"The Petrified River"

Made in 1957 by Union Carbide & Carbon company, PETRIFIED RIVER describes the modern romance of the present-day West in the search for uranium. It shows modern uranium prospecting, including prospecting by airplane, as well as mining in the Colorado Plateau.

"Why Won't Energy Companies Drill?"

[Previously from Goehring & Rozencwajg: Q2 (2022) Natural Resource Market Commentary, "The Distortions of Cheap Energy" and Goehring & Rozencwajg and Horizon Kinetics on Commodities.]

Highlights from Goehring & Rozencwajg's third quarter 2022 Natural Resource Market Commentary, "Why Won't Energy Companies Drill?":

• Following Russia’s invasion of Ukraine, oil prices broke through $100 per barrel for the first time since 2014. Most analysts predicted that triple-digit oil prices – the highest in nearly a decade – would produce a strong response in drilling activity. However, thus far, that response has been muted. Even now, after six months with oil prices greater than $85 per barrel, the US oil-directed rig count remains at 533 – nearly 40% below the 2018 levels despite oil prices having nearly doubled.
• [A] tight relationship has historically existed between oil prices and drilling activity. Between 2008 and 2018, the oil price alone explained 70% of the variation in drilling activity. Since 2020 however, this relationship has broken down. The industry should be turning 1,000 rigs; instead, they are stuck stubbornly at 533.
• We estimate that a company with high-quality Permian acreage can generate $38 mm in undiscounted cash flow from a well given $80 WTI, compared with $8 mm in drilling and completion costs. Given more than half of a well’s cash flow is generated in its first two years, the IRR at today’s oil prices is well over 200%. Given these extremely attractive single-well economics, why are the companies not drilling more?
• By keeping activity low, oil companies are simply responding to the signals sent from their three significant constituencies, all emphatically telling them not to drill. These constituencies are policymakers, investors, and their internal strategy teams.
• Low valuations encourage companies to favor returning capital to shareholders over increasing drilling, despite strong single-well returns. Here’s why: The E&P sector trades at 0.8x its net-debt adjusted PV-10 per share. For those to whom this is unfamiliar, the SEC requires energy companies to publish their PV-10 value (or standard measure) annually in their 10-K. The companies must list their proven reserves and estimate the discounted cash flows using a given oil and gas price. Removing net debt and dividing by the share count yields the so-called “net-debt adjusted PV-10 value per share,” which we will refer to as NAV per share going forward. In the past, investors capitalized an energy company at a multiple of NAV, reflecting the future development potential not yet reflected in their proved reserve figure. The trick was to determine the appropriate multiple given the company’s assets.
• We cannot recall a time when the entire industry traded for less than its NAV, and these extremely low valuations have tipped the scales away from drilling and toward dividends and share repurchases. Consider a hypothetical E&P company trading at 0.8x its net-debt adjusted PV-10 per share. Our hypothetical company has $1 bn of PV-10, 10 mm shares, and $200 mm of net debt. The company’s CEO can choose between spending $100 mm on new drilling or buying back stock. Assuming they can find and develop energy reserves for $15 per barrel of oil equivalent (boe), the company will book 6.7 mm boe of newly proved developed reserves for the $100 mm investment. At $80 crude and $5 gas, we estimate this investment would generate ~$130 mm in new PV-10. However, because the market capitalizes the company at only 0.8x NAV, the ending stock price would be virtually unchanged. On the other hand, if the company bought back $100 mm of its stock, its share count would fall by nearly 20%. Adjusting for net debt and dividing by the new lower share count implies the stock would rise by over 5% -- more than by drilling new wells. Therefore, the CEO that choses to return money to shareholders will enjoy a higher stock price and still have his best wells left undrilled. Under these conditions, no rational executive would rush to increase activity. Even though each well drilled would generate an IRR of nearly 80% in our example, the company is better off deferring development. The companies’ extremely low valuations explain this paradox. To summarize Edward Chancellor in “Capital Returns,” high multiples value growth and reward investment, while low multiples discount growth and encourage discipline.
• We call this analysis a company’s “signal to drill,” and we believe it explains the industry’s reluctance to increase activity. Looking company by company, we estimate over 50% of the remaining undeveloped reserves in the US are in the hands of companies for whom it is better to return capital than to drill. Those companies with a clear “signal to drill” are growing production by 8%, while those without are shrinking by 4%. Pioneer Natural Resources (PXD) is an example of the former. PXD trades at a 100% premium to their NAV, and the company is growing production by almost 20%. In the latter category, Laredo Petroleum trades at a 70% discount to NAV, and its production is declining by 7%.
• In 2018, the industry had a much clearer signal to drill despite lower prices. Oil averaged $51 per barrel in 2017 – 40% lower than today; however, we estimate the industry was valued at 4x NAV compared with 0.8x today. Using the same parameters as in the example above, drilling increases the stock price by 7%, whereas buying back stock at very high valuations would decrease the price by 10%. Even though a single well’s IRR is much better today than it was in late 2017, the difference in valuations back then pushed oil companies to drill. If oil companies traded at 3x NAV, everyone would have a positive “signal to drill,” and a considerable drilling boom would be underway. These same companies today are being told to defer drilling and development because of depressed valuations.
• The last group signaling energy companies to keep development muted are their strategy teams: petroleum engineers, rig crews, and project managers. The reason is resource depletion. We have long argued that Eagle Ford and Bakken producers have drilled out most of their best wells, so production would likely plateau and decline. Over the past years, several companies have gotten into serious trouble by running out of high-quality inventory. As recently as 2017, Oasis Petroleum, a sizeable Bakken driller, claimed they retained 20 years of top-quality Tier 1 drilling locations. However, only a few months later, they tacitly acknowledged they were running out by closing a high-priced Permian acquisition to exit the Bakken and forestall future production declines. The strategy did not work, and Oasis declared bankruptcy in September 2020.
• When you think about the challenges now being faced by the industry in these terms, you can easily see why oil company executives would keep the pace of development subdued. On the one hand, you could increase activity, risk attracting the ire of policymakers, have your stock price go down, and deplete your irreplaceable asset. On the other hand, you could return capital to shareholders, stay under the radar of policymakers, have the market reward your capital discipline, and keep your Tier 1 assets for a later time when the market will better value them.
• In past cycles, the “signal to drill” has often been determined by the oil and gas price. When oil prices fell from $100 to $27 between 2014 and 2016, the industry laid down rigs because they could not generate a return on drilling. As prices recovered in 2016 and into 2018, the rig count rebounded by 600 rigs. Because of record low valuations, this is the first time we can recall where the “signal to drill” is driven by valuation instead of oil price. As a result, higher prices have not incentivized increased activity. Until investors allocate capital to the
  space and valuation improves, we expect drilling activity to remain subdued and oil shale supply disappointments to continue.
• [W]e believe OPEC’s current output, at 29.9 mm b/d, represents its maximum capacity. Not only is OPEC pumping less than 2 mm b/d below their quota, but we believe Saudi Arabia’s current production (~ 11mm b/d) is putting strain on their fields and is unsustainable -- a subject we have covered in the past. With any contrarian thesis, we lay out roadmaps that try and predict what we should expect to see if we are heading in the right direction. In 2019, when Saudi Aramco released its first reserve report in nearly 50 years, we predicted their production could not exceed 10.5 m b/d for any sustainable period without incurring material field damage. As a “mile marker,” we stated that anytime Aramco pumped above 10.5 m b/d, they would quickly announce an unexpected production cut. These “surprise” curtailments occurred in 2019, 2020, and again today. In today’s example, weak oil demand has given the Saudis cover to slow production once again. We continue to believe the real reason they slowed production is field exhaustion.
• Assuming our models are correct and the Saudis cannot pump more than 10.5 mm b/d, OPEC pumping capacity is much lower than stated. Nearly every other OPEC member cannot achieve their quotas, and the 1.5 m b/d of unused Iranian capacity remains sanctioned. Since Iranians are now providing weapons to Russia, the probability of the US lifting its sanctions is quite remote. Considering these, we believe OPEC’s pumping capacity is only 31 m b/d and not the commonly stated (and accepted) 34 m b/d. With demand now pushed up against total pumping capability, the only thing keeping inventories from continuing their multi-year plunge has been the 1.5 mm b/d of coordinated releases from US, European, and Japanese strategic petroleum reserves. The world has become addicted to SPR sales to keep global markets balanced and prices from soaring. The Biden administration has stated that SPR sales will continue into December, but they cannot go on forever. As of today, the US SPR has already fallen by 32% and, at current rates, will be entirely depleted within 17 months.
• Although the continued growth in gas supply combined with the loss of Freeport LNG demand has pushed out our thesis concerning the convergence of US and international gas prices, we still have great confidence this will occur at some point in 2023. It appears the Marcellus is in the process of rolling over, which is very much in line with our models. Those same models suggest we will see a significant slowdown in the Hayneville’s growth very soon. The Haynesville rig count has doubled since the 2020 COVID-related bottom but has stagnated over the last 10 months.

A correspondent writes in to share a link,

I think it's pointing to why everyone shorting energy according to the "recession playbook" is going to be blown out. Energy was in a nearly decade-long retreat and then was finally clubbed to death in 2020. Equities have recovered, but are still at a discount. Managers shorting XLE according to the usual recession rules are committing the recency bias error. They are missing the fact that energy stocks were clubbed in 2020, and only came off historic lows in 2021. They are looking at 2022 in isolation and thinking "sell energy," as if it's 2008, 1998, or 1980 and energy is going to return to 2020/2021 prices without realizing how impossibly cheap 2020/2021 valuations were. or that energy companies have been deleveraging like mad the last 12 months. Equities have even more earnings power now than they did last year. 

We pointed this out on Twitter:

It appears that many investors think that shorting energy is a smart way of hedging recession risk in their “software eating the world” tech portfolios. The top 800 hedge funds are long "tech" and short energy, still, a full two years after tech versus energy peaked.

Bach: Christmas Oratorio VI - 1. Herr, wenn die stolzen Feinde schnauben

Black Friday Links

• The use of technology does not prevent us at all from using the graceful forms of the Roman, Moslem, or Gothic arches. They are much more efficient and effective in concrete and steel than in stone. [Minoru Yamasaki]
• By the 1990s, the Big Sprout industrial complex had had enough and started to look into ways to Make Brussels Great Again. A study published in 1999 by scientists from the seed and chemical company Novartis managed to pinpoint the specific compounds that gave Brussel sprouts their undesired bitterness: two glucosinolates called sinigrin and progoitrin. This helped to prompt a number of seed companies to sift through gene banks to look for old varieties of vegetables that happened to have low levels of the bitter chemicals, according to NPR. These less bitter varieties were then cross-pollinated with modern high-yielding ones, aiming to get the best of both worlds: a better-tasting product that could be cultivated on an industrial scale. After years of patience, they eventually produced a crop that was both tasty and economically viable. And just like that, the former glory of Brussels sprouts was restored, shifting this vegetable from a culinary pariah to a prized side dish. [link]
• The mustard oil bomb, formerly known as the glucosinolate–myrosinase complex, is a chemical herbivory defense system found in members of the Brassicaceae (or cabbage family). The mustard oil bomb requires the activation of a common plant secondary metabolite, glucosinolate, by an enzyme, myrosinase. The defense complex is typical among plant defenses to herbivory in that the two molecules are stored in different compartments in the leaves of plants until the leaf is torn by an herbivore. The glucosinolate has a β-glucose and a sulfated oxime. The myrosinase removes the β-glucose to form mustard oils that are toxic to herbivores. The defense system was named a "bomb" by Matile, because it like a real bomb is waiting to detonate upon disturbance of the plant tissue. [wiki]
  
• It’s Thanksgiving week. What about the fact that non-Western countries have gotten Western science (not Science in the form of cloth masks and vaccines that don’t prevent infection or transmission, but science as taught prior to 2020) for free? Shouldn’t these non-Western countries give thanks for Western science and engineering and maybe even give money (as an offset) for Western science and engineering? How much are Michelle Faraday‘s descriptions of electrical phenomena worth? For a poor country that wishes to set up a power grid, what are Katherine Clerk Maxwell’s Equations worth? For people in poor countries who don’t want to die from infection, how much value did they receive from being handed the work of Louise Pasteur? If they want to get from place to place without having to build roads, aren’t they getting a lot of value from Katharine Wright‘s invention of the first practical flying machine? (assembled and piloted by her brothers) If they enjoy communicating and being entertained, they’re getting value from Wilma Shockley‘s invention of the transistor, no? If they don’t want to starve to death, they need the fertilizers that are made via the process that chemists Frida Haber and Carla Bosch developed. It doesn’t make sense to start money flowing until both credits and debits have been tallied, does it? If we did that accounting, wouldn’t we likely find that poor countries were getting a lot more than $600 billion in value from Western science and engineering? [Phil G]
• We can’t raise our families by ourselves in our own islands. We need each other. And if we are going to resist the temptations this age offers to create our own realities through the metaverse, we are going to have to recover everyday joys and pleasures in thick community—like reading and praying as a family, cooking and eating together, singing folk songs with our kids, playing live music around the campfire, and limiting our reliance on screens. So this group of families had pledged to keep kids off social media and smartphones for the next year, to limit parental use of technology, and to cultivate habits of attention and presence, all toward the ultimate end of loving God with our whole hearts. We’d recognized that our children need the limits as well as the disciplines of freedom—and so did we adults. After all, it does little good to think we can teach our kids how to be free from the tyranny of technocracy if we’re checking Twitter at the ball game, Instagramming our daily lives, and Googling our way through life. It quells the cause if we claim to be a localist when our most-tread locale is the Twitterverse. [Tessa Carman]
• Without pedigree collapse, a person's ancestor tree is a binary tree, formed by the person, the parents (2), the grandparents (4), great-grandparents (8), and so on. However, the number of individuals in such a tree grows exponentially and will eventually become impossibly high. For example, a single individual alive today would, over 30 generations going back to the High Middle Ages, have 230 or roughly 1,000 million ancestors, more than the total world population at the time. This paradox is explained by shared ancestors, referred to as pedigree collapse. Instead of consisting of all different individuals, a tree may have multiple places occupied by a single individual. This typically happens when the parents of an ancestor are related to each other (sometimes unbeknownst to themselves). For example, the offspring of two first cousins has at most only six great-grandparents instead of the usual eight. This reduction in the number of ancestors is pedigree collapse. It collapses the ancestor tree into a directed acyclic graph. [wiki] 
• Republicans have been under Trump’s spell for six years now, so the fact that things started to go sour after Dobbs indicates that abortion may have helped Democrats more than any other issue. We know this in part because abortion itself was on the ballot last night in 5 states, and the pro-choice position universally ran ahead of Democratic candidates, sometimes by a very wide margin. [Richard Hanania]
• Defeated politically and running out of money after a ranch deal gone bad, Theodore Roosevelt began writing his epic history of the conquest of the American West in 1888. He wove a sweeping drama, well documented and filled to the brim with Americans fighting Indian confederacies in the north and south while dealing with the machinations of the British, French, and Spanish and their sympathizers. Roosevelt wanted to show how backwoodsmen such as Daniel Boone and Simon Kenton, followed by hardy pioneer settlers, won the United States the claim to land west of the Alleghenies. Heroism and treachery among both the whites and the Indians can be seen in his rapidly shifting story of a people on the move in pursuit of their manifest destiny. By force and by treaty the new nation was established in the east, and when the explorers and settlers pushed against the Mississippi, everything west of the river was considered part of that nation. [link]
• It is my very firm belief that the diet and lifestyle approach to maintain health in the cancer-free state and to prevent cancer is radically different from the diet and lifestyle approach that will support cancer treatment. The path to cancer prevention is to nourish detoxification and immune surveillance. When this fails, we need to shift our focus to restraining cancer growth and killing cancer. We know we have reached this point of failure if we are diagnosed with cancer. At this point, it is still important to nourish detoxification and immune surveillance, but we must realize that many things that do this will also promote cancer growth or interfere with our efforts to kill the cancer. Since restraining cancer growth and killing the cancer now take priority, we must redesign our health program to make those goals central. This may mean restricting protein and other nutrients that would otherwise be healthy to consume abundantly. Some nutrients can be used strategically to help kill the cancer (like high-dose intravenous vitamin C, when paired with oxidative chemotherapy). Nutrients that have a risk of promoting cancer growth or protecting cancer from being killed may be strategically alternated with cancer-killing therapy. If the cancer-killing therapy neutralizes the cancer for a period of time, this allows a window wherein focus can shift to nourishing the patient. [Chris Masterjohn]
• I've been in wine shops across the country that won't sell Silver Oak, the same way that a cool indie bookstore might shun Danielle Steel. One such retailer in suburban Dallas, who didn't want to be identified for fear of alienating his Silver Oak-drinking friends, explained that he stocked many more interesting wines. Gary Fisch, owner of Gary's Wine shops in New Jersey, which sells a good amount of Silver Oak Cabernet, said he thought that dislike of the wine was a bit of a bandwagon phenomenon. "Silver Oak is the wine that's sexy to hate." The winery's aging process is a possible factor in the Silver Oak controversy. Unlike just about every other Cabernet made in Napa Valley, Silver Oak is aged in American oak, which adds sweet notes of vanilla and, some even say, coconut. (Silver Oak makes its own barrels.) The more commonly used French oak is far more subtle, with spicy aromas. And yet Silver Oak also has a large, and very passionate, following. The winery produces just under 100,000 cases of their two Cabernets annually, and their tasting room has won raves from amateur drinkers and wine professionals alike. [WSJ]
• The Adams Memorial is a grave marker for Marian Hooper Adams and Henry Adams located in Section E of Rock Creek Cemetery, Washington, D.C. The memorial features a cast bronze allegorical sculpture by Augustus Saint-Gaudens (which he called, The Mystery of the Hereafter and The Peace of God that Passeth Understanding, but was often called in the newspapers, "Grief"). Saint-Gaudens' shrouded-figure statue is seated against a granite block which takes up one side of a hexagonal plaza, designed by architect Stanford White. [wiki]
• Despite his objections, Weinman is still best remembered as the designer of the Walking Liberty Half Dollar, a design now used for the obverse of the American Silver Eagle one-ounce bullion coin, and the "Mercury" dime along with various medals for the Armed Services of the United States. Among these are the identical reverses of the Asiatic-Pacific Campaign Medal, the European-African-Middle Eastern Campaign Medal, and the American Campaign Medal. Weinman was one of many sculptors and artists who employed Audrey Munson as a model. [wiki]
• "I wanted to wear a blue Brioni dress shirt and tie, and Mark wanted to wear a crisp white Eton shirt." George Clooney, the couple’s 8-month-old golden retriever, dressed up for the day in a floral collar made with a steel gray grosgrain ribbon adorned with hellebores, piers, roses, hydrangea, and Italian pittosporum. [Vogue]
  

Thanksgiving 2022 Links

• Thanks to today's release of the November 2nd FOMC meeting minutes, we know that the Fed has "pivoted" as expected; they are backing off of their aggressive tightening agenda. Instead of hiking rates another 75 bps at their December 14th meeting, we are likely to see only a 50 bps hike, to 4.5%, and that could well be the last hike of this tightening cycle—which would make it the shortest tightening cycle on record (less than one year). And they might not even raise rates at all in December—that would be my preference. For more than two years I have been one of a handful of economists keeping an eye on the rapid growth of the M2 money supply. Initially I warned that it portended much higher inflation than the market was expecting. But since May of this year I have argued that inflation pressures have peaked: "Many factors have contributed to this: growth in the M2 money supply has been essentially zero since late last year; the stimulus checks have ceased; the dollar has been very strong; commodity prices have been very weak; and soaring interest rates have brought the housing market to its knees. All of these developments mean that the supply of money and the demand to hold it have come back to some semblance of balance." To sum it up, I think the Fed has gotten policy back on track, so there's no need to do more. In fact, the October M2 release showed even more of a slowdown than previously, thus underscoring the need to avoid further tightening. I'm still firmly in the inflation-is-falling camp, and it's because of the unprecedented decline in the M2 money supply, coupled with forceful actions on the part of the Fed to bolster money demand with sharply higher interest rates. As a result, I believe we are going to see a gradual decline in inflation over the next year or so. [Scott Grannis]
• A "substantial majority" of policymakers at the Federal Reserve's meeting early this month agreed it would "likely soon be appropriate" to slow the pace of interest rate hikes as debate broadened over the implications of the U.S. central bank's rapid tightening of monetary policy, according to the minutes from the session. The readout of the Nov. 1-2 meeting, at which the Fed raised its policy rate by three-quarters of a percentage point for the fourth straight time, showed officials were largely satisfied they could move rates in smaller, more deliberate steps as the economy adjusted to more expensive credit and concerns about "overshooting" seemed to increase. [Reuters] 
• This gives an interesting spin on what volatility in markets “is”, from a microstructural perspective: a security’s variance is proportional to the ratio of the arrival rate of trades to the steepness of the order book. If a lot of trades arrive very quickly, or if the order book is shallow and there isn’t much resting liquidity, then a security will be volatile. By contrast, if a security trades rarely, or has a very steep book with lots of bids and offers and trading interest, then its price will generally not move as much, and it won’t be volatile. [Quantian]
• A simple crypto rule to live by: any token or exchange that has a CEO, identifiable individual or development team associated with it is not real crypto; it's the antithesis of crypto. This substack has been warning for quite some time that all of these centralized exchanges are nothing more than grifting operations, IRS reporting nodes and CIA black ops money laundering facilitators. I have been warning since around 2019 that Tether is the single most egregious crypto scam out there. It is far worse than FTX, with Sam Bankman-Fried (SBF) and his team of scammers having had direct ties with Tether. The sordid cadre of snake oil salesmen behind Tether makes SBF look like an ethical player. [link]
• One thing Murphy does not really address but that I find captivating is the effect of increasing populations and development in the exporting countries: the Export Land Model. We see this right now with Nigeria, for example. Nigeria exports ~2MM bbl/d and is the 4th most important source of U.S. imports. Nigeria has a very young population and a total fertility rate of close to 6, with the result that their population is doubling roughly every 20 years. Combine that with increasing development (only 30 cars per 1000; even Cuba and Iraq have more) and you will see a ferocious increase in oil consumption. During our lifetimes, Nigeria will transition from oil exporter to oil importer. [CBS]
• Nigeria's crude oil production fell below 1 million barrels per day (bpd) in August, figures from its regulator show, as the nation grappled with rampant theft from its pipelines and years of underinvestment. The decline is a further threat to strained finances in Africa's most populous nation and cuts global oil supply amid soaring energy costs due to the war in Ukraine. Nigeria's total oil and condensates output dropped to an annual low of 1.18 million bpd in August, data from the Nigerian Upstream Petroleum Regulatory Commission showed. [Reuters]
• Yesterday we suggested a theory that what happened with Suntech would make sense as part of Chinese plan to capture the photovoltaic solar industry at the expense of foreign investors. Raising capital through a holding company that funnels money to China would allow a huge capacity build up, which could be followed by dumping of product that drives non-Chinese competitors out of business. After that, it would be time to foreclose on the loans to the operating subsidiary, leaving the overseas holding company with nothing. If this theory is correct, what we are witnessing right now is the "blow off", where the marks who invested in the holding company need to be let down gradually. If the Chinese were blowing off the holding company bondholders, they wouldn't explicitly decide yes or no on a bailout but just keep the conversation going. How long would it take for the bondholders to get tired of the legal fees and aggravation and just sell and move on? [CBS]
• The bullish case for the Suntech bonds (and stock) has always been that China will bail out (give money gratis) to the Suntech Power holding company that owns the Chinese manufacturing subsidiary because it... feels bad? wants to save face?... about how foreign investors paid for it to build up PV manufacturing capacity while at the same time dumping product and driving foreign competitors out of business. [CBS]
• Fourth, and finally, is that tech workers – from whom the DEI movement drew its most active and engaged disciples – no longer hold as much power over their place of employment as they once did. Gone are the days where elite tech worker could easily threaten their employer with a jump to a competitor for another plum position making $200K+. All the major tech companies are now either doing layoffs in mass numbers or have instituted hiring freezes. With potentially hundreds of thousands of tech workers soon to be out of a job – perhaps for quite a while! – I suspect many of the most fervent ideologues among them will find it more difficult to convince companies to hire them elsewhere. The idea of bringing Your Whole Self to Twitter may suddenly seem a fair bit less appealing as the job market turns. [DHH]
• At only $300 million US, the price values the refinery at only about 0.6 times its current EBITDA earning power. Using BP's long-term $60 crude planning price set, it is still only 4 times EBITDA. Such a low price is hard to justify based on the high demand for US refining capacity and instead seems like a move to improve its ESG profile given the reputation of oil sands crude with the green crowd. At 1% of BP's current EBITDA, the refinery income is barely material but still serves as a warning that BP management is at risk of doing deals for uneconomic reasons. The company is still cheap, but the risk of uneconomic deals may cause the market to continue valuing it much lower than US peers. For Cenovus, the deal is more material, improving EBITDA by around 5%. [link]
• Zillow managed to lose nearly $1 billion buying and flipping houses during the most dramatic real estate inflation in the history of the United States. They could have bought houses at random and made money, at least in nominal dollars, yet they managed to lose. MIT alum and major Joe Biden donor Sam Bankman-Fried managed to lose his own money and also money that he stole from depositors in the crypto marketplace. But how? His trading operation, Alameda Research, was started in November 2017. Bitcoin was about $7,000 back then. Today, however, Bitcoin is quoted at over 16,000 Bidies. Adjusted for inflation, perhaps this is not a great return but it looks good in nominal dollars at least. How did a guy celebrated as a genius by Sequoia Capital and the rest of the Silicon Valley smart set manage to lose money while operating in a strong tailwind? Is it like the Florida real estate boom of the mid-1920s in which people who’d been successful kept doubling down and, therefore, the recent dip in crypto prices caused losses far greater than what had been earned on the way up? [Phil G]
• This is just one example, but similar dynamics are playing out in natural gas, coal, base metals, and all manner of other commodity and base materials producing businesses. My point is: investing in a cyclical company at 6+ times peak earnings is a bad idea. But at 3x? 2x? At some valuation shares are attractive, even if future earnings will certainly trend downward. In my view, the market is discounting many of these temporary over-earners too sharply. [Alluvial]
  

Thursday Night Links

• The release this morning of October Producer Price indices brings yet more evidence that the inflationary pressures sparked by multi-trillion dollar Covid "stimulus" checks in 2020 and 2021 peaked earlier this year, as I have been pointing out for months. Many factors have contributed to this: growth in the M2 money supply has been essentially zero since late last year; the stimulus checks have ceased; the dollar has been very strong; commodity prices have been very weak; and soaring interest rates have brought the housing market to its knees. All of these developments mean that the supply of money and the demand to hold it have come back to some semblance of balance, and that is of course essential if inflation is to return to a low and steady rate of, say, 2%. This all but guarantees that the Fed soon will be scaling back on its tightening agenda. For my money, the FOMC's November 2 rate hike (from 3.25% to 4.0%) should be the last, but a hike next month of 50 bps (to 4.5%) is likely to be the Fed's last move for the foreseeable future. The Fed simply can't react as fast as the market does to changing realities—unfortunately, the Fed is usually "behind the curve." In any event, a 4.5% funds rate by year end is fully priced into the market and thus it should not be very impactful. What will change though is the market's expectation for where rates will be a year from now: lower than currently expected, and that is what is driving equity prices higher. [Scott Grannis]
  
• But avoiding scams, frauds, and mass hysterias is an invaluable skill. You will earn tremendous returns over your lifetime making 10-12%/year compounded let alone 15% as long as you avoid huge downside risk. As long as you keep losers small, the gains add up without too much trouble. 12%/year doubles your money in six years. That's five doubles over a 30-year span. $300,000 invested turns into $9.6 million. The path to a very wealthy retirement is actually fairly simple; invest a decent sum every year and avoid big losses. Compounding solves the rest. [Ian Bezek]
• LET ME REPEAT THIS FOR EVERYONE AGAIN: Shitcoins are bad, and you should feel bad if you trade them. Get the fuck out of the shitcoin casino you dumb ass gamblers! Solana is garbage. TRON is garbage. Exchanged-based coins like FTT are garbage. Coins with fucking dogs faces are garbage. Bitcoin is the only cryptocurrency you should hold. Maybe ETH. Hedge your bets there. You need to CONTROL YOUR OWN KEYS. Don't lend your coins out to charlatans promising you 5%, 8%, 15%, or 20% "risk free" returns. They are all scam Ponzis. There is no such thing as risk free 20% returns. It doesn't exist. Stop chasing it. If you don't control your private keys, it's not your crypto. If you trust an exchange based in the Bahamas ran by a jabroni who thinks he needs SIX MONITORS, you are in for a bad time. I've been in cryptocurrency since 2010 when BTC was 81 cents. I lived through the MT GOX implosion. I have had more crypto stolen from me in hacks and exit scams than you probably have ever even seen. Learn from my experience. Listen to what I am saying. TWELVE YEARS now I have been in crypto. This too shall pass. Fuck all these frauds stealing everyone's shit. We will all be better off with them out of the industry. However, you all have to learn from this shit. CONTROL YOUR OWN KEYS! Stop gambling on shitcoins. You are being used as exit liquidity for idiots. [MisterYouAreSoDumb]
• We mentioned FTX in our recent batch of Links, but not previously. Once you know that cryptocurrency is bogus, who cares about each individual fraud or Ponzi? But it turns out that this story really has everything: polygamous nerd freaks, regulatory capture, Democrat party and Ukraine money funnels, institutional investors who got suckered. [CBS] 
• Tyler has a tendency to seriously overrate tech and tech lords. I've been checking out MR since the early days. Over the years, TC has been hyper-enthusiastic about autonomous vehicles, Siri / PDAs, delivery drones, and crypto. All are failing to live up to the hype. Ford just shut down the autonomous vehicle company it co-owned. PDAs have been boring for years and Amazon is apparently ready to lay off 10,000 particularly including people in the group responsible for Alexa (Amazon has realized people are interested in only Alexa's most basic features). Amazon is also slashing it's robotics divisions. Drone delivery isn't happening. And now Crypto. Definitely don't make investments based on what TC identifies as 'the next big thing'. [MR]
• The Romanians are descended from the Dacians and Wallachians and like to consider themselves “an island of Latins in a sea of Slavs”, with the exception of their long-time nemesis, the Magyars of Hungary. They speak a Romance language, but, given their geographical isolation for centuries, it barely resembles Spanish or Italian. They like to say they’re the descendants of the Roman Emperor Trajan and his V Legion, thus the popularity of the male name Troian. They manufacture a car called the Dacia, which is now owned by Renault and quite popular in Southern Europe. [Curated Carlos]
  
• I have a theory about this election. It's based on nothing but my gut & some common sense, no matter how unpleasant it may be to consider. Why was Biden so confident? How do you explain so much fraud all across the country, happening down to district level? I think it's possible MAGA or candidates linked closely linked to Trump have been declared "enemies of the state" by the federal government. I think it's possible Biden has already such an order. This obviously would be classified and a matter of "national security." These "Trump candidates" are simply not allowed to win. Prevented from doing so by our own intel community. The definition of "Trump linked candidate" is probably spelled out, but has some wiggle room. For example, JD Vance. Vance began as a National Review linked NeverTrumper, but he played along and got Trump's endorsement. At his election night victory party, JD Vance did NOT mention Trump at all. It's likely JD doesn't make "the list" of banned candidates. Other who are "exempt" would be SITTING elected officials. This would explain strong MAGA people like Boebert & Greene winning their races. They key word is "candidate." People running for re-election get a pass. But anyone trying to get in, & aligned with Trump, nope. Mitch McConnell would know about this. He has to. Pelosi knows. Schumer. The biggies would all be in the know. Katie Hobbs, who has been very smug, could know because Kari Lake is probably "enemy #1." It would change the context for Mitch McConnell being so dismissive of Trump candidates. Mitch knows they CAN'T win, so it's a waste of money. This is why "GOP Inc" is so determined to get past Trump and on to DeSantis. It's not (just) that they hate Trump and his ideas, even though they do. It's because Trump is a waste of time: the natsec state will NOT let Trump gain power, regardless of any "votes." J6 is probably considered an actual insurrection by the feds and treated as such on a classified level. It's their justification to cancel any Trump sponsored candidates. Mitch & the GOP can't say this to the public, so they're doing their best to push Trump aside any way they can. Including by coordinating a narrative to go along with the natsec state denying Trump's candidates. It would explain the massive presence of the feds in specific areas during the election, from the DOJ "observers" to the Nat Guard. This would've been a massive op. Is Biden immoral enough to do this? -YES Is our government lawless enough to do something like this? -YES It's the only thing that makes sense. The GOP winning the House popular vote by 6 million & only having (maybe) a 4 seat majority is the tell. The GOP isn't an urban party. Winning the popular vote by 6 million is nuts, by itself. Barely winning the House is CRAZY. [link]
• While this may initially seem like a frivolous observation, it is actually shocking that SBF was unable to rank higher than the Bronze or Silver league after years of regular play across hundreds if not thousands of individual games. It is reflective of an incredibly impaired level of cognition, much like someone who was unable to learn how to ride a bicycle after an entire month of practice or someone who never progresses past the level of an average elementary school student after five years’ of daily piano practice. To me, this is one of the strongest indications possible that SBF is, to be blunt, “not entirely there.” [milkyeggs2]
• Remember kiddies, Michael Lewis last attempt at financial journalism  was a love letter to IEX. When I took that  marketing submarine to the wood shed, I noticed it was a company spun up by friends of his from one of his previous books (Jim Clark of “New New Thing” fame). This is of course, speculation on my part, but knowing how the sausage gets made, and noticing his Flash boys book does no actual investigative journalism or technical explanation of what IEX does or even what HFT is, it seemed worth mentioning. If it’s not completely obvious by now, most “journalism” -especially high profile entertaining journalism such as that of Michael Lewis is just somebody’s marketing baloney. I’ve seen this happen; at this point I’ve even seen stacks of money change hands for this sort of thing. Anyone who isn’t aware that this is happening and represents the majority of what you see in news media is a credulous ninnyhammer. [Scott Locklin]
• The Company is still evaluating the actual level of losses due to the recent decline in the cryptocurrency mining industry, and such losses may exceed this estimate. The net loss resulted from a provision for loan losses for the quarter ended September 30, 2022.  During the third quarter of 2022, the volatility in Bitcoin and rising energy costs called into question the financial stability of the Company’s borrowers who hold digital asset mining loans, the collectability of all principal and interest related to these loans, as well as the value of the cryptocurrency mining rigs that serve as the underlying collateral.  These considerations, in conjunction with a partial write down on cryptocurrency mining rigs that were repossessed in exchange for the forgiveness of a $27.4 million loan relationship, triggered a detailed review of the portfolio of similarly collateralized loans. After the $27.4 million loan forgiveness, the digital asset mining loan portfolio totaled $76.5 million at September 30, 2022, of which, upon review, the Company estimates a majority to be impaired and placed on non-accrual status with significant related specific reserves. [PVBC]
• What’s the blue-green bottle to the left of the red circle? Here the heroic detectives on r/NootropicsDepot recognized it as their company’s old brand of adrafinil. Adrafinil is a prodrug of modafinil, an unusual stimulant-like drug. That is, your body metabolizes adrafinil and turns it into modafinil after you take it. So was SBF effectively on modafinil? Seems likely - many traders are. I won’t lie - modafinil is a good stimulant, during medical residency some doctors (including me) would use it to stay alert through the night shift. It’s not any better than Adderall or anything, just a bit different and easier to get. Does it affect attitudes to risk? Hopefully you can already predict my answer to that question: all dopaminergics affect attitude to risk in complicated ways we don’t really understand, but for most people these effects will be too small to notice. There’s one case report of modafinil causing pathological gambling, and various contrived studies where neuroscientists investigate how modafinil shifts some technical parameter in a risk curve; these kinds of studies often don’t replicate. I think you can really just stick to your prior of “all dopaminergics affect risk curves in ways we don’t understand, but it’s usually fine when your job doesn’t require perfectly-tuned risk awareness”. Except - was he taking the selegiline and adrafinil at the same time? Selegiline prevents the body from breaking down dopamine. Modafinil works by preventing cells from reabsorbing dopamine. If you can’t break it down, and you can’t reabsorb it, what happens? Does it just build up forever until it explodes and you die? This is what happens with serotonin. If you take a drug that prevents serotonin breakdown (like a traditional MAOI) and a drug that prevents serotonin reuptake (like an SSRI) at the same time, you definitely die. Lots of doctors have noticed that the MAOI + stimulant situation is pretty similar and decided you shouldn’t take these at the same time either. So some people following the FTX situation have wondered whether this combo might have been very dangerous - either to Sam’s health or to his risk-management ability. [Scott Alexander]
  

@PDXSag on the Sam Bankman-Fried "FTX" Ponzi Scheme

[From our CBS correspondent @PdxSag. We mentioned FTX in our recent batch of Links, but not previously. Once you know that cryptocurrency is bogus, who cares about each individual fraud or Ponzi? But it turns out that this story really has everything: polygamous nerd freaks, regulatory capture, Democrat party and Ukraine money funnels, institutional investors who got suckered.] 

With the spectacular implosion of FTX (Sam Bankman-Fried's cryptocurrency ponzi) raging in the financial headlines, it seemed an excellent, and hopefully instructive, opportunity to visit one of our long-running themes at the CBS blog: Grift Club.

FTX and SBF raised more red flags than a freight-train switching yard, but somehow he was able to donate millions for social (engineering) causes and share the stage with the likes of Tony Blair and Bill Clinton. Not surprisingly once you know the signs to look for, his family has deep connections to Democratic causes and (of course) the WEF. Oh yeah, and there is a Ukraine connection too. (Coincidence Theorists are so mad.) SBF was literally second only to George Soros for Democratic fundraising in the 2022 election.

Early estimates are $8 billion of FTX customers' deposits missing. (This makes Jon Corzine stealing $600 million of customer money at MF Global look like a piker.)

Where did all the money go? It's not cheap running a fraud. They run on social proof and you have to pony up to buy it, and keep buying it. Everybody has their hand out wanting a piece of the action. As you move up the hierarchy of social proof, the only thing that changes is the size of the checks you need to cut.

Imagine gamify-ing social proof. The "Fake it 'til you make it" hack is tacit acknowledgement of the importance of social proof. Less mentioned, indeed unmentionable, is that the easiest, most trivial hack for social proof is to buy it.

Don't confuse easy with cheap. It may be easy to buy, but it doesn't come cheap. Tom Brady, Bill Clinton, MLB... The truth is they are easy, but they are not cheap.

To normal people living in the normal world, cheap and easy are virtually interchangeable; likewise for expensive and hard. Grifters hack this mental model by seeking out expensive endorsements. Normals assume those must be hard. So, by association, whoever has such an endorsement must be skilled and highly competent.

Now imagine a group of OCD, Adderall-abusing, polymaths, with a short-cut to the initial “in” from connected parents to get the ball rolling, treating social proof like a computer game, and where money is virtually unlimited. Well, of course... when (not if) they blow-up it will be with a hilarious dossier of top-tier endorsements. The stadium naming rights might be the most hilarious because it is the most textbook. (On the other hand, a Clinton endorsement is pretty textbook, and hilarious, too.)

Incidentally, this explains why stadium naming rights are such a solid heuristic for frauds right before they blow-up. It is not that the grifter's arrogance gets the best of them and they take their eyes off the ball. It is because they know the walls are closing in and they are desperate to keep up appearances a bit longer and hopefully bring in another round of “investors” so they can keep the ship afloat for a while longer.

As we've said previously, the only thing Lindy about crypto and SBF is that so many dorks have fallen for these dressed-up ponzi schemes before.

Addendum: even more hilarity ensues seeing the reaction from the biggest grifter of them all, Elon Musk. When approached about a $3-5B investment by SFB into Musk's take-private buyout of twitter, Musk's immediate response was, “Does Sam actually have 3 billion liquid?” Of course no one knows better than the world's richest man (on paper) the difference between wealth and liquid wealth.