Monday, February 22, 2021

Value vs Growth

The most important investing theme in the world today is the potential reversion to long term trend of value vs growth (VvG).

The covid case numbers are crashing and it appears as though herd immunity (through a combination of vaccines and previous infection) has been reached. The catalyst for the VvG inflection will be the economy reopening combined with shortages stemming from a year of lockdown socialism and the printing of $3.4 trillion in a year. 

The pent up demand for many types of goods and services is so high that we could see a one-time price spike, almost like a currency devaluation, that benefits old-economy goods producing companies and ends the bubble in the Robinhood fad stocks.

I was sitting with the bartenders and managers at my local joint after they closed and for the first time ever they started talking about investments. Some things mentioned: marijuana stocks, BYND, sub-penny stocks, TSLA. All based on momentum. General manager mentioned one of the bartenders made $20k on a sub penny stock and was giving him Apple trading advice. He's at risk for these kinds of employees suddenly quitting when that kind of money falls in their lap.

Another recent anecdote is talking with an early 20s zoomer who is trading Dogecoin on Robinhood. He calls the coins "shares" since the Robinhood UI apparently doesn't distinguish between a crypto coin and an equity share.

These retail folks don't have any self-awareness or irony about what they're doing. It's like how crazy people never think they are crazy; these guys never say "I'm going to put a little money in a momentum strategy and continually rebalance and take profits if it works". If anything, they add capital as the prices go up.

But even though I think the inflection point is here, it does not have to be for value to be a great trade with a cheap hedge. I don't have to call the inflection point or bubble top. I can buy the bottom decile cheap stuff and hedge it with long term put options on the top percentile expensive stuff. 

The reason I think that works is that with record valuation dispersion between value and growth, the top percentile is overvalued by 10-100x. The puts are "expensive" on IV but these represent trillions of dollars of market cap that may vanish in 24 months. Examples: TSLA, ZM, SPCE, NKLA, LI, XPEV, CVNA. Then there are garden variety expensive stocks like CMG, but the IVs on those are cheaper so they could work too.

Meanwhile, the cheap part of the market looks like tobacco (1,2), hydrocarbons, land/timber, pipelines, certain Oddballs, and small banks. All real assets except the banks, but I like the banks as a reopening trade. I think the cheap stuff earns more than enough to pay for the hedge, and I think there's a chance that both legs of the trade perform, where value rallies as the growth bubble pops.

The best writing I have seen on the growth bubble popping is from GMO (linked above) and AQR, which put together a long piece demolishing the idea that value investing is not going to work anymore "because disruption":

Besides just an inherent discomfort with randomness, part of the issue is confusion about why value works at all. It does not depend on getting big events or trends right. It does not depend on having perfect accounting information. Certainly, it does not require a lack of massive technological change over time. No matter what the situation, it simply needs investors to net overreact. Companies that are cheap need to tend to be a bit too cheap for whatever set of facts exists at that time, and expensive companies need to tend to be a bit too expensive. For instance, it’s OK if there’s more monopoly power for a few firms today than before (or any other thing being different this time), as long as humans will still tend to overdo estimates of how powerful and long-lasting those monopolies will be, and vice versa for cheap stocks that lack these advantages.

Some charts that I am watching to measure the growth vs value inflection: Tesla vs Toyota, NASDAQ vs Small Banks, Peloton vs AerCap, Zoom vs Exxon, Carvana vs Penske, and Russell 1000 growth vs value.

Note that R1K value's (IWD) top sectoral holding is 20% financial while the R1K growth's (IWF) top sectoral holding is information technology (45%!). It's Apple vs Berkshire - which is obviously funny since Berkshire has an Apple position.

Sunday, February 21, 2021

Sunday Night Links

  • Unlike all other US energy markets, Texas does not even have a capacity market. By design they rely solely upon the energy market. This means that entities profit only from the actual energy they sell into the system. They do not see any profit from having stand by capacity ready to help out in emergencies. The energy only market works well under normal conditions to keep prices down. While generally markets are often great things, providing needed energy during extreme conditions evidently is not their forte. Unlike the traditional approach where specific entities have responsibilities to meet peak levels, in Texas the responsibility is diffuse and unassigned. There is no significant long term motivation for entities to ensure extra capacity just in case it may be needed during extreme conditions. Entities that might make that gamble theoretically can profit when markets skyrocket, but such approaches require tremendous patience and the ability to weather many years of potential negative returns. This article from GreenTech media praises energy only markets as do many green interests. Capacity markets are characterized as wasteful. Andrew Barlow, Head of the PUC in Texas is quoted as follows, “Legislators have shown strong support for the energy-only market that has fueled the diversification of the state’s electricity generation fleet and yielded significant benefits for customers while making Texas the national leader in installed wind generation.” [link]
  • The D.C. conservative scene is a veritable cornucopia of pear-shaped men. Here are the supposed intellectual elite of the American right—men who know their C.S. Lewis and are, ostensibly, fighting the abolition of men and manliness—without chests to speak of. The chest was Lewis’s metonym for thumos, Plato’s “spiritedness.” Spiritedness guards the intellect as it seeks to transform appetite into philosophic eros, the hunger that draws the great-souled upward to the truth. Thumos, chest, mediates between the head and stomach. A lot of things fell into place with the heavy lift of graduate school. I’m grateful for what my teachers taught me in the classroom, but maybe just as valuable a part of my M.A. was what I learned beforehand in the gym, the discipline of mind and body, the pursuit of excellence, the virtue of self-mastery. The other great pleasure in the flesh’s submission to the rule of steel—itself a rebellion against Weber’s iron cage—is what people call “broscience.” Or, as we would have said before the post-war technological elite that sent men to the Moon became the decadent priests of scientism, just plain old science. An educated guess, experiment, theory, more experiments, always questioning, always seeking, hungry for knowledge, hungry for gains—it’s the gym-bro way. It conquered the planet, it conquered gravity, it can conquer your fat, lazy [posterior]. [TAC]
  • In America, we are heirs to Whig history. The Whig interpretation of history is a four hundred year narrative in which Western civilization progressed from the darkness of monarchy, aristocracy, stasis, inequality, bigotry, and anti-empiricism, toward a world of freedom, democracy, progress, equality, and scientific enlightenment. All mainstream history today is Whig history. Even conservative history, as interpreted by the National Review or Heritage Foundation, is 99% Whig history, with only dissent when it comes to the most recent events and revisionism. For instance, no mainstream conservative is openly on the side of the Tories or Loyalists on the question of the American Revolution. Not only is Whig history the official narrative, we rarely even read the views of the non-Whigs. Whether we take a typical AP History class or endure the Yale Directed Studies survey course, we do not read what the losers and reactionaries had to say. One hypothesis is that the Whigs were in fact the good guys, and good has consistently prevailed over evil. A second hypothesis is that the Whigs were almost always the bad guys, and that evil routinely triumphs over good, and then writes histories to make their faction not seem so evil. A third hypothesis is that sometimes the Whigs were the good guys, sometimes they were the bad guys. Sometimes they won, sometimes they did not. But whoever won wrote the history books, and painted themselves as good guys, painted themselves as the friends of liberty and equality, painted themselves as heirs to the Whig tradition, whether it was true or not. If you genuinely love history, I encourage you to sample some readings from the other side, the losers, the non-Whigs. As you read, keep the all three hypotheses above in mind. On events ranging from the English Civil War, to the American Revolution, to World War I, to the Red Scare, it is time to hear the other side of the story, the side of the story that you never before read. You may end up eventually renewing your faith in Whig-history – but at least by reading the other side your views will now be in full color. You will have replaced the cartoon version of history’s bad guys with a three-dimensional version. [Devin Helton]
  • Social Security should be indexed to nominal national income. In fact, the way to solve the entire social security crisis is to simply state that 12.6% of national income will go to social security, and whatever that income buys, it buys. If the economy produces fewer goods because seniors retire, there is no inflation adjustment possible that can give those seniors the promised income. If the cost of living increases because the economy is shrinking, everyone must bear the pain. Conversely, if the economy grows really fast, there is no reason to exclude seniors from this windfall by reducing their income. To the extent that a changing dependency ratio is a problem, the fix should be to make part of social security income come from the tax payments of your own children. So if you had four children you get a larger payout than if you had zero children. This is fair, since social security is not actually an insurance or savings program. It is a socialization of the age-old method whereby children support their elders in retirement. But as with all socialization, it creates an incentive to freeload. The childless retirees are essentially freeloading off of the work of those who raised the next generation. Thus the childless should get less than those with children. [Devin Helton]
  • Every rat-racer fears dropping out of the race. If a rat-racer fails to put in enough effort, he will fall into the pleb class. I have seen it happen to friends. Maybe they take it easy at work and get laid off. Maybe they do not build the needed career connections. They might have had slightly lower SAT scores, and gone to a less prestigious school, and then failed to get the high powered finance job. They take a crappier job and end up laid off during a downturn in business. Desperate for a job they end up bartending or painting houses. The first few years as a rat-racer are precarious. The worker has not built up unique skills and connections, and is therefore replaceable. Because a rat-race career takes time to establish, rat-racers do not feel comfortable starting families until they near thirty. At that point, their career still requires long hours to maintain, so balancing work and children can be stressful. Thus rat-racers rarely have more than two children. Rat-racers do not want themselves or their children to fall down into the pleb class. So rat-racers must buy expensive homes so that the plebs and the underclass are priced out of the town and its schools. By sending their kids to school and college with other rat-racers, parents can prevent their kids from making friends with underclassers, and ensure their kids pick up the proper polish. However, since rat-racers are bidding against other rat-racers for slots in these towns and schools, the price of the rat-race life keeps going up. Entering the rat-race life used to only require attending college. Now it can require paying for grad school, plus supporting the child through unpaid internships. Having more than two children is quite out of the question - children are too expensive and take up too much time. Given that many rat-racers never feel the urge to have children at all, the total fertility for rat-racers is well below replacement. Rat-racers are good, smart, hard-working folk. That their work ethic is driving them to extinction is tragic and long term catastrophic. The plight of the rat-racer is one of the great problems of our age. [Devin Helton]
  • It may make readers uncomfortable that this essay has put so much emphasis on violence committed by black people. People who focus too much on selecting anectdotes of black crime are often accused of cherry-picking facts to further a racist narrative. I can only hope you believe me when I say that when I first started reseaching the problem of urban decay over a decade ago, the analysis in this post was not something I set out to prove. Rather, I set out to find as many first-hand, narratives accounts of urban decay and “white flight” as I could. I wanted to learn the story from the people who were actually there, or from the people who interviewed the people who were actually there. And these are the stories I found, over and over again. And these were the stories that were almost completely ommitted from my college courses – we only ever heard that white people left because the suburbs were so much better – without hearing why people thought the suburbs were better. We heard about block busters promoting fear – without learning that the fears were justified, not irrational. It should also be pointed out that it is erroneous to single out violent young black men as the villains in this story. I think a lot of American politics is basically manipulating enforcement of the law in order to steal turf from other people. A fair amount of blame goes to the liberal WASP establisment, who in their battle with the ethnic white political power, relaxed enforcement of the law in black areas, hooked them on welfare, and used black people as a tool for claiming political power. Right now we are in a vicious cycle. In academic and policy wonk circles, any criticism of “black crime” is considered victim blaming and possibly racist. The problems of the black community are instead pinned on segregation and racist policing. Yet it is not segregation that causes the crime. And every time we try to integrate, without fixing the crime problem, integration fails because white people flee the violence. And while police misbehavior is a problem, under-policing is also a big problem. When we cannot honestly describe the problem, when we cannot propose proper solutions, the problem only becomes worse. [Devin Helton]
  • I also think that we may have the problem of drug enforcement backwards – rather than the predominantly black ghettos being policed too harshly, they may be policed too lightly. In my white suburban town growing up, if a group of young men were to set up an open air drug market on our police corner, they would be reported, shut down, and sent to juvenile court within days, probably hours. It would be unthinkable that open air dealing would be tolerated. Yet in many ghettos, these markets are in fact tolerated, with minimal punishment, for long times. [Devin Helton]
  • In a dysfunctional society, people acquire wealth via corruption, rent-seeking, and theft. Perhaps they steal it at the point of a sword. Perhaps they acquire wealth through outright corruption. Perhaps they acquire wealth through holding a position in a completely dysfunctional management structure that requires internal politicking and Kabuki make work rather than actual performance. As Adam Smith wrote, "there is a great deal of ruin in a nation" Corruption has always existed in America. But in the past decades it seems as if the dominant paradigm has shifted, so now more and more income accrues via dysfunctional rent-seeking rather than via creating wealth. [Devin Helton]
  • Consider the goods and services that make up a good and comfortable life: high-tech gizmos, gas heating, indoor plumbing, a well-built home, access to a skilled doctor, good restaurants, good beer, parks, well-built infrastructure, a stroll down a street with pretty buildings, etc. If you look at the production process for those goods and services, only a small percent of the workers involved need a college degree. And most degrees granted do not improve the production process – how does granting millions of degrees in “business”, “communications” or “social science” lead to more and better of these products? It doesn’t. And in fact, by channeling so many people into the college pipeline, we have lost out on the skills that did make for the good life. We have lost the artisans that once created beautiful streetscapes and ornate architectural detailing. We have less money to spend on infrastructure. We have more debt, and more stress. Furthermore, even in the engineering fields, much of the know-how exists exclusively inside the productive organization – not inside the textbooks. Every engineer, when getting a job, has a big adjustment period as they learn how things are actually done. They learn why the schoolbook version was simplified or out-dated, and they learn the real techniques and tricks and tooling that they actually need to know to make things work. In the past few decades, America has become more educated in terms of degrees. But in reality, people like my dad were training Chinese engineers to replace them, as the boomers retired and the high-tech job moved overseas. [Devin Helton]
  • I did an inventory of every Supreme Court Justice who served between 1835 and 1870. Among them: 2 of 18 went to Law School. One graduated at age 20, the other at age 22. 11 of 18 graduated college, of those four graduated at the age of 18. 7 of the 18 had no college, they were either self-taught or had an apprenticeship. [Devin Helton]
  • Thus the life of a Philadelphia WASP might go something like this: He would start out being raised in Chestnut Hill, proceed through high school at a local elite day school like Episcopal Academy or a boarding school like St. Mark’s, then move on to college at Princeton, where he would join an exclusive dining club like the Ivy. Returning to Philadelphia, he would live in Ardmore, join a prestigious firm such as Drexel and Company or a family enterprise, assume membership in a city club like the Philadelphia or Rittenhouse Club, and be engaged in various charitable endeavors. He would play tennis at the Merion Cricket Club, attend annual Assembly dances, and spend summers in Cape May. He probably met his wife at her debutante, and would proceed to have a larger-than-average number of children with her, staying together for life. Their children would in turn marry the children of other upper-class families or the children of newly minted wealth as a means of assimilating them into the upper class. Having chronicled this shift from a local and familial to a national and associational upper class, along with describing its social and institutional life, Baltzell observed several troubling developments that by 1940 were casting a cloud over the future of the WASPs. One was the managerial revolution. The country was shifting from a bourgeois (laissez-faire family firms) to a managerial (large publicly traded corporations interlinked with an expanded state) economy, run by professional managers rather than entrepreneurs. WASP heirs increasingly became trust funders rather than business runners. [Aaron Renn]

Friday, February 19, 2021

Friday Night Links

  • The people who need to worry are landlords and banks who bet heavily on white collar workers.  The majority note holders of this asset class are regional banks.  It isn’t a small community bank that owns a note on a $250m office building, it’s the name brand regional bank that owns the note. If companies reduce their office space by 20-30% this is going to create a significant issue for regional commercial banks that own notes on these buildings.  Who is going to purchase this office space?  Will it be the upstart tech companies that are remote only?  If it’s not them then who?  There isn’t a natural buyer, and hence prices could drop through the floor. As we’ve talked to local banks they are interested in owner occupied commercial real estate, but nothing office related (unless it’s a doctor or dentist). If we extrapolate that out it’s a depressing print for regional banks and downtown office buildings, but not that awful for smaller banks that have avoided those buildings simply by size. [Oddball Stocks]
  • So why financials over tech when tech is where the innovation is? First, off the top of your head can you name a recent innovation from Facebook, Apple, Netflix or Google other than buying competitors or increasing prices? In contrast the market may be underestimating the innovation taking place at Live Oak Bank, currently 21x forward earnings and re-configuring how banks interact with technology. Second, most of FANG plus Tesla, while enjoying solid returns on capital, are at triple the valuation on earnings vs banks, or more. When looking at a combination growth rates, margins and valuations, many smaller emerging banks look attractive in comparison. [Colarion]
  • The irony of Eleanor Roosevelt, feminist political icon, is that her career was a 50-year vindication of every misogynist cliché about women in politics. Her politics were sentimental rather than rational. She was impulsive and easily swayed, a busybody who meddled in every issue under the sun without bothering to master anything intellectually. She honestly believed we could end poverty and war by all being a little nicer to each other. Hillary at least has a political temperament. Eleanor, had she not married Franklin Delano Roosevelt, probably never would have gone near politics at all. [Claremont]
  • López Obrador has also showed a marked enthusiasm for coal, which produces roughly 9.5% of Mexico’s electricity. In October, he travelled to the coal mining regions of Coahuila, to announce the reactivation of the CFE’s coal-fired plants. He called clean energy a “sophism” to prioritize private over public enterprise. [The Guardian]
  • Financial businesses are interesting in the sense that you don’t really need to be a great business analyst to understand or value banks and insurers. The product is undifferentiated, unaffected by competitive obsolescence or innovation, and the valuation is not reliant on intangible factors like IP or “flywheel effects” or network effects or “unit economics”. Investing in financials often just comes down to 3 questions: what’s the health and level of equity capital, what can the company earn on that equity capital over a cycle and is management relatively prudent. [Canuck-Analyst]
  • His lectures frequently lasted for three or four hours. His longest known lecture defined the unit of time known as the "Woodward", after which his other lectures were deemed to be so many "milli-Woodwards" long. In many of these, he eschewed the use of slides and drew structures by using multicolored chalk. Typically, to begin a lecture, Woodward would arrive and lay out two large white handkerchiefs on the countertop. Upon one would be four or five colors of chalk (new pieces), neatly sorted by color, in a long row. Upon the other handkerchief would be placed an equally impressive row of cigarettes. The previous cigarette would be used to light the next one. His Thursday seminars at Harvard often lasted well into the night. He had a fixation with blue, and many of his suits, his car, and even his parking space were coloured in blue. In one of his laboratories, his students hung a large black and white photograph of the master from the ceiling, complete with a large blue "tie" appended. There it hung for some years (early 1970s), until scorched in a minor laboratory fire. He detested exercise, could get along with only a few hours of sleep every night, was a heavy smoker, and enjoyed Scotch whisky and martinis. [Wiki]
  • I think you are correct and note that both of the parts of the value chain you mention (mineral royalties and pipelines) benefit from one of the Achilles heels of the e&p part of the value chain: the large barrier to exit. The majority of the cost of a producing wells is incurred upfront; the operating/lifting costs of already producing wells are relatively low. The result is that wells that would be uneconomic to drill at current prices don't shut down; instead, the ownership of them shifts to creditors, who keep producing because price is above marginal cost. The result of that pattern is that volumes don't collapse even when price collapses. And who benefits from volumes: royalty owners (variable cost of extraction taxes decrease with price declines) and pipelines. The latter can also have real competitive advantages due to government regulation making it impossible to build competing pipelines (e.g., Transco) and the service provided by the some pipelines being irreplaceable (for example, a pipeline is the only way to move natural gas from field to end user; you can't move it by truck or rail). [CBS]
  • The worldwide glut of capital has caused low quality debt to be bid up to outrageous levels. Subprime debt has already had a severe correction. I believe this will spread to the "Alt-A" market, which is defined by slightly higher credit scores but similar programs and underwriting. I think that Downey Financial (DSL), a California savings and loan is another possible play. Downey has branches in CA and AZ, and focuses on residential mortgage lending. As of June 2006, 89% of DSL’s approximate $15.4 billion residential real estate portfolio was secured by properties located in southern California. 78% of the residential mortgages were based on borrower stated income. 10% were underwritten with no verification of borrower income and/or assets. This is especially bad because mortgage fraud is so prevalent in southern California. 19% of the Company’s loans were originated in 2006 and 40% were originated in 2005. In 2005, approximately 81% DSL’s one-to-four unit residential real estate loans were originated or purchased through outside mortgage brokers. Of course, this creates severe moral hazard. 85% of its residential portfolio consists of adjustable rate mortgages subject to negative amortization with the majority structured as option-ARMs. They sell the conservative, fixed rate loans and keep the toxic loans as investments. [CBS]
  • Look at a graph of nicotine consumption and obesity rates from the 20th century; they are mirror images. The lines cross in 1990. Did quitting smoking cause people to kill themselves with food? Nicotine helps people moderate their appetites. Society is craving nicotine after a few decades without it. If they can get it from reduced harm nicotine products, people might eat less and be thinner and healthier. Maybe more sociable too. And if big tobacco squeezes out smaller vaping competitors, they will print money selling the new delivery vehicle. [CBS]
  • 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. [CBS]
  • Most of my big life decisions right now account for a belief there's a significant chance that the US ceases to be functional in the next 20 years as a federation, and ceases even in name to exist in my lifetime, and how to hedge against that. How do I distribute my time, energy, and assets to deal with different types of breakdown? Rule of law. Monopoly on violence. Travel within the continental US. Financial systems. Unless people like me (capitalist/intelligentsia/Jewish/right wing) are getting -actively hunted down-, I'm probably not leaving the US. So given that, how do I prepare my life, my children's life, and my grandchildren's lives to succeed as much as possible with a changing order? How can I take advantage of new opportunities, maximize upsides, and minimize risks? Merely storing assets in foreign currencies isn't enough - in fact, there's a very good chance if the US goes down those economies or obligations get totally fucked. Land that you don't live near can be appropriated. Central digital assets can be repossessed (e.g. stock). Gold is an iffy investment if things -don't- go to shit, and can also make you a target if they do. My asset distribution is almost entirely index funds, but I've recently moved my monthly auto-investments to a 85% index / 15% crypto portfolio. Ammunition, tools, land (my house; immediate term) are also hedges. A full workshop, a ton more printed books, etc., these are things that are even more core against types of outcomes I hope aren't very likely but would be devastating if they happen. This is also why I told my best friend I'd pay for him to move from wherever in the country he was to wherever I settled in a few years. A true friend, a bosom companion, is an asset that cannot so easily be priced - and we're on the same page. I'm tremendously lucky no one in my immediate closest friends and family thinks I'm crazy about this. My mom sent me a blacksmithing fundamentals book. My wife is getting her ham radio license. Even with this social support, I'm afraid I'm not taking it seriously enough. There have been so many points since 2014 where something I should have seen coming blinded me because of status quo bias. I don't have the opposite bias, happening bias, luckily, some of you do. But we must look reality in the eye if we want to come out on top of Interesting Times, with our descendants poised to take the world. Are you prepared for catastrophe? Are you prepared for -not- catastrophe? Do your preparations reflect your predictions? Think the unthinkable. Be like Herman Kahn. Be like the guys who wrote "10 feet to survival". The panic over food in covid area is going to cease at some point. Is a year of food for you and your family worth 5 grand? I say it probably is. There's suppliers. Don't tell your neighbors unless you trust them. If you have land, bury it. Why Texas? Texas has national identity, it has Vigor, it's on the Gulf (it can't be isolated like a number of other red states can), it has military assets and culture, it has oil. In other words, it is (imo) the top American successor state. Sorry, this thread is a bit scattered. There's Certain Collections of Knowledge I'm planning on spending quite a bit of money to keep a full backup of. Just in case. Eventually maybe a book binding machine, just in case. Maybe this becomes detritus for my children someday. All states die. Sometimes there are inter-state histories that provide a link (monarchies, for example). Sometimes merely the people stay the same. To make sure your family persists through history, it is your job to prepared for this state, this paradigm to pass. I am not a trad ill at ease in modernity. I am a stereotypical exemplar of what you'd expect from a patriotic American with Jewish and Anglo heritage. I am the man of high modernism. I am the striver, the climber, the off white business card buyer. And I'm saying to buckle up. [@orthonormalist]

WSJ: "We’ll Have Herd Immunity by April"

Bullish for reopening:

Amid the dire Covid warnings, one crucial fact has been largely ignored: Cases are down 77% over the past six weeks. If a medication slashed cases by 77%, we’d call it a miracle pill. Why is the number of cases plummeting much faster than experts predicted?

In large part because natural immunity from prior infection is far more common than can be measured by testing. Testing has been capturing only from 10% to 25% of infections, depending on when during the pandemic someone got the virus. Applying a time-weighted case capture average of 1 in 6.5 to the cumulative 28 million confirmed cases would mean about 55% of Americans have natural immunity.

Now add people getting vaccinated. As of this week, 15% of Americans have received the vaccine, and the figure is rising fast. Former Food and Drug Commissioner Scott Gottlieb estimates 250 million doses will have been delivered to some 150 million people by the end of March.

There is reason to think the country is racing toward an extremely low level of infection. As more people have been infected, most of whom have mild or no symptoms, there are fewer Americans left to be infected. At the current trajectory, I expect Covid will be mostly gone by April, allowing Americans to resume normal life.

Antibody studies almost certainly underestimate natural immunity. Antibody testing doesn’t capture antigen-specific T-cells, which develop “memory” once they are activated by the virus.

This opinion by Marty Makary.

Previously in CBS regarding reopening: 1, 2.

Wednesday, February 17, 2021


Here is a table that I found showing nicotine category sales (cig/smokeless/vapor/cigars) and units as of February 6, 2021. You can see that e-cigs and vapor products are way up year-over-year. Cigarettes, which are the most important category, had a 2.5% volume decline but a 6.8% price increase, which nets out to a 4% increase in revenue. 

That is consistent with what we have seen from the Marlboro brothers (MO and PM), and with what we saw in BTI's earnings report today:

On a reported basis, revenue was marginally lower than the prior year (down 0.4%), with good growth in New Categories up 14.9%, supported by strong combustibles price/mix of 7.3% offset by a translational foreign exchange headwind of 3.5%, and a 4.6% decline in total cigarette volume.

It is funny that people think that the tobacco business is dying when its revenues are growing. We have shorted plenty of dying businesses and industries at CBS, and one thing they have in common is falling revenue. 

Take Frontier Communications (FTR) which we wrote about in December 2019. Their revenues were falling at a mid single digit annualized rate consistently for two years before they filed for bankruptcy. And they were in a very high fixed cost business, unlike the tobacco companies.

I'll be worried about tobacco investments if cigarette revenues and profits fall, and if nicotine alternatives are not profitable enough for the big tobacco companies to compensate for the decline.

But I am bullish on nicotine alternatives, based on a theory I am developing that society is under-nicotined. A friend has a concept of "Conservation of Intoxication," whereby individuals need to manage their brain chemistry with a melange of chemicals in order to feel good. The list, much of which goes back thousands of years and is very Lindy, includes ethanol, caffeine, and nicotine. It also includes refined carbohydrates. 

You will notice that a lot of these substances tinker with dopamine. The Conservation of Intoxication theory says that if people kick some of these substances you would expect remaining ones to go up. The classic example is the Mormon who binges on sugar because he can't have any of the other substances. And Utah and Idaho are the only places I have been where you can go to a drive-through to buy a sugar cookie and a Mountain Dew soda with cheesecake flavored syrup added.

Look at a graph of nicotine consumption and obesity rates from the 20th century; they are mirror images. The lines cross in 1990. Did quitting smoking cause people to kill themselves with food? Nicotine helps people moderate their appetites.

Society is craving nicotine after a few decades without it. If they can get it from reduced harm nicotine products, people might eat less and be thinner and healthier. Maybe more sociable too. And if big tobacco squeezes out smaller vaping competitors, they will print money selling the new delivery vehicle.

Tuesday, February 16, 2021

Hydrocarbon Royalties and Pipelines

I'm interested in mineral landowners (energy royalties, previously 1, 2) and pipelines as being possibly the best part of the hydrocarbon value chain.

They generate cash and distribute it to shareholders, which removes the reinvestment risk. The explorers and producers have trouble creating as much long term value for shareholders because management's incentives are bad. They get paid to grow asset size, and they only have the money to do that at the top of the cycle when properties are expensive.

Refiners have huge operating leverage and volatile capacity utilization. (Valero, for example, has single digit operating margins.) It is hard for them to make money unless their fragmented industry is at capacity. 

Like tobacco, there is the mistaken perception that the oil business is dying. And some fraction of investors even think it is morally questionable to invest in producing the energy that our civilization runs on.

Notice how much more consistent the net income of a pipeline company (MMP) or a royalty company (DMLP) is than an E&P company (DVN) or a refiner (VLO).

Pipelines and royalties seem like the superior part of the hydrocarbon value chain. They are more consistently profitable over time, have less reinvestment requirement, and so more consistently send cash to shareholders.

Monday, February 15, 2021

Washington’s Birthday Links

  • Unless the intermediate host necessary for completing a natural zoonotic jump is identified, the dual‐use gain‐of‐function research practice of viral serial passage should be considered a viable route by which the novel coronavirus arose. The practice of serial passage mimics a natural zoonotic jump, and offers explanations for SARS‐CoV‐2's distinctive spike‐protein region and its unexpectedly high affinity for angiotensin converting enzyme (ACE2), as well as the notable polybasic furin cleavage site within it. [link]
  • We also liked the people driving capital allocation in the energy market. In particular, we liked that experienced and successful investors like Sam Zell and John Fredriksen were moving in, self-made billionaires who’d made their fortunes partly by buying things that no one else wanted over the years. On the other side, the «sellers», were politicians, bureaucrats and other non-economically motivated players (primarily ESG-driven investors). [link]
  • The C19 pandemic and its response in the US convinced me, all the way down, that the US is just not nearly as functional or capable a society as I had imagined.  I had previously held the science agencies of the federal government in rather high regard, but the FDA and CDC have ranged from lousy to disastrously bad.  Despite many decades of counterexamples, I'd imagined that there was some reserve of competence in most levels of government, that would come out in a real crisis.  Nope.  The way everything about C19 became culture-war fodder (so that peoples' opinions of the effectiveness of masks or HQC was determined by their political identity) shouldn't have been as shocking as it was.  I guess, at some level, I previously saw a lot of the dysfunctional bits of US society as being more like a capable guy who lollygags around at work because nobody's pushing him, but he's *capable* of doing more, and will in a pinch.  And instead, we saw that while there are highly competent people in government and media and academia, the systems they work in are pretty much garbage and only occasionally will a little bit of sanity or some minimal image of competence shine through (like the FDA actually approving a couple vaccines without dragging the matter out for another several years). In some fundamental sense I probably can't even express adequately, the consistently botched C19 response has left me accepting, all the way down, that my society has lost the mandate of heaven. [link]
  • The swirly curvilinear streets of the typical suburban subdivision are based on the cemeteries of the late 1800s. Halifax’s Fairview Lawn, final resting place of victims of the Titanic, demonstrates the precursor of every modern cul-de-sac housing development. Streets twist through a parklike landscape of grass and trees insulated from the outside world. It’s peaceful. And it’s a complete break from both military gridiron urban blocks and the chaotic tangle of streets of ancient towns. [Granola Shotgun]
  • In a public health emergency, absolutism is a very tempting response: People should cease all behavior that creates additional risk. That instinct led to calls for gay men to stop having sex during the AIDS crisis. It has also spurred campaigns for teen abstinence, to reduce sexually transmitted diseases and pregnancies. And to fight obesity, people have been drawn to fads like the elimination of trans fats or carbohydrates. These days, there is a new absolutist health fad: the discouragement — or even prohibition — of any behavior that seems to increase the risk of coronavirus infection, even minutely. People continue to scream at joggers, walkers and cyclists who are not wearing masks. The University of California, Berkeley, this week banned outdoor exercise by on-campus students, masked or not, saying, “The risk is real.” [NY Times]
  • You can see why elites so much want to have the Biden Administration and the tech monopolists more strongly censor social media: it provides too level of a playing field. In the past, you’d have to deal with one critical Letter to the Editor being published a week after your column. But today, you, a Pulitzer Prize winner, can quickly be logically/empirically/morally humiliated by scores of Internet Randos. That is the crime of lèse-diversité. [Sailer]
  • [T]he Orange Man was, indeed, playing a game of multi-dimensional chess. But for purposes of an outcome very different than “making America great again.” What if the Orange Man’s presidency was intended to weaponize opposition to the Left by making it easy (by making it seem righteous) to characterize anyone who supported or even sympathized with anything the Orange Man did as a “white supremacist” or even an “insurrectionist” – i.e., someone dangerous to “our Democracy” who must be stifled (or worse) using any means necessary? [Eric Peters]
  • The piece describes SSC as “astoundingly verbose.”  A more neutral way to put it would be that Scott has produced a vast quantity of intellectual output.  When I finish a Scott Alexander piece, only in a minority of cases do I feel like he spent more words examining a problem than its complexities really warranted.  Just as often, I’m left wanting more. [Scott Aaronson]
  • If we took the most efficient energy consumption assumptions above (the lower bounds), these seven PoW chains consume 55.1 TW/h per year.  Roughly the footprint of Romania, around 49th place.  But in most cases – such as with Bitcoin itself – the lower bound is not realistic because the necessary amount of efficient hashing equipment (miners) have not been manufactured. In contrast, if we took a less conservative assumption and used the upper bound these same PoW chains consume 180.1 TW/h per year.  Roughly the footprint of Poland or Thailand, around 25th place.  The upper bound scenario is likely unrealistic for coins that have seen their value (measured in USD) decline or stay the same.  For those that have seen rapid appreciation (such as Bitcoin), it is possible that older equipment temporarily comes back online until newer replacements are installed. And yet, in either scenario, these PoW networks are notalso adding the equivalent GDP output of similar sized countries.  Society is in effect, at a net loss. [link]