Monday, July 15, 2019

July 15th Links

  • We are often asked, "what protection does cash give investors against inflation?" Most people assume the question relates to consumer price inflation (CPI), for which the year-over-year average over the last five years has been 1.3%. The answer is, barely. The average yield on the 5-year U.S. Treasury note has been 1.4%, before taxes. The irony is that the well-to-do investor's well-being would not be threatened by consumer price inflation rates two or three times the current level. Compared to most of the population, he or she spends only a modest portion of income or wealth on consumables, while expending a far greater portion on asset purchases, the prices of which have inflated dramatically in recent years. Nothing will destroy the wealth of the wealthy as fast as deflation in financial and real assets. Only cash protects against that risk. Interestingly, we rarely get the question, "how do I protect my portfolio against asset price deflation?" Ironically, CPI deflation will precipitate or accompany asset price deflation. Cash, the all-purpose hedge, ends up being the perfect asset in both scenarios. Of course, most investors think they are not getting their money's worth when they see their investment manager holding large amounts of cash. Some "enterprising" investors may gradually realize instead that they are paying someone who has demonstrated the necessary expertise to buy cash as a call option when it is utterly out-of-favor and thus compellingly cheap, despite the agonizing wait for bargains to appear. Such careful thought and deliberate inaction may chip away at the foundation of the institutional imperative that only sees value creation where there is activity. Enlightened passivity is expected of philosophers, not investment managers. [Frank K. Martin]
  • The main thing to comprehend about China is scale. There are easily ~350M (i.e., population of US) people here living roughly first world lives: with access to education, good jobs, climate controlled apartment in major city, good public transportation, fast internet access, etc. Probably the number is twice as large depending on how one defines the category. For one thing, this means that the supply of engineers, technologists, lab scientists, project managers, entrepreneurs, etc. is very large. There are certainly poor people who lack opportunity, but the size of the population for which the education and economic system are working reasonably well is very large. Possibly a billion people out of ~1.4B. [Hsu]
  • The news that a globalized cabal of billionaires and politicians and journalists and Hollywood bigwigs might be flying around the world raping teenaged girls will not surprise them in the least because it is what they have long suspected. For the rest of us it is like finding out that the Jersey Devil is real or turning on cable news and finding Anderson Cooper and his panel engaged in a matter-of-fact discussion of Elvis's residence among the Zixls on the 19th moon of Dazotera. [The Week]
  • Of course, once too many illegal immigrants' children show up in an urban school district, the white people tend to up and move. But a lot of minority parents don't want to send their kids to those schools, either, so they try to follow the whites to the 'burbs, which then turn into slums, too. Much of the Housing Bubble / Crash that set off the Great Recession, for example, was a result of minorities fleeing California's old barrios for new inland exurbs, whose home prices deflated once they turned into new barrios. There's no stable resting point in this system. It leads to a constant churning of the population across the landscape. (Needless to say, real estate developers, real estate agents, and mortgage brokers consider that a feature, not a bug.) [Sailer]
  • I favor the Texas Sailermander, not because I think it will solve anything, but because if we want an autonomous national homeland at some point it will be necessary for Red America to demonstrate an ability to impose on Blue America as much as the opposite has been demonstrated. [Blair Nathan]
  • It turns out that the previous Boeing CEO who made the decision to just "upgrade" the 737 was an MBA with no experience in aviation. (He has never had any type of pilot certificate!) He did have a career at GE, including in jet engines, but his first job was in "brand management" at Procter & Gamble. So what are the common elements at Boeing and the U.K. firms, which you would not find at German or Japanese owned firms? There seem to be two: company managers with no technical or scientific knowledge and weak, ignorant shareholders who also lack technical knowledge. [CBS]
  • My impression is that whatever woke craziness happens, expensive law firms like Baker McKenzie will still come out on top. If tomorrow there were a Khmer Rouge coup in Washington and the government began executing people who wear glasses, the big time law firms would just add free laser eye surgery to the employee benefit list and carry on unimpeded. [Sailer]
  • Everything happens faster these days. It took Christianity three hundred years to go from Christ to Constantine. It only took fifty for gay pride to go from the Stonewall riots to rainbow-colored gay bracelets urging you to support your local sheriff deparment. [SSC]
  • I had a friend whose father had 1,800 acres of tung-nut oils down in the Gulf, in Mississippi. You put tung-nut oil into the paint, it was the best marine paint in the world. And therefore the U.S. Navy specifications, for decades, required this big percentage of paint in all the Navy vessels to have to come from the tung nut. And so this family, with this very productive supply of tung-nut trees, and this absolute requirement that the Navy use tung-nut oil, the paint with the tung-nut oil in it, they flew back and forth in a private plane between the Cypress Point Country Club and their home, and they minted money. And then, suddenly, two things happened: No. 1, advanced chemistry got so they could make better artificial oil than the tung-nut tree could, and 2, all the trees died. I watched this family go from enormous prosperity to nothing. It is dangerous. Who would think of that? It wasn't just one thing that happened, it was two. They couldn't replant or anything, even if they were prepared to wait, because their whole advantage from having tung-nut oil, which was better, went away. [Munger]
  • The fact that an age-related clinical event developed in approximately 1 out of 3 healthy individuals in the upper tertile of insulin resistance at baseline, followed for an average of 6 yr, whereas no clinical events were observed in the most insulin-sensitive tertile, should serve as a strong stimulus to further efforts to define the role of insulin resistance in the genesis of age-related diseases. [NLM]

Tuesday, July 9, 2019

Sears Holdings - Notice of Confirmation Hearing

1. Approval of Disclosure Statement. By order dated June 28, 2019 (ECF No.4392) (the “Order”), the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) approved the Disclosure Statement for Second Amended Joint Chapter 11 Plan of Sears Holdings Corporation and Its Affiliated Debtors dated June 28, 2019 (as it may be amended, modified, and supplemented, the “Disclosure Statement”) filed by Sears Holdings Corporation and its debtor affiliates, as debtors and debtors in possession in the above-captioned chapter 11 cases (collectively, the “Debtors”) (ECF No. 4390). The Bankruptcy Court authorized the Debtors to solicit votes with regard to the approval or rejection of the Second Amended Joint Chapter 11 Plan of Sears Holdings Corporation and Its Affiliated Debtors, dated June 28, 2019 (as it may be amended, modified, and supplemented, the “Plan”),2 annexed as Exhibit A to the Disclosure Statement. Any capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the Plan.

2. Confirmation Hearing. A hearing (the “Confirmation Hearing”) to consider confirmation of the Plan will be held on August 16, 2019 at 10:00 a.m. (Prevailing Eastern Time), before the Honorable Robert D. Drain, United States Bankruptcy Judge, in Courtroom 118 of the United States Bankruptcy Court for the Southern District of New York, 300 Quarropas Street, White Plains, New York, 10601. The Confirmation Hearing may be continued from time to time without further notice other than the announcement by the Debtors at the Confirmation Hearing or any continued hearing or as indicated in any notice filed by the Debtors with the Bankruptcy Court, and the Plan may be modified, if necessary, prior to, during, or as a result of the Confirmation Hearing, without further notice to interested parties.

Monday, July 8, 2019

July 8th Links

  • "My biggest fear," he confessed, "is that there will be a huge earthquake while we're gone and I'll miss it." It would be like a bird-watcher missing a rare hawk he has been waiting his whole life to see. [Wired]
  • A lot of car enthusiasts make fun of Ferrari owners, since the typical car only covers about 2,000 or 3,000 miles a year. In the last year, I put just over 5,000 miles on mine, and I discovered the reason why most Ferrari owners are so sparing with their mileage: these cars are difficult to drive. One reason is simply time. A few months ago, a friend perfectly summed up this car to me: it's a Point A to Point A car. In other words: this isn't a car you use to go somewhere. It's a car you take out of your house, and drive around for a while, before you return to your house. You don't go to the mall in it. You don't take it to dinner. You can't pick up anything large, and you can't transport more than one person. It's not a vehicle you use. It's a toy to be played with. And therein lies the problem: most Ferrari owners don't get to the point of owning a Ferrari by having large blocks of free time they can devote to aimlessly driving around for several hours. So the cars sit, and sit, and sit, except for that one weekend, in between business trips, when the weather is nice, and the wife and kids are at the museum, and the house is clean, and the car is in good, working order. As you might imagine, this only happens a few times a year. Roughly two thousand miles worth, I suspect. [Jalopnik]
  • Like many small banks, maintaining this as a going concern seems to be of dubious value to shareholders, compared to the immediate return (and opportunity to redeploy capital) that they would get if the bank were sold. Instead, its purpose as a company might perhaps be better understood either as a jobs program ($1.65 million of salaries) or as civic monument with a copper cupola. One could look at the non-interest expenses is as percentage of assets or as a percentage of equity (which is obviously multiplied by the leverage of the bank). So, the $3.1 million of total non-interest expense for 2018 was 2.7% of the year-end total assets. If the bank can maintain its net interest margin (which may be tricky with short term rates higher than what they paid on deposits last year), this situation might continue indefinitely, even though it may not be the most efficient use of shareholders' capital or the most efficient way for society to provide deposit and lending services to rural northern Alabamans. [Oddball Stocks]
  • The first year after we were gone, the Super Soaker volume dropped from $125 million to $25 million. We were told that as soon as we were out of the business, our competitors knew they could make the knock-offs and get them into the stores. They knew Hasbro wouldn't enforce their patent rights as strenuously as we did. The problem was that Hasbro had so many great products to sell — all the great lines that Hasbro carries — and the Super Soaker was just one line to them. With us, there was really only one product. The Super Soaker to us was the company; that was what we lived and died for. [link]
  • Ever since the fiasco in the Garden of Eden, most of what we get is by sweat, strain, and anxiety. Two villains – nature and other people – prevent us from getting what we want. Nature is niggardly: it provides fewer resources than we could use, and much of what is available is made useful only by hard work. As for other people, the problem stems not from malevolence: their wants and ours simply exceed what is available. [Armen Alchian]
  • Stores that sell clothing have the special problem that their merchandise comes in a large range of individually-different sizes. That means they have to constantly sort stacks or racks of clothing into neat categories so customers can find their own sizes. If cost-cutting leaves too few store clerks to tidy up after customers, it quickly becomes very difficult or impossible for customers to find their sizes. So they stop coming in. Untidy piles of clothing are a sign of a bankruptcy feedback loop. Watch for these in clothing stores. [CBS]
  • It seems like the Chinese will be the ones to organize and colonize Africa, because they don't have white guilt or Christian sympathy for the weak. One problem that the Egyptians have, and a reason they need outside organization, is low literacy. (Another problem is that 40 percent of Egyptians married to cousins.) Hessler thinks that the low literacy is because written, formal Arabic is so different than spoken Egyptian. This leads to one of the funniest episodes in the book, a parliamentary election where the ballot has names and symbols, which the candidates pick from a list of government approved ones (that include knives, rifles, and scorpions). One man outside a polling station told him, "I voted for the lamp and the helicopter." [CBS]
  • [P]roof-of-work axiomatically requires high transaction costs to ensure payment finality ... Counterfeiters can attack bitcoin via a "double-spending" strategy, ie spending in one block and later undoing this by releasing a forged blockchain in which the transactions are erased. This paper starts by introducing the concept of "economic payment finality" in the blockchain. That is, a payment can be considered final only once it is unprofitable for any potential adversary to undo it with a double-spending attack. ... If the incentives of potential attackers are analysed, it is clear that the cost of economic payment finality is extreme. For example, to achieve economic payment finality within six blocks (one hour), back of the envelope calculations suggest that mining income must mount to 8.3% of the transaction volume – a multiple of transaction fees in today's mainstream payment services. [DSHR]
  • Let's compare Nakamoto's goals to the state of cryptocurrencies in practice: *No trusted third parties. In practice you have to trust both exchanges and mining pools. *Irreversible transactions. In practice immutability is a double-edged sword, but in any case the 51% attacks on smaller cryptocurrencies illustrate the reversibility of transactions. *Micro-transactions. In practice the average fee to get your transaction confirmed is more than $1 - as I write it is $4. *Parties transact directly without intermediaries. This is possible, but in practice for large transactions you need exchanges, and for small transactions you would need the Lightning Network (if it worked). *Buyers need not reveal personal information. In practice, except to an exchange. And note that de-pseudonymizing cryptocurrency addresses turns out to be fairly easy in practice. *Irreversibility protects sellers from fraud. In practice, fraud is rampant. *Escrow protects buyers from fraud. In practice, escrow mechanisms have not turned out to "easily be implemented". So Bitcoin hasn't been a great success measured by Nakamoto's goals for it. [DSHR]
  • In 2001, a Boeing employee named L. Hart Smith published a paper criticizing the business strategy behind offshoring production, noting that vital engineering tasks were being done in ways that seemed less costly but would end up destroying the company. He was quickly proved right. [Matt Stoller]
  • The superficial perspective might be that every internal activity that used to be related to a task that has been out-sourced is no longer necessary. Even that is not true but, worse, it fails to acknowledge all of the new internal tasks that had not previously existed. To add insult to injury, contemporary accounting practices do not allow these unavoidable additional costs to be billed against that particular item of work – because it is no longer identified as an in-house task – so these charges are allocated instead as overhead to any remaining in-house work. This misrepresentation of true costs furthers the illusion that outside production is cheaper than anything done inside, building the pressure to ship even more work offsite, until there isn't any left. The irony of this situation is that it is so easy to understand in the extreme. Suppose that a manufacturer had succeeded in out-sourcing all of the work that it wished to isolate from the preferred task of systems integrator. The unallocatable costs from the huge amount of out-sourced work will now appear as overhead on the few remaining tasks, like sales and product support, confirming that these were now even less profitable than manufacturing had been when the spiral began! "What are all of these additional tasks?", one might well ask. The first is the need to write a specification for the product, which must be more complete and precise than would be needed for in-house production, for which omissions, refinements, and improvements could have been accommodated without the need for costly legal discussions. One must ask the question as to where the skills for writing such specifications will come from if there is no continued in-house production from which to learn. [Hart-Smith]

Sunday, July 7, 2019

Review of Tragedy & Challenge: An Inside View of UK Engineering's Decline by Tom Brown

It has already been a year since we did a "full review" of a book on the blog. We have come to rely heavily on the abbreviated "note" format (e.g. Q1). However, we had enough notes and thoughts about Tragedy & Challenge: An Inside View of UK Engineering's Decline that a "full review" is warranted.

It is by a Brit named Tom Brown, about the decline - collapse - of engineering ("metal bashing") in the U.K. that took place from WWII to present. For example, Britain's car manufacturers are gone, with either the brands bought out by foreign firms or else, like Austin or Morris, just gone. Naturally this means that the U.K. lost the many smaller firms that supplied components, as well.

The most interesting part of the book is the first fifty pages contrasting the first two engineering shops from the beginning of his career, where he had very hands-on experiences managing production. He started out working on the shop floor and mentions a philosophy of not asking people to do anything that he would not do, and not trying to manage anything that he has not done himself.

(Remember one of the key concepts from our 2018 book reviews: people who have not done the job they are asking someone else to do are unable to tell if their employees are lying when they say they cannot do something. The way they deal with this is to just demand an outcome and then see what happens. The type of person who is an employee does not understand this tactic and desperately tries to do the impossible.)

In "Seeing How to Do It Wrong," he is working for a U.K.-owned firm in the U.K. called Scottish Stamping and Engineering. One of their problems was union labor that was so angry or crazy that they were happy to sabotage their employers and prevent profitability. But many of the problems were also caused by management. For example, the firm would have obsolete, broken-down equipment that would slow down productivity when it broke. Replacing these items would eliminate bottlenecks at the plant and consequently have very high return on the capital invested. (See The Goal from Q1 reviews on bottlenecks.)

However, the broken down items were fully depreciated, so replacing them would have two certain effects on the financial statements: an increase in net property, plant, and equipment (and total assets), and an increase in depreciation expense over the new life of the machine. This had the potential to lower the Return on Net Assets (RONA) metric because of the higher denominator. (Note that the investment ought to result in a net increase in profit, driving up return if the idea was sound, but this is uncertain and his managers seemed very pessimistic with the result that the investments like this were not made.) Despite unwillingness to authorize these capital expenditures, his management was complacent about higher operating expenditures, like paying overtime when these breakdowns would otherwise prevent deliveries to customers. He noticed an absence of key performance indicators relating to quality, productivity, and job punctuality. His conclusion based on that experience is that "companies that won't invest inevitably rot away after a few years of fictitious prosperity." (You can also consider this an "anti-EBITDA" book; a metric that Brown calls the "milking ratio".)

In "Discovering How to Do It Right," he moves on to work for a U.K.-owned firm in South Tyrol (the German speaking part of northern Italy) at a ball bearings plant which was German speaking and had Germanic engineering culture and labor relations - which includes a positive attitude towards work. The employees were educated for manufacturing jobs in technical high schools and apprenticeships. The sales people were engineers who understood the technology and could speak the buyers' language of engineering. But one of the key competitive advantages was superior process engineering:

"[I]n such a small niche the range of specialist manufacturing equipment available to buy on the market was very limited. We rebuilt our presses in our maintenance department, which gave us the enormous advantage of being able to build in all the know-how and ideas which had been generated in the works, so that our rebuilt machines were literally much better than anything available new (and it taught me how very important this kind of production engineering and process development is, creating intellectual property of a type that is very hard to copy and impossible to buy)."
Thing like that are where profit margins come from. Too many investors, especially right now, take profit margins to be permanent features of businesses. But it is difficult to maintain these heroic levels of accomplishment, which would be why the profit margins revert. (Plus the high profits attract competition.) Nobody is going to manage with that level of intensity unless they are properly incentivized with upside or young and irrationally dedicated like Brown was.

The German ways were superior, and Germany beat the U.K. in manufacturing despite having the burden of east German reunification and lacking the bonanza of the U.K.'s North Sea oil. Brown says that this is because people in the U.K. with power and influence over manufacturing had no operating or engineering experience, just financial, and in contrast "the one thing Germans don't invest in is financial engineering."

The Boeing 737 MAX mistake has been in the news recently, and the parallels between the problems at Boeing now and the U.K. manufacturing firms before they collapsed are eye-opening. In Matt Stoller's blog about monopolies, he recently wrote,
In 2001, a Boeing employee named L. Hart Smith published a paper criticizing the business strategy behind offshoring production, noting that vital engineering tasks were being done in ways that seemed less costly but would end up destroying the company. He was quickly proved right.
The L. Hart Smith paper is worth reading - here is a good section:
The first issue to be examined, is precisely what is out-sourced and what is inevitably retained. The superficial perspective might be that every internal activity that used to be related to a task that has been out-sourced is no longer necessary. Even that is not true but, worse, it fails to acknowledge all of the new internal tasks that had not previously existed. To add insult to injury, contemporary accounting practices do not allow these unavoidable additional costs to be billed against that particular item of work – because it is no longer identified as an in-house task – so these charges are allocated instead as overhead to any remaining in-house work. This misrepresentation of true costs furthers the illusion that outside production is cheaper than anything done inside, building the pressure to ship even more work offsite, until there isn’t any left. The irony of this situation is that it is so easy to understand in the extreme. Suppose that a manufacturer had succeeded in out-sourcing all of the work that it wished to isolate from the preferred task of systems integrator. The unallocatable costs from the huge amount of out-sourced work will now appear as overhead on the few remaining tasks, like sales and product support, confirming that these were now even less profitable than manufacturing had been when the spiral began!

“What are all of these additional tasks?”, one might well ask. The first is the need to write a specification for the product, which must be more complete and precise than would be needed for in-house production, for which omissions, refinements, and improvements could have been accommodated without the need for costly legal discussions. One must ask the question as to where the skills for writing such specifications will come from if there is no continued in-house production from which to learn. The next is the obvious need for additional transportation costs associated with off-site production and the increased total span time this inevitably causes. These could be avoided by having the supplier co-locate his factory alongside the final assembly site, but only at the cost of a new factory and the perceived higher wages that were to be reduced by removing the work in the first place. No, the additional transportation costs are the least expensive of the options, once the decision to “off-load” the work has been taken. A major source of unplanned costs associated with out-sourcing has been subassemblies that cannot be fitted together because all of the drawing tolerances had been consumed earlier in the fabrication process. As a minimum, this has entailed considerable out-of-position work, a lot of rework, delays for replacement parts, and recriminations as the source of any error is uncovered. Whenever it is a drawing error or omission, added costs are incurred in changing the contract. And whenever it was a tool supplied to the subcontractor or built by him and bought-off by the prime manufacturer’s inspectors with an undetected error, the costs of fixing the mistake were even greater. These, and other, problems would be diminished tremendously if only internal organizations need to be involved. In order to minimize these potential problems, it is necessary for the prime contractor to provide on-site quality, supplier-management, and sometimes technical support. If this is not done, the performance of the prime manufacturer can never exceed the capabilities of the least proficient of the suppliers. These costs do not vanish merely because the work itself is out-of-sight. 
The paper goes on to talk about Boeing using outsourcing to drive improvement in the Return on Net Asset Ratio - the same problem that Tom Brown observed at the U.K. owned firms.
Return on Net Assets (RONA), barely qualifies as a sub-optimum solution. Superficially, it seems to be very appropriate. Who wouldn’t want to make the most from all of the assets an organization possessed? It would make an excellent goal, by any standards. Only when it is converted into a performance metric do its devastating effects become apparent. As a ratio, it can be enhanced by either increasing the numerator or decreasing the denominator. Each activity can be related or totally unrelated. Far too many additional issues are involved. But unless one studies all of the cause-and-effect relationships created by changing either numerator or denominator, one cannot possibly tell if a course-of action is good or bad for a company, no matter whether RONA is being increased or decreased. Conversely, if one were to apply RONA unthinkingly, once could easily convince oneself that decreasing assets was always a good thing, because doing so would always increase RONA – assuming that changes in assets being employed never had an effect on the costs of production!

It is the author’s belief that this process, and others like it, is what has led the aircraft industry into a state of excessive out-sourcing. It is obvious that doing all of the work in-house would require a greater supply of capital equipment than subcontracting it all outside. That is not the issue. The first issue is whether or not an incremental change in capital facilities or other assets results in a beneficial or undesirable change in revenues and associated profit. There is absolutely no guarantee that a reduction in assets will ever result in an increase in RONA, let alone an increase in profits. That is the great fallacy about this metric. It is applied by far to many with the authority to do so as if reductions in assets are always to be preferred over increases in capital spending. The second issue is whether or not that same incremental change in net assets results in any collateral or downstream consequences that had not been included in the initial cost/benefit assessment. This brings us to the next great fallacy about the concept of RONA. No allowance is made for the fact that company revenues and/or profits can vary greatly for other reasons, while the level of assets might remain unchanged. Using the ratio of two sometimes totally unrelated variables as a basis for strategic business decisions simply doesn’t make sense!

RONA might be a worthy overall goal, but as a performance metric, it is usually meaningless – and a serious threat to the survival of any organization on which it has been inflicted. The problem with RONA is its superficiality and its plausibility if one does not think too seriously about it. A typical stock-market analyst lacks the deep understanding of what makes different companies tick and why their profitability cannot always be assessed by the same metrics. The misapplication of ANY of the financial assessment tools can do, and has done, great harm to the livelihoods of far too many people.
That paper was written in 2001, about three decades after the U.K engineering decline in Brown's book. It turns out that the previous Boeing CEO who made the decision to just "upgrade" the 737 was an MBA with no experience in aviation. (He has never had any type of pilot certificate!) He did have a career at GE, including in jet engines, but his first job was in "brand management" at Procter & Gamble.

So what are the common elements at Boeing and the U.K. firms, which you would not find at German or Japanese owned firms? There seem to be two: company managers with no technical or scientific knowledge and weak, ignorant shareholders who also lack technical knowledge. The dearth of information that the owners of public companies have about them reminds us of something in the book Panic by Andy Redleaf:
What modern capital markets do very well is raise large amounts of capital from a broad base of investors who are persuaded to give their money to perfect strangers with precious little idea of what these fortunate recipients are going to do with it. In order to keep the money coming in under such admittedly odd circumstances, liquidity and the universal, instantaneous "price discovery" that financial markets offer with a glance at a computer screen are essential. The public investor, knowing so little about what he is buying, must be able to tell himself he can get that money back (or what's left of it) pretty much whenever he likes. […] Public securities markets, and especially equity and derivative markets, are bad markets because their knowledge base is thin (at least compared to the sum of what could be known about the underlying companies if shareholders were allowed to know it, or inclined to learn it).
The index investing trend - the desire for a free lunch through diversification - has led to fund management by generalist investors with pedigree, connections, and confidence but not technical knowledge. They operate based on social proof (see Theranos). Brown says that the professional U.K. fund managers invested in his companies could not understand anything technical and would not engage with anything besides financial results. He said that they would invest in offerings brought to them by the sell-side with very little diligence, "taking it on trust from the brokers that they were being given an inside track on a good thing." He said it was "extraordinary what obvious questions the fund managers [would] fail to ask."

As a result of this, not only are securities prices obviously inefficient, but so is society-wide allocation of capital. Brown points out that the investors in his companies had "enormous portfolios of shares in up to 200 companies" - something which no entrepreneur would ever have, and which left them with no inability or inclination to act as owners of the companies.

In contrast the best engineering firms were those of the German Mittelstand, which are mostly family owned. He says "many German companies would not even know what their weighted average cost  of capital was, and would only consider financing costs if specific financing was necessary for a project."

Monday, July 1, 2019

July 1st Links

  • The state—or, to make the matter more concrete, the government—consists of a gang of men exactly like you and me. They have, taking one with another, no special talent for the business of government; they have only a talent for getting and holding office. Their principal device to that end is to search out groups who pant and pine for something they can't get, and to promise to give it to them. Nine times out of ten that promise is worth nothing. The tenth time it is made good by looting A to satisfy B. In other words, government is a broker in pillage, and every election is a sort of advance auction sale of stolen goods. [Mencken]
  • Goldfinches feed their newborn broods a strict diet of regurgitated seeds rather than high-protein insects or a mix of seeds and insects favored by other passerine (perching) birds. Coincidentally, this habit offers a distinct advantage against an occasional parasite, the cowbird. Cowbirds are known for depositing their eggs in other birds' nests, where the large cowbird nestling often receives an unfair share of food from the unsuspecting parent, risking starvation for the other chicks. But baby cowbirds can't survive off seeds, and a cowbird hatchling in a goldfinch nest is doomed. [link]
  • The development of a caries lesion is now recognized as an imbalance in the demineralization and remineralization cycle. Many researchers are now investigating the use of techniques to induce remineralization of the affected tooth structure. The use of fluoride is an effective method for promoting the remineralization of an early lesion in enamel through the formation of fluorapatite. However, for every two fluoride ions, ten calcium ions and six phosphate ions are required to form one unit cell of fluorapatite (Ca10(PO4)6F2). Hence, when topically applying fluoride, an inadequate amount of available calcium and phosphate ions can limit net enamel remineralization. Another option to enhance remineralization is to supply calcium and phosphate, and to deliver fluoride more effectively. [NLM]
  • The early naturalists had a gift for description you just don't see anymore. In 1929, Edward Forbush called the Chipping Sparrow "the little brown-capped pensioner of the dooryard and lawn, that comes about farmhouse doors to glean crumbs shaken from the tablecloth by thrifty housewives." [link]
  • Bernd writes about Lynn in One Wild Bird at a Time. As the couple sat around a winter bonfire at night, sipping red wine, he noticed that his beloved barred owl had shown up by surprise, and he regarded its arrival, equally appreciated by Lynn, as the most wonderful thing he could hope for. "In the moment of joy and mystery," he wrote, "I felt connected with all the moments of my past and now my prospects for the future." [Outside]
  • I often find it helpful to put things in rank order and then stare at the top items and the bottom items. If you put these 300 confounders in order of effect size, what's at the top of the list? (Age, I hope, or, say, having cancer.) What percentage of the total effect do the top 10 confounders have? The top 25? Next, do the confounders in this study correlate closely with confounders in studies of general mortality? Or are there confounders that cause particularly high mortality in people who take sleeping pills but not among the general public? It could be that seemingly odd high effect confounders turn out to offer important insights. For example, if, say, living in a 2 story house rather than a 1 story house correlates with much higher mortality among sleeping pill takers, but not among non-takers, maybe falling down the stairs after taking a sleeping pill is a big problem. [Sailer]
  • Only a few visionaries considered the hypothesis that the most complex and subtle of human traits might depend on more than one protein? Only the boldest revolutionaries dared to ask whether maybe cystic fibrosis was not the best model for the entirety of human experience? This side of the veil, instead of looking for the "gene for intelligence", we try to find "polygenic scores". Given a person's entire genome, what function best predicts their intelligence? The most recent such effort uses over a thousand genes and is able to predict 10% of variability in educational attainment. This isn't much, but it's a heck of a lot better than anyone was able to do under the old "dozen genes" model, and it's getting better every year in the way healthy paradigms are supposed to. Genetics is interesting as an example of a science that overcame a diseased paradigm. For years, basically all candidate gene studies were fake. "How come we can't find genes for anything?" was never as popular as "where's my flying car?" as a symbol of how science never advances in the way we optimistically feel like it should. But it could have been. And now it works. What lessons can we draw from this, for domains that still seem disappointing and intractable? Turn-of-the-millennium behavioral genetics was intractable because it was more polycausal than anyone expected. Everything interesting was an excruciating interaction of a thousand different things. [SSC]
  • Trump has energized and alarmed the left, while he did nothing to protect his followers or sympathizers, did nothing to go after the tech giants where a case could be made that they broke some laws, and accomplished very little to nothing of the things which could have been expected of him (like slowing down illegal immigration or building the wall). Overall nationalism or the Hard Right are probably worse off than would be without him. [Karlin]
  • When fintechs or banks introduce new media of exchange or payments systems, they invariably piggy back off of the existing national units of account. For instance, when PayPal debuted in 2001, it didn't set up a new unit called PayPalios. [link]
  • Until that moment, it had not really occurred to me — or my mothers, even though one is an ObGyn — that I might have half siblings out there. It makes no sense that we didn't think about that, because my parents deliberately chose a donor whose sperm had successfully produced at least one live birth, whose sperm had, in a sense, "worked." I think they were just so focused on thinking about the new family they were creating that they never stopped to think about the implications of the huge, inadvertent social experiment they were joining. [NY Times]
  • In the years between his youthful passion for little sports cars (Fiat 850, Alfa Spider, etc.) and his later less flexible and more comfort-oriented self, he'd come to like creature comforts, modern accouterments, and the like. The narrow seats, floor-hinged pedals, narrow dash, and haphazard cockpit layout just didn't suit his then-Lexus-driving self. I implored him to give it a shot, but at the asking price he was having none of it, and we left the dealership. About 3 months later, he bought a brand new 5th Generation Honda Prelude which suited him just fine, and he kept reminding me how he'd saved something like $50K and still got a great fun little car. And, well, he did. [Bring a Trailer]
  • Students who came from lower-income households were much less likely to drink than their wealthier peers; 35 percent of respondents whose parents make less than $40,000 in combined income drank at least once a week while that figure was 69 percent for students whose parents make at least a combined $250,000. [Harvard Crimson]
  • A walk around the block revealed a classic 1920s district of modest craftsman bungalows, Spanish revival cottages, tudors, and colonials mixed with more than a few large impressive homes all beautifully maintained and thoughtfully landscaped. Comparable properties in Los Angeles or San Francisco sell for millions. Stockton is a bargain basement Pasadena.[Granola Shotgun]
  • One of the most enjoyable things in the world is seeing the dude with the $200K car show up at an open track event and watch as his ego gets absolutely shattered by the dude with a sub $20K race car who laps him repeatedly during a 20min session. Buy a $40K race car and get really, really fast with it. Then when you show up with you $200K car you aren't part of the 99% who cannot use even 7/10th the performance of it. [Jalopnik]
  • The cash conversion cycle (CCC) refers to the time span between the outlay of cash for purchases to the receipt of cash from sales. It is a widely used metric to gauge the effectiveness of a firm's management and intrinsic need for external financing. This paper shows that a zero-investment portfolio that buys stocks in the lowest CCC decile and shorts stocks in the highest CCC decile earns 5 to 7% alphas per year. The CCC effect is prevalent across industries and remains even for large capitalization stocks. The CCC effect is distinct from the known return predictors. The returns of high-CCC stocks are more sensitive to the health of the financial intermediaries than low-CCC stocks. This suggests that the CCC-based strategy cannot be explained by the financial intermediary leverage risk. [SSRN]

Sunday, June 30, 2019

Books Read - Q2 2019

This quarter was a slow one for reading - only 9 books. Been doing lots of writing, which you can see over at Oddball Stocks. (Previously: see the Q1 books list (16) and the 2018 list which was 113.)

  • Fraud Casebook: Lessons from the Bad Side of Business (3.5/5) These are almost all small business embezzlement cases - not big public company frauds. In most of these cases the fraud uses fake expenses. A person in accounting or accounts payable arranges to pay his company or a buddy's company based on bogus invoices, the purpose obviously being to receive those funds. (That's why it is so strange that the Tesla payables guy who was indicted just paid one vendor instead of another.) At companies with workers who are paid in cash, there could be fake payroll instead of fake vendors, but that is small time. There are a handful of cases of diverting revenue, but those are pretty small time too, like hotel employees renting out vacant rooms, or retail employees not ringing up sales. (Retail businesses have three measures of sales: those recorded on the POS system, the cash and noncash tender received, and the change in inventories.) But the big money embezzlements are fake expenses or, at someplace really profitable but really disorganized like a doctor's office, an office manager with the checkbook just writing herself checks. Which brings up the big theme of the book, in my view: small businesses can be terribly under-managed but still remain in business. If they are not noticing 1 or 2% of revenue being diverted, how much attention are they paying to any aspect of the business, at least on the cost side? I have noticed that firms that go bankrupt have poor accounting systems. How hard would it be to buy these small companies with checked out owners and improve them? You'd think there would be low hanging fruit: ditch low profit work to focus on high profit, charge more for the high profit based on improved service, cull low performers and replace them with high performers (who are a bargain). One friend of the blog thinks that there will always be profits (and high returns on capital) to be had in small business because there is so much work to be done and so few smart people to organize it.
  • Heat: An Amateur's Adventures as Kitchen Slave, Line Cook, Pasta-Maker, and Apprentice to a Dante-Quoting Butcher in Tuscany (4.5/5) New Yorker editor (and author of Among the Thugs) Bill Buford got very interested in cooking and worked at the Mario Batali restaurant Babbo in Greenwich Village for a year as a "kitchen slave". As you would expect from someone who made the cut at NYer, he's very astute and it's a great read. When first starting at Babbo he's cutting celery and throwing the leaves away. Batali happens to come in the kitchen and see them in the trash: "What have you done? You're throwing away the best part of the celery! Writer guy - busted! Remember our rule: we make money by buying food, fixing it up, and getting other people to pay for it. We do not make money by buying food and throwing it away." Something that's been missing from my short rib recipe: "turn the braising liquid into a sauce... pour the liquid they were cooked in through a strainer into another pot.. take this dense, aromatic, already highly extracted liquid and hammer it: you put it back on a burner and boil it to hell. Just torch it... keep boiling the thing [and skimming the fat] until it's reduce by more than half, when, lo and behold, it is no longer a braising liquid or a broth: it's a sauce." He mentions that northern Italians are polenta eaters, Tuscans are bean eaters, and "a Napoletano is a macaroni eater, the belief in Italy being not that you are what you eat but that you're the starch." Mentions economic analysis by Giovanni Rebora: "until recently, there had always been plenty of meat... meat was consumed in quantities that, to us, seem excessive. It was also cheap. Meat was so available because farm animals were, in the pre-plastic days, essential for many other things besides dinner: like leather for belts, boots, helmets, and the adornments required by Europe's vast armies". Also mentions that the diagrams for how to butcher an animal: "each one different, no two cuts alike, with few shared terms... every country-and in Italy, every region and, sometimes, every town-has its own unique way of breaking an animal down into dinner size portions." Good description from a review on Goodreads: "I felt that the most interesting parts were those chronicling his time in the kitchen at Babbo and telling Batali's personal story. The parts that, in the end, were the least interesting to me were those detailing the regional gastronomy of Italy, or the history of pasta... even as a person interested in food and cooking, some of these histories just went into too much detail and were too lengthy to hold my interest (for example, a seemingly unending chapter on when and why cooks starting adding eggs to their pasta dough)..."
  • Stalin: Triumph and Tragedy (2.5/5) In 1991, it was called the "most candid and fullest reappraisal of Stalin to date by a Soviet source." However, for me it was redundant because I already read Khrushchev Remembers last year. Like that memoir, this biography was anti-Stalin but only from a "true" Communist perspective. Reading about how Stalin "betrayed the Revolution" is incredibly tedious. The book which we really need - and I do not think it exists - would analyze the Bolshevik revolution and subsequent history of the USSR as an inter-ethnic conflict, because that is what it was. Two things of note: first, at the end of his life, Lenin was isolated and possibly killed by Stalin, Kamenev, and Bukharin. (Just as Stalin was isolated and possibly killed by Beria!) Second, Stalin and Trotsky were born within two weeks of each other in 1879. There is a quote from a book by Essad Bey about the two men: "Trotsky and Stalin were the two opposing poles of the Communist Party. Neither in personal nor political terms did they converge at any point. Trotsky was a brilliant European, an experienced and conceited journalist, and Stalin was a typical Asiatic, a man without vanity or personal needs, with the cold, dark mind of an eastern conspirator. Two men such as these were bound to hate each other."
  • Working (4/5) By Robert Caro, two-time Pulitzer Prize-winning author of the Robert Moses biography The Power Broker and then the multi-volume Lyndon Johnson series. It took him seven years to write the Moses book and he still is not finished with LBJ. This collection of essays is about his research process - "turning every page" of archival materials, plus thousands of interviews. (For example, Caro got the guy who fixed LBJ's Texas Senate race - he made up 200 votes - to confess because he was an old man and proud of his role.) Similar to McPhee's recent book about his writing process. Caro got interested in Moses as a young reporter, when he saw that Moses - an unelected urban planner - had the power to completely reshape New York City. Moses used techniques like giving booze to state legislators during prohibition, or directing insurance premiums for the infrastructure to brokerages controlled by legislators. This book is great because you learn a lot about LBJ, Moses, and Caro without having to read the thousands of pages of the five biographies - it's a capsule summary, and it's additionally helpful because Caro talks about his motivations for dedicating his life to this, which you would not find in the underlying books. Moses was born 1888, LBJ in 1908, and Caro in 1935. Caro is a very clever and indefatigable researcher but his writing is not as smooth as someone like John McPhee (a fellow New Yorker writer). When the New Yorker excerpted Power Broker, editor William Shawn condensed it - something that Caro was not happy about, but he was paid more for the excerpts than he had been seven years earlier for the whole book. ("The New Yorker series is a very readable redaction of the original — and without sacrificing much essential information, easier on the attention span than the book, which requires an immense time commitment.")
  • Fortune's Children: The Fall of the House of Vanderbilt (3/5) A Vanderbilt descendant (Arthur T Vanderbilt II) wrote this in 1989 to answer the question frequently asked of him, "why aren't you rich?" The answer is that the descendants of Cornelius, starting with his grandchildren, spent the money extremely rapidly, largely on houses. The worst offender - and the villain of the book - is a woman named Alva, who married William K Vanderbilt, the son of William H Vanderbilt, who was the eldest son and primary heir of the Commodore. This grandson (W.K.), husband of Alva, was weak and allowed her to dissipate a huge amount of the fortune on a series of mansions. (Would you be surprised to hear that she was a suffragette, and that she later divorced him?) Their "Marble House" cost $11 million in 1892, at a time when an ounce of gold was equivalent to $20. The 550,000 ounces of gold is $700 million in today's dollars. Apparently the bulk of this expense was to buy 500,000 cubic feet of marble. The U.S. GDP in 1890 was apparently about $15 billion, so this house cost almost a tenth of a percent of GDP (spread over several years), which would be more like $13 billion in today's dollars. (This overstates the expense because GDP has grown so much in real terms.) However you look at it, this was a massive malinvestment, and it was just one of the mansions - a summer house in Rhode Island used for a small part of the year. The best part is that in 1932 she was forced to sell it (worst possible time) for only $100,000 (one cent on the dollar). The psychology (mistakes and delusions) of these elite WASPs at the turn of the century is a window into how founding stock Americans lost their country. Don't worry about leaving too much money to your descendants because they'll waste it. Try to leave them good genes and culture.
  • Cities and the Wealth of Nations: Principles of Economic Life (3/5) Wish I'd realized that "Cities and the Wealth of Nations attempts to do for economics what The Death and Life of Great American Cities did for modern urban planning", because I'm only interested in Jacobs' thoughts on urban planning, not economics. She wrote this in 1984 and her thought was that macro-economics was a shambles (true): "Its undoing was the good fortune of having been believed in and acted upon in a big way. We think of the experiments of particle physicists and space explorers as being extraordinarily expensive and so they are. But the costs are as nothing compared with the incomprehensibly huge resources that banks, industries, governments and international institutions... have poured into tests of macro-economic theory. Never has a science, or supposed science, been more generously indulged." She's not the brightest star in the sky (or most honest?) as she's at a loss for why Germany, Northern Italy, and Southern Italy had varying levels of success after receiving Marshall Plan aid. That makes it hard to believe that any of her thoughts on economics would be worthwhile. And it didn't take a genius to point out - as she did in her key, first work - that having Robert Moses bulldoze your neighborhood to build an expressway is good for the people using the expressway but bad for you. There are a few interesting thoughts on economics though. Writing about stagflation - "a condition of high prices and too little work" - she observes "this condition is not abnormal or unprecedented. Rather, it is the normal and ordinary condition to be found in poor and backward economies the world over." This is a great point. She thinks that cities rather than nations are the most salient macro-economic entities: "most nations are composed of collections or grab bags of very different economies, rich regions and poor ones within the same nation." She contrasts "import replacing cities" with "supply regions" - "the great deficiency of poverty-stricken and backward economies is that they do not produce amply and diversely for themselves, depending to a ridiculous degree on imports instead." Successful cities grow to replace their imports and create "city regions" - "a dense, rich mixture of city and rural activities". Then there are supply regions - "stunted and bizarre economies" - that can be temporarily rich but are too focused on exporting one good and ultimately crash because they never advanced to import replacement. Uruguay did this during the early 20th C by focusing on ranching cattle and sheep, doing very well during WWII but crashing afterward due to competition from Australia and New Zealand plus substitutes for wool and leather. Uruguay did then try to do some import replacement, but directed from the top down, and failed because it "lacked the ranges of skills, the symbiotic nests of producers' goods and services, and the practice and improvising and adapting." She says, "today Uruguay has what is called a Third World Economy, but even when it was prospering, Uruguay had a Third World economy... supply regions are inherently overspecialized and wildly unbalanced economies, hence unresilient and fragile, helpless when they lose their fragments of distant markets." Who else is like this? North Dakota, the Arab oil states, even Iowa is far too dependent on growing carbs and selling them to foreigners. Attempts at making these places prosperous are like the Tennessee Valley Authority boondoggles - they fail for lack of the organic, gradual establishment of an import replacing city. One of her ultimate points is that "national or imperial currencies give faulty and destructive feedback to city economies." One last concept is "transactions of decline," like the growth of Sun Belt cities: "financed by draining older cities of their earnings."
  • The Buried: An Archaeology of the Egyptian Revolution (4/5) The latest by Peter Hessler (previously on China: 1, 2, 3). This is his story of living in Cairo during the Arab Spring and revolution / coups in Egypt. Successful writing means finding interesting things to write about - one of the keys to McPhee's success. However, revolution tip: stay away from crowds and protests. When there are episodes of violence during a short event like a revolution or war, or a long event like a drug war, it comes down to location, location, location. Although he did visit protests in person (and broke his foot running away from gunfire), Hessler and his family lived in the nice neighborhood of Cairo called Zamalek, which is on an island in the Nile called Gezira. Zamalek has "quiet, leafy streets and 19th-century apartment blocks" in Art Deco style - sounds like La Condesa in Mexico City. When people in this part of the world are successful, one thing they do is build a six story building for their extended family. Interesting things about Egypt: Great Pyramid of Giza was tallest structure in world for 4,300 years. The monument building in Egypt shows the evolution of kingship. Kings as parasites. [Remember Against the Grain.] "After Christians began to reconquer the Iberian Peninsula, in the late 11th C, scholars translated the Arabic versions of Greek classics into Latin." Uh oh: "In a country where systems and laws had always been weak, there were other forces that kept the place from collapsing." (We don't have that?) Hessler has the idea that language textbooks "teach much more than just vocabulary and grammar." One funny thing about him - he never writes about food. He made friends with his garbage man Sayyid and got in hot water for his writing that exposed the guy's funny habits. There is a Chinese presence in Egypt, and of course Hessler could talk to them because his project before Egypt and Arabic was China and Chinese. "After 11 years in China, I couldn't recall a single instance in which a Chinese shopkeeper gave me too much change. But in Cairo this happened more times than I could count." It seems like the Chinese will be the ones to organize and colonize Africa, because they don't have white guilt or Christian sympathy for the weak. One problem that the Egyptians have, and a reason they need outside organization, is low literacy. (Another problem is that 40 percent of Egyptians married to cousins.) Hessler thinks that the low literacy is because written, formal Arabic is so different than spoken Egyptian. This leads to one of the funniest episodes in the book, a parliamentary election where the ballot has names and symbols, which the candidates pick from a list of government approved ones (that include knives, rifles, and scorpions). One man outside a polling station told him, "I voted for the lamp and the helicopter." The clan elders tell them which symbols to vote for.
  • The Pioneers: The Heroic Story of the Settlers Who Brought the American Ideal West (3/5) This caught my eye because of McCullough's use of both "pioneers" and "settlers" in the title. (See my review of Audubon, On The Wings Of The World: "Audubon represents early American pioneers, settlers, and frontiersmen - words you never hear anymore, replaced by 'immigrants'".) Maybe not surprisingly, my favorite part of this book was the first third, which had Congregationalists from Massachusetts carving out the first permanent settlement of the new United States in the Territory Northwest of the River Ohio (at Marietta, Ohio). One of the founders (of the land company; he never lived there) would climb up hills in New England with a barometer to measure their elevation. Random farming fact - a corn crop in 1789 was measured at 20,000 bushels on 400 acres (50b/ac). The blacksmith forge a center of social and industrial activity. One question: was Ft Harmar built to protect Indians from Scots Irish settlers? Or at least to prevent settlement?
  • A Naturalist at Large: The Best Essays of Bernd Heinrich (3/5) In 1793, a German schoolteacher named Sprengel published his idea that flowers are the reproductive organs of plants (using bees). The ideas was considered crazy and he was fired. Some highlights from Bernd: "Individual bumblebees of any one species learned to become specialist foragers on the flowers of specific but different plant species. They thereby increased their foraging profits by learned skills in flower finding and handling, as they carried pollen from an individual plant of one species to another flower of the same species... those plants in turn co-evolved to accentuate flower differences that favored the bees' becoming specialists (and hence reliable pollinators of those plants)." I always tell people that nests aren't birds' "houses," but - "downy and hairy woodpeckers excavate tree holes in November, apparently for the sole purpose of sleeping in them at night." Also: "Biology is in large part history, which is what separates it from physics and chemistry. And to gain a historical perspective into any specific biological pattern requires seeing where else the phenomenon may be found, and then asking if the pattern is associated with any of a large number of environmental factors that may have been in common or different with respect to a related species." I liked his Nesting Season and Beaver Bog books from last year better.

Monday, June 24, 2019

June 24th Links

  • Beal plays his cards patiently. For three long years, from 2004 to 2007, he virtually stopped making or buying loans. While the credit markets were roaring and lenders were raking in billions, Beal shrank his bank's assets because he thought the loans were going to blow up. He cut his staff in half and killed time playing backgammon or racing cars. He took long lunches with friends, carping to them about "stupid loans." His odd behavior puzzled regulators, credit agencies and even his own board. They wondered why he was seemingly shutting the bank down, resisting the huge profits the nation's big banks were making. One director asked him: "Are we a dinosaur?" Now, while many of those banks struggle to dig out from under a mountain of bad debt, Beal is acquiring assets. [Forbes]
  • Meanwhile, the Debtors continue to deplete the remaining assets that could otherwise be used to satisfy Second Lien Debt. This is, in fact, the scenario that 507(b) of the Bankruptcy Code is designed to prevent. Without it, the Second Lien Creditors would soon find themselves in the position of the Jarndyce family in Charles Dickens' Bleak House: "Mr. Kenge," said Allan, appearing enlightened all in a moment. "Excuse me, our time presses. Do I understand that the whole estate is found to have been absorbed in costs?" "Hem! I believe so," returned Mr. Kenge. "Mr. Vholes, what do you say?" "I believe so," said Mr. Vholes. "And that thus the suit lapses and melts away?" "Probably," returned Mr. Kenge. "Mr. Vholes?" "Probably," said Mr. Vholes. [SHLDQ]
  • Here he tells how the gift of a beautiful scarlet dressing gown leads to unexpected results, eventually plunging him into debt. Initially pleased with the gift, Diderot came to rue his new garment. Compared to his elegant new dressing gown, the rest of his possessions began to seem tawdry and he became dissatisfied that they did not live up to the elegance and style of his new possession. He replaced his old straw chair, for example, with an armchair covered in Moroccan leather; his old desk was replaced with an expensive new writing table; his formerly beloved prints were replaced with more costly prints, and so on. "I was absolute master of my old dressing gown", Diderot writes, "but I have become a slave to my new one... Beware of the contamination of sudden wealth. The poor man may take his ease without thinking of appearances, but the rich man is always under a strain". [Wiki]
  • This is why the media activists are pumping air in the tries of the Warren campaign. She is the fall back candidate for when the party has to take the keys away from the Biden Buggy and put Uncle Joe in a home. She is no spring chicken herself, but her handlers are not wiping oat meal off her chin either. Her new economic pitch is aimed at the same old white people Biden is attracting with his lunch pail Joe act. That and she can appeal to angry single women and the snotty cosmopolitans. It speaks to the age that both parties in the 2020 presidential election will be running explicitly nostalgic campaigns. Trump is a crude reboot of the Reagan years. [Z Man]
  • For a variety of reasons I have shifted away from Taleb and towards Falkenstein (with his devastating critiques of Taleb's bloviation). Falky's book is a 5/5 and nothing by Taleb comes close to that. Most readers have probably seen Taleb's freak-out about IQ (where he's utterly wrong) in early 2019, but if not see some summaries [1,2,3,4]. Taleb's level of humility relative to accomplishment and actual novel ideas discovered is an unfortunate outlier. The reason we took a look at TBS and FBR within the past year is that they go from the review desk into the trash can. Now we are left with zero Taleb works on the premises. [CBS]
  • Roll ups of HVAC have been tried a number of times and nobody has cracked the code. The problem is that they are largely mom and pops who's success is tied to an owner/manager who lives the business. The customer relationships and employee loyalties are tied largely to that owner. Once they sell out and move on, those relationships slowly dissipate and die - especially when employees are now reporting to an Area Manager and have to focus on budgeting and targets and other "corporate" metrics. There are very few synergies with the exception of some systems and purchasing but those tend to take more effort to integrate than they achieve in savings. Historically the play has been to buy the mom-and-pops at 3x EBITDA with a parent that trades at 5x EBITDA and get the value pop there. But over time that EBITDA shrinks instead of growing and the whole thing dies slowly. [CoBF]