file room (also known as the storage room) under the stock and mail room.(17) Despite every investigative effort, Chief Census Clerk E. M. Libbey reported, no conclusion as to the cause was reached.

previous coverage of Buffett and Charlie Munger.

Charlie Munger unfortunately couldn’t be in Omaha, but looks like he had interesting things to say as always at the Daily Journal annual meeting in February:

Question 28: You talk frequently about having the moral imperative to be rational. And yet as humans, we’re constantly carrying this evolutionary baggage which gets in the way of us thinking rationally. Are there any tools or behaviors you embrace to facilitate your rational thinking?

Charlie: The answer is, of course. I hardly do anything else. One of my favorite tricks is the inversion process. I’ll give you an example. When I was a meteorologist in World War II. They told me how to draw weather maps and predict the weather. But what I was actually doing is clearing pilots to take flights.

I just reverse the problem. I inverted. I said, “Suppose I wanted to kill a lot of pilots, what would be the easy way to do it?” And I soon concluded that the only easy way to do it, would be to get the planes into icing the planes couldn’t handle. Or to get the pilot to a place where he’d run out of fuel before he could safely land. So I made up my mind that I was going to stay miles away from killing pilots. By either icing or getting him into (inaudible) conditions when they couldn’t land. I think that helped me be a better meteorologist in World War II. I just reversed the problem.

And if somebody hired me to fix India, I would immediately say, “What could I do if I really want to hurt India?” And I’d figure out all the things that could most easily hurt India and then I’d figure out how to avoid them. Now you’d say it’s the same thing, it’s just in reverse. But it works better to frequently invert the problem. If you’re a meteorologist, it really helps if you really know how to avoid something which is the only thing that’s going to kill your pilot. And you can help India best, if you understand what will really hurt India the easiest and worst.

Algebra works the same way. Every great algebraist inverts all the time because the problems are solved easier. Human beings should do the same thing in the ordinary walks of life. Just constantly invert. You don’t think of what you want. You think what you want to avoid. Or when you’re thinking what you want to avoid, you also think about what you want. And you just go back and forth all the time.

How about this:

Question 30: My question is about electric vehicles and BYD. Why are electric vehicles sales at BYD down 50 to 70 percent while Tesla is growing 50 percent? And what’s the future hold for BYD?

Charlie: Well, I’m not sure I’m the world’s greatest expert on the future of electric vehicles, except I think they’re coming generally and somebody’s going to make them. BYD’s vehicle sales went down because the Chinese reduce the incentives they were giving to the buyers of electric cars. And Telsa’s sales went up because Elon has convinced people that he can cure cancer. (laughter)

And then by Question 33 he really gets going.

 Lots of luck if you’re an impulsive person that has to be gratified immediately, you’re probably not going to have a very good life and we can’t fix you. (laughter)

Buffett is like beer, Munger is like whiskey.

(via latticeworkinvesting)


fast and decisive adjustments

This struck home, read it in a Sequoia Capital memo someone Twittered.

Also in the category of: clear writing from people in the world of VC/tech financing, an anecdote retold by Morgan Housel

The Battle of Stalingrad was the largest battle in history. With it came equally superlative stories of how people dealt with risk.

One came in late 1942, when a German tank unit sat in reserve on grasslands outside the city. When tanks were desperately needed on the front lines, something happened that surprised everyone: Almost none of the them worked.

Out of 104 tanks in the unit, fewer than 20 were operable. Engineers quickly found the issue, which, if I didn’t read this in a reputable history book, would defy belief. Historian William Craig writes: “During the weeks of inactivity behind the front lines, field mice had nested inside the vehicles and eaten away insulation covering the electrical systems.”

The Germans had the most sophisticated equipment in the world. Yet there they were, defeated by mice.

 


How Will You Measure Your Life?

Some books give value just with their title.  I’d say I think about the title of Clayton Christensen’s book about once every two weeks or so.  Most of what’s in the book can be found in Christensen’s 2010 speech on that theme.

This theory addresses the third question I discuss with my students—how to live a life of integrity (stay out of jail). Unconsciously, we often employ the marginal cost doctrine in our personal lives when we choose between right and wrong. A voice in our head says, “Look, I know that as a general rule, most people shouldn’t do this. But in this particular extenuating circumstance, just this once, it’s OK.” The marginal cost of doing something wrong “just this once” always seems alluringly low. It suckers you in, and you don’t ever look at where that path ultimately is headed and at the full costs that the choice entails. Justification for infidelity and dishonesty in all their manifestations lies in the marginal cost economics of “just this once.”

I also find myself often thinking of an anecdote about milkshake purchases Christensen describes in the book:

The company then enlisted the help of one of Christensen’s fellow researchers, who approached the situation by trying to deduce the “job” that customers were “hiring” a milkshake to do. First, he spent a full day in one of the chain’s restaurants, carefully documenting who was buying milkshakes, when they bought them, and whether they drank them on the premises. He discovered that 40 percent of the milkshakes were purchased first thing in the morning, by commuters who ordered them to go.

The next morning, he returned to the restaurant and interviewed customers who left with milkshake in hand, asking them what job they had hired the milkshake to do. Christensen details the findings in a recent teaching note, “Integrating Around the Job to be Done.”

“Most of them, it turned out, bought [the milkshake] to do a similar job,” he writes. “They faced a long, boring commute and needed something to keep that extra hand busy and to make the commute more interesting. They weren’t yet hungry, but knew that they’d be hungry by 10 a.m.; they wanted to consume something now that would stave off hunger until noon. And they faced constraints: They were in a hurry, they were wearing work clothes, and they had (at most) one free hand.”

The milkshake was hired in lieu of a bagel or doughnut because it was relatively tidy and appetite-quenching, and because trying to suck a thick liquid through a thin straw gave customers something to do with their boring commute.

Something illuminating about food as something to do.

Understanding the job to be done, the company could then respond by creating a morning milkshake that was even thicker (to last through a long commute) and more interesting (with chunks of fruit) than its predecessor. The chain could also respond to a separate job that customers needed milkshakes to do: serve as a special treat for young children—without making the parents wait a half hour as the children tried to work the milkshake through a straw. In that case, a different, thinner milkshake was in order.

In the book, Christensen also goes on about how parents have to say no very often, and a milkshake is a relatively easy “yes.”

Christensen died last week.