Books Read - Q4 2019

In Q4 read 15 books, which makes 48 for the year. Previously: see the Q1 books list (16), Q2 books (9), Q3 books (8), and the 2018 list which was 113.

• Junk to Gold: From Salvage to the World's Largest Online Auto Auction (3/5) Somebody on fintwit mentioned this - the story of Copart which is a salvage auction company, and an $18 billion company founded in 1982 by a rural Oklahoman with a high school education. He started out in 1972 with a junkyard that he bought with seller financing - selling his house to come up with the downpayment, and moving into the yard. The best excerpt that was posted from the book was this one, about how he thought about buying and acquiring salvage auctions versus how his fast-growing, "roll-up" public competitor thought about it. It was a quick read but not much marginal benefit from reading the whole thing vs just those excerpts. Book ideas from Twitter have been subpar lately.
• Dead Companies Walking: How A Hedge Fund Manager Finds Opportunity in Unexpected Places (2/5) Another one from Twitter that was not really worthwhile, except for two good excerpts. The first, "The financial world suffers from an inherent flaw: the people who work in it, by and large, are terrible investors." People who work in finance are hyper-competitive status-climbers, which means that they have trouble admitting failure and are highly susceptible to groupthink. The second (thread) is about the optimism bias of corporate managers: "People in management positions, even very senior management positions, are often completely wrong about the fortunes of their own companies. More important, in making these misjudgments, they almost always err on the side of excessive optimism." We have talked about the optimism bias in the past. He thinks that there are six common mistakes that cause companies to fail: (1) learning only from the recent past, (2) relying too heavily on a formula for success, (3) misreading or alienating their customers, (4) falling victim to a mania, (5) [being disrupted], and (6) being physically or emotionally removed from their companies' operations. As a shortseller, he has also noticed that stocks underreact to negative news: "Even the stocks of the most severely troubled businesses would often continue trading at much higher prices than they should have, and for far longer than they had any right to. Time after time, I would study a company's financial statements and be mystified that its share price was anywhere over a penny."
• The Trees in My Forest (3.5/5) By Bernd Heinrich (previously in links) - not as good as some of his other books from last quarter or last year. It's about his forest - three hundred acres in Maine - that he bought in 1977 after it had been recently logged. Some thoughts: "All the ingenious strategies that different tree species use to tap the incredible amount of solar energy that is available are contingent on what competitors do." "Wood itself has evolved independently several times." Wood is dead tissue that is water-conducting and also structural. About Dutch elm disease: "If it is inevitable that the tree will be killed before it reaches a half foot in diameter, then only those who have a tendency to reproduce early, while they have the chance, will pass on their genes to future generations... Perhaps the best strategy for elms now may be to reproduce at any size, immediately upon becoming infected... Theoretically a tree could evolve to require the fungus as a signal to tell it to bloom." Allergies: "Trees improve their odds of fertilization by dispersing astronomical numbers of pollen grains... [no one knows] why northern trees are mostly wind-pollinated rather than animal-pollinated." Anti-oxidants: "As part of the process of photosynthesis plants release oxygen. Too much sunlight may release a toxic excess of oxygen molecules." Plants have pigments that divert excess sunlight: "They are responsible for some of the brilliant fall leaf colors after the clorophyll" is removed from the trees in the fall. Large seeds vs small seeds strategy - large seeds invite predators to eat them and they are less mobile. "[A] tree generally produces no seeds for a few years - until all of its seed predators have starved or left." Bernd has "kept informal records of the nut crops, commonly called 'mast,' in [his] forest since the fall of 1980." By buying the forest for $90 an acre in 1977, Bernd made a timber investment when the ten year treasury was yielding around 7.5%. He says that he has sold timber on the stump (net) for more than twice the original price of the property. (See Norwegian Wood review from Q1 books.)
• The Homing Instinct: Meaning and Mystery in Animal Migration (3/5) Another one by Bernd Heinrich. A few interesting things. Loons that have claimed a northern pond to nest in the spring confront "floaters;" single birds without homes. "The floaters were scouting - making assessments of both the worthiness of the others' real estate and the defensive capabilities of the resident males - to gauge the possibility for future takeovers." Indigo buntings navigate with stellar orientation. "Knowledge of the specific star patterns as such is thus not inherited, but attention to them, the capacity to learn from them and respond to them, is." Other birds can sense (and "see") the variation of Earth's magnetic field and use it to navigate - not only to fly north or south but also to estimate latitude based on the angle of the magnetic lines of force.
• Everything I Know About Business I Learned From The Godfather (4/5) "Writing about The Godfather's business lessons is not an endorsement of horses' heads in beds, garroting, cold-blooded murders of business rivals, bribery, extortion, or any other Mafia criminality, any more than writing about the US government is an endorsement of theft via taxation, regulatory extortion, crony socialism, regime changes, senseless and endless wars, intelligence agency skullduggery, Orwellian surveillance, bureaucratic rot, and nonstop lies." He quotes something from the novel that I did not remember: "He had a fleet of freight hauling trucks that made him a fortune primarily because his trucks could travel with a heavy overload and not be stopped and fined by highway weight inspectors. These trucks helped ruin the highways and then his road-building firm, with lucrative state contracts, repaired the damage wrought." He likens this to government schools: "[T]hose who love government have a growing number of votes. Many of them educated in government schools, which have instilled in them a belief in government  - a corrupt business creating more corrupt business for itself."
• Life Everlasting: The Animal Way of Death (3/5) One more Bernd Heinrich. His is less consistent than John McPhee - my favorite was probably One Wild Bird at a Time. And The Nesting Season was important because it illuminates how the human mind is susceptible to harmful memes just as a sparrow is vulnerable to having cowbird eggs dumped in its nest. I might read One Man's Owl and, when it comes out next year, White Feathers. Some thoughts from Life Everlasting... who knew: "Aside from eusocial species such as ants and honey bees, parental care is quite rare among insects, and burying beetles are remarkable exceptions." Humans are "the ultimate scavengers of all time," sustaining an enormous population now using the remains of plants that are hundreds of millions of years old. The more I read about biology and ecology, the more I think that Malthus will eventually be proven right in the physics vs economics debate about the finite world. We may be starting to see this with the failure of oil shale to generate shareholder returns (or even preserve bond investors' capital) at current low oil prices. Also: vultures "find food by soaring, which has nearly the same metabolic cost as perching - it's the equivalent of perching in the sky... they are also adapted to survive fasts of several weeks or more." Points out that biocides (like rodent poisons) travel up the food chain and hurt larger animal predators and scavengers of them. "A slower but surer method would be to foster populations of native owls and kestrels." One other thing - a puzzle - why do salmon die after they spawn? As Wikipedia explains, the death of salmon looks like a "programmed senescence," "characterized by immunosuppression and organ deterioration"! ("Semelparous animals spawn once only in their lifetime. Semelparity is sometimes called 'big bang' reproduction, since the single reproductive event of semelparous organisms is usually large and fatal to the spawners.") This was the question in Cracking the Aging Code, a Q1 2019 book. Remember, that author believes that aging is a group-selected adaptation that serves to "stabilize ecosystems, to level the death rate in good times and hard times," because "despite the fact that aging is a disaster for the individual, evolution seems to have guarded and preserved the genes for aging as though they were the crown jewels. This is a dead giveaway that aging must have an essential biological function."
• The Lost Philosopher: The Best of Anthony M. Ludovici (3/5) British intellectual who lived 1882-1971, he briefly worked for sculptor Rodin. He points out that "the lesson of the Middle Ages was to the effect that Church and state were only too frequently in conflict, and unless a European monarch had either come to an agreement with Rome, or had, like the aristocratic rulers of Venice, wisely insisted on controlling ecclesiastical affairs in his own state, his authority was never secure. At any moment, the Church as the spiritual and moral guide of Christendom might intervene and champion the cause either of his subjects or of his enemies against him... and when we remember that the Christian religion, unlike the Jewish, the Greek, the Egyptian, and the Roman, is an international or Catholic religion, aiming at universality and calling itself universal, we have to recognize in its presence in the nation not only a state within the state but in some respects a foreign state within the state." We saw this in God's Secret Agents - during the reign of Richard II an act of parliament called the Statute of Praemunire made it illegal for anyone to act in a way that recognized papal authority over the authority of the king. Ludovici was a translator of Nietzsche and so, like Mencken, he was a critic of Christianity. He favored eugenics and was worried about how Christianity failed to "value man biologically and asethetically" as opposed to just morally. He traced this back to Greece: "every essential position of Christianity was first discovered and conquered by the thinkers of Greece: dualism, the immortality of the soul," etc. 
• On Liberty, Society, and Politics: The Essential Essays of William Graham Sumner (2/5) William Graham Sumner was mentioned in The Forgotten Man by Amity Shlaes (read in Q2 2018). "The Forgotten Man" is a Sumner coinage (from this essay) which Roosevelt and his communist "brain trust" stole and turned on its head! (His words twisted by knaves to make a trap for fools.) The Forgotten Man is you and me, the Credit Bubble Stocks community of thrifty workers and investors. Sumner's point was that do-gooders steal money from the likes of us to give to other people. But FDR inverted it with the absurd notion that the millions of people on his dole were the forgotten. That's Sumner's best (and only good) essay. He says: "All the public expenditure to prevent vice has the same effect. Vice is its own curse. If we let nature alone, she cures vice by the most frightful penalties. It may shock you to hear me say it, but when you get over the shock, it will do you good to think of it: a drunkard in the gutter is just where he ought to be. Nature is working away at him to get him out of the way, just as she sets up her processes of dissolution to remove whatever is a failure in its line. Gambling and less mentionable vices all cure themselves by the ruin and dissolution of their victims. Nine-tenths of our measures for preventing vice are really protective towards it, because they ward off the penalty."
• How Not to Be Eaten: The Insects Fight Back (3/5) We live on Planet Insect. Many insects undergo metamorphosis, either gradual (starting as nymphs) or complete (starting as larvae). The two life phases represent anatomical and behavioral specialization: the jarvae are "eating machines" and the adults are "flying gonads". Based on insect species that are known, "complete metamorphosis has been an evolutionarily more successful strategy for survival," with only 15% of species having gradual metamorphosis. Quotes Roger Tory Peterson on the insects: "The insects, which have invaded nearly every terrestrial environment on Earth, are unable to evade the birds that probe the soil, turn over the leaf litter, search the bark, dig into the trunks of trees, scrutinize every twig and living leaf. The water is no safe refuge,  nor is the air, nor the dark of night. There is a bird of some sort to hunt nearly every insect." Birds that eat insects from trees are divided into feeding guilds, the specialization driven by the principal of competitive exclusion. "People of almost all non-Western cultures eat insects, usually as a special treat." The current "elite" are working on preparing Americans to live in shipping containers and eat bugs as the country gets more crowded. There was a natural experiment showing natural selection during the 19th century in England when coal smoke blackened tree trunks and killed lichens that grew on them. The pale peppered moth quickly changed color to black (over a period of several decades) - then changed back when the air got cleaner during the 20th century! Animals use countershading - dark on upper surfaces and light on lower surfaces - "the artist, by the skillful use of light and shade, creates upon a flat surface the illusionary appearance of roundness. Nature on the other hand, by the precise use of countershading, produces upon a rounded surface the illusionary appearance of flatness." Insects that are insect eaters are especially likely to be solitary - to avoid cannibalism. Other types are gregarious and get advantages against predators from group living. "The epitome of group living and group defense is practiced by the eusocial insects..." "Insects are good biochemists," and they also use toxins created by plants. "The seeds plants produce a huge variety of toxins, may thousands of them, to deter insects and other animals that intend to nibble on them." Mentions Bernd Heinrich's observations of caterpillars that know to hide the evidence of their leaf feeding so that birds, which are looking for this, don't find them. "Insects are the most effective of the biological agents that limit the increase of plant populations." "Batesian mimicry is arguably the ultimate of the counterdefenses that have evolved so far."
• Beyond the Hundredth Meridian: John Wesley Powell and the Second Opening of the West (3.5/5) Previously, see Cadillac Desert by Marc Reisner, which mentions Powell. Born in 1834, he is most famous for his expedition from the Green River in Wyoming down the Colorado River to Nevada: "Nine men had plunged into the unknown from the last outpost of civilization in the Uinta Valley on the sixth of July, 1869. On August 30 six came out." Towards the end of the journey, three of the men left the boats to try to hike out of the canyon because they did not think the remaining rapids would be survivable. "The three had climbed the wall and made it to the forested top of the plateau. They had made it no farther. They lay out there now somewhere beside a waterpocket, stripped and filled with Shivwits arrows, victims of an Indian misunderstanding and of their own miscalculation of the algebra of chance." The key to the West: "Water is the true wealth in a dry land; without it, land is worthless or nearly so. And if you control the water, you control the land that depends on it. In that fact alone was the ominous threat of land and water monopolies." And some other implications as well.
• This Idea Is Brilliant: Lost, Overlooked, and Underappreciated Scientific Concepts Everyone Should Know (3.5/5) Some ideas: (1) illusion of explanatory depth: "most people feel they understand the world with far greater detail, coherence, and depth than they really do," (2) determinism: "all matter and energy in the universe, including what’s in our brain, obey the laws of physics," (3) comparative advantage, (4) J.B.S. Haldane's rule of the right size: “Comparative anatomy is largely the story of the struggle to increase surface in proportion to volume.” The essay about the Reynolds number was written by George Dyson, son of Freeman Dyson, who wrote a book about his rediscovery of Aleutian Indian kayak design and also a history of the invention of the computer.
• Owls: Our Most Charming Bird (2.5/5) Watercolor cartoons of owls along with silly, whimsical descriptions. I didn't really think he did the owls justice. As someone on Goodreads pointed out, the descriptions had a lot of "weird anthropomorphic metaphors". A better bet for owls is a good guide.
• Christmas Stories (Everyman's Library) (2.5/5) As with any short story collection, some were better than others. Enjoyed The Blue Carbuncle by Arthur Conan Doyle and Bella Fleace Gave a Party by Evelyn Waugh. (Turns out that one was made into a short film.
• The Spanish Civil War: Reaction, Revolution, and Revenge (Revised and Expanded Edition) (2/5) The author is a Communist sympathizer - he dedicates the book to the International Brigades! He describes the prelude to the SCW as a "gradual and immensely complex division of the country into two broadly antagonistic social blocks." I did not know much about those factions. He says that, "from the very first days of the Republic right-wing extremists disseminated the idea that an alliance of Jews, Freemasons and the working class Internationals was conspiring to destroy Christian Europe, with Spain as a principal target." In contrast the Nationalists were Catholics (worried about the brutal anti-clericalism of the left) and people with property. "The triumph or defeat of the military coup followed the electoral geography of the country." "Had we no sewers in Madrid, Barcelona, and Bilbao, all these Red leaders would have died in their infancy instead of exciting the rabble and causing good Spanish blood to flow. When the war is over, we should destroy the sewers." Spaniards caught "behind enemy lines" - in territory where people like them were not in firm control - were in big trouble once the war broke out. It is questionable whether the Nationalists would have succeeded without ample assistance from Italy and Germany - as it was, the war took three years for them to win. Franco moved very slowly, eliminating leftists in detail along the way - "which was to be one of his greatest sources of strength after 1939." Franco: "I will occupy Spain town by town, village by village, railway by railway... Nothing will make me abandon this gradual programme. It will bring me less glory but greater internal peace. [...] I am not interested in territory but in inhabitants. The reconquest of the territory is the means, the redemption of the inhabitants the end." The Republicans were armed by the Soviet Union, so this was a proxy war that anticipated WWII. Nationalists had some foreign volunteers as well, although not like the scale of the International Brigades: "the ferociously anti-semitic Romanian Iron Guard sent eight volunteers..." Stalin needed the most revolutionary Spanish Republicans to tone it down so as not to drive a wedge between the USSR and France/Britain; this led to a lot of intra-Republican violence, which was a problem the Nationalists did not have. "Soviet policy on Spain was constrained by Stalin's search for Western allies against Hitler. Accordingly, Russian help had to ensure that political and social developments in Spain would stop short at the maximum which French and British policy-makers would tolerate." The Trotskyist party in Spain (POUM) "made itself even more of a target by dint of its outspoken public criticism of the trial and execution of the old Bolsheviks Kamanev and Zinoviev." You can visit Franco's Valle de los Caídos monument (see photo) to the SCW near Madrid.
• Baidarka: The Kayak (4.5/5) Rediscovery of Aleutian Indian kayaks by boat designer and author George Dyson - the son of physicist Freeman Dyson. The forward is written by Kenneth Brower, the author of a profile of Dyson father and son called The Starship & the Canoe. [Freeman's father was composer George Dyson, which makes three generations with Wikipedia pages. Being accomplished enough to have a Wikipedia page must be hereditary.] The opening paragraph is fantastic: "Two distinct groups of people made the shores of the eastern North Pacific their home: those who built dugout canoes and those who built skin boats. All the contrasts between virgin rain forest and barren island were reflected in their opposing techniques, yet the resulting vessels displayed equally sparse and graceful lines. The dugout builders took an enormous chunk of wood and eliminated everything, down to splinters, that was not essential to their definition of a boat. The skin boat people, working in reverse, began their boats from splinters, piecing together a framework that delineated the bare minimum of their vessel. The dugout, of living cedar, was a creature of the forest. The baidarka, of driftwood, whalebone, and sea-lion skin, was entirely a creature of the sea. The skin boat was a circumpolar concept. Along all northern coastlines, and on inland waterways as well, these craft ranges southward as far as materials, climate, and hostile forest-dwellers would permit." An early observer of the baidarka: "The hatches are so fat apart that lovers cannot indulge in osculatory or other demonstrations of affection." Another quote: "In mountaineering there is a proverb, 'Never step on anything you can step over, and never step over anything you can step around.'" About his massive baidarka, the Mount Fairweather: "If the Aleuts had conquered the Russians and everybody after the Russians, if the Aleutian culture had become dominant in the world, if an Aleut Pentagon had gone into building long-range strategic warships, then the warships would have looked something like this." About kayaking" a series of lengthy intervals spent watching distant headlands, islands, or landmarks grow slowly closer by degree, the intervals punctuated by those moments when you actually round the headland, pass the island, or reach the distant shore. And then the next objective comes into equally distant view."

New Year's Eve Links

• I can't think of a single large software company that doesn't regularly draw internet comments of the form "What do all the employees do? I could build their product myself." Benjamin Pollack and Jeff Atwood called out people who do that with Stack Overflow. But Stack Overflow is relatively obviously lean, so the general response is something like "oh, sure maybe Stack Overflow is lean, but FooCorp must really be bloated". And since most people have relatively little visibility into FooCorp, for any given value of FooCorp, that sounds like a plausible statement. After all, what product could possible require hundreds, or even thousands of engineers? A few years ago, in the wake of the rapgenius SEO controversy, a number of folks called for someone to write a better Google. Alex Clemmer responded that maybe building a better Google is a non-trivial problem. Considering how much of Google's $500B market cap comes from search, and how much money has been spent by tens (hundreds?) of competitors in an attempt to capture some of that value, it seems plausible to me that search isn't a trivial problem. [Luu]
• Language skills are highly multi-dimensional*, so while learning a language, it's important to come at it from lots of different directions. Here are some of the tricks I've used to practice Spanish that I haven't heard so many other people use. (They're likely useful for other languages too, of course.) (1) Translate past writing you've already published in English. (2) Start a Spanish-speaking Twitter account. (3) Rewatch your favorite kids movies in Spanish. (4) Set up a quick-access translator app. (5) Opt for e-books rather than physical ones. (6) Subscribe to Spanish language podcasts and YouTube channels. (7) Use spaced repetition. (8) Word of the Day newsletters. (9) Change your phone's system language to Spanish. (10) Build muscle memory for typing accented characters. (11) It is fine to fill in the gaps with English and Spanglish. (12) Date an Argentinian. [Devon Zuegel]
• Yes, at FedEx, we considered that problem for about three seconds before we noticed that we also needed: (1) A suitable, existing airport at the hub location. (2) Good weather at the hub location, e.g., relatively little snow, fog, or rain. (3) Access to good ramp space, that is, where to park and service the airplanes and sort the packages. (4) Good labor supply, e.g., for the sort center. (5) Relatively low cost of living to keep down prices. (6) Friendly regulatory environment. (7) Candidate airport not too busy, e.g., don't want arriving planes to have to circle a long time before being able to land. (8) Airport with relatively little in cross winds and with more than one runway to pick from in case of winds. (9) Runway altitude not too high, e.g., not high enough to restrict maximum total gross take off weight, e.g., rule out Denver. (10) No tall obstacles, e.g., mountains, near the ends of the runways. (11) Good supplies of jet fuel. (12) Good access to roads for 18 wheel trucks for exchange of packages between trucks and planes, e.g., so that some parts could be trucked to the hub and stored there and shipped directly via the planes to customers that place orders, say, as late as 11 PM for delivery before 10 AM. So, there were about three candidate locations, Memphis and, as I recall, Cincinnati and Kansas City. [Hacker News]
• Blockchain is the world's worst database, created entirely to maintain the reputations of venture capital firms who injected hundreds of millions of dollars into a technology whose core defining insight was "You can improve on a Ponzi scam by making it self-organizing and distributed; that gets vastly more distribution, reduces the single point of failure, and makes it censorship-resistant." [Hacker News]
• I'm mostly familiar with the Word file format, so I will restrict my comments to that. It's been more than 15 years since I did this stuff, so my memory is hazy -- specifically I can't remember how the Excel file formats work at all. Basically, the Word file format is a binary dump of memory. I kid you not. They just took whatever was in memory and wrote it out to disk. We can try to reason why (maybe it was faster, maybe it made the code smaller), but I think the overriding reason is that the original developers didn't know any better. Later as they tried to add features they had to try to make it backward compatible. This is where a lot of the complexity lies. There are lots of crazy work-arounds for things that would be simple if you allowed yourself to redesign the file format. It's pretty clear that this was mandated by management, because no software developer would put themselves through that hell for no reason. [Hacker News]
• According to Baraghani, a good bone broth doesn't need much more than bones and a few choice aromatics, like onions, garlic, and black pepper. "Don't even get me started on carrots," he says, which add sweetness. [Bon Appetit]
• The psychoactive ingredient in peyote was identified that same year, 1897, by the German chemist Arthur Heffter. He extracted five distinct alkaloids from the dried cactus and ingested them one by one, monitoring their effects. The most abundant, the compound he named 'mescaline', produced effects like those he had experienced after eating peyote buttons. The root word 'mescal' was applied in the 19th century to the agave spirit we now call 'mezcal', to the red 'mescal bean' (Sophora secundiflora, a seed that was ingested by some Mexican groups as a medicine) and to the peyote cactus. It was used, Jay says, as 'a portmanteau term for all local plant intoxicants' in northern Mexico and the American Southwest. [LRB]

Handel: Messiah, For unto us a child is born (Sir Colin Davis, Tenebrae, LSO)

A Credit Bubble Stocks Christmas Day tradition:

Christmas Eve Links

• "Ichinomiya City Hotel offers up a basket of all-you-can-eat hard-boiled eggs with waffles and coffee for 600 yen. If you're ever looking to feast on a basket of eggs, now you know where to go." [Eater]
• Lately off shore "international" or "print on demand" book copiers have been dumping books into the market place. These books have color copies of original covers ( in the ads) and under inspection I find the following: Weak non-stitched spines, poor paper quality (laser paper) Black and White reproductions (poor quality scans or photocopy) pictures that are difficult to see details, This make it impossible to read because your seeing three pages of text or pictures - or worse, no ability to put on a projector for educational purposes or loss of eye sight assistance. Trimming errors up to a 1/8 inch or more and duplication's or missing sections. Technical support said because of their volume they could not tell me if the book I was buying was the genuine or these sham books. If you don't have a policy - get one! I will not waste my time returning books after I have done your quality control. [Baidarka]
• Late in life, going dotty (or dottier than usual), my father contemplated returning to the battle zone of the Ardennes and seeking out German privates who had fought on the other side. He wanted to test his theory that they had hated their officers as much as he had hated his—whose sole aim, from his perspective, was to squander the lives of their men. I recounted this plan to the German painter Anselm Kiefer, who was born in 1945. As I recall, though he doesn't, he said, "Don't tell your father. Our men loved their officers." [New Yorker]
• You know full well that Vice President Biden used his office and $1 billion dollars of U.S. aid money to coerce Ukraine into firing the prosecutor who was digging into the company paying his son millions of dollars. You know this because Biden bragged about it on video. Biden openly stated: "I said, 'I'm telling you, you're not getting the billion dollars'...I looked at them and said: 'I'm leaving in six hours. If the prosecutor is not fired, you're not getting the money.' Well, son of a bitch. He got fired." Even Joe Biden admitted just days ago in an interview with NPR that it "looked bad." Now you are trying to impeach me by falsely accusing me of doing what Joe Biden has admitted he actually did. [NY Times]
• Unless you can have reason to believe that the decline in customer losses is about to stop, there does not seem to be a margin of safety in the unsecured debt. If 13% of customers (net - more after figuring churn) left over the past two years, they probably went somewhere, since they are not likely just canceling their internet entirely. There must be competitors in Frontier's markets that are better or cheaper and are eating their lunch. For all we know, the most alert or savvy customers are the ones who just left and it is the beginning of an S-curve of the slower to react customers leaving too. [CBS]
• The fundamental problem is that the unusual crimes that obsess the press are, by definition, unusual, and thus their profilers must draw upon much smaller sample sizes than routine crimes like crack dealing. For instance, in an even more important case, the post-9/11 anthrax murders that helped drive the Intelligence Community so nuts that it argued for invading Iraq, the FBI spent six years tormenting bioweapons expert Steven Hatfill before paying him about $5 million for their abuse. Remarkably, Eastwood is likely a more consistent director now in his later 80s than in his early 80s when he made some forgettable movies like Hereafter and J. Edgar before his 2014 comeback American Sniper. We hear constantly these days about Baby Boomers, but I keep seeing movies directed by or starring amazingly old yet still competent pre-Boomers such as Eastwood, Martin Scorsese, Al Pacino, and Christopher Plummer. When will they shuffle off and finally allow us poor Boomers our moment in the spotlight? [Sailer]
• The board of directors of a Delaware corporation has a fundamental duty and obligation to "protect the corporation enterprise," and to defend stockholders "from harm reasonably perceived, irrespective of its source." This case involves a board that is purposely letting half of its members – including the known repeat fraudster who founded the company – buy a controlling stake in the company through open market purchases at depressed prices, without paying a fair price, much less a control premium. Instead of adopting a poison pill or taking other defensive measures to protect public stockholders in the face of a change of control transaction executed in the open market, this board helped turn a slowly developing creeping takeover into a modern street sweep. [OBS]
• The hydrofoil usually consists of a wing like structure mounted on struts below the hull, or across the keels of a catamaran in a variety of boats (see illustration). As a hydrofoil-equipped watercraft increases in speed, the hydrofoil elements below the hull(s) develop enough lift to raise the hull out of the water, which greatly reduces hull drag. This provides a corresponding increase in speed and fuel efficiency. [Wiki]
• With any software start-up, there is a non-zero probability that you wake up the next day and find that a better-resourced firm (Microsoft, Oracle, Salesforce, Adobe) has deployed 200 engineers to copy your product, bundle it with their stack for free, or near free, and ... welcome to zero. I believe this is happening to Slack, but more slowly than Netscape, as Microsoft’s General Counsel has likely coached Satya to charge a nominal fee for Teams and let Slack bleed out, instead of putting a bullet in its head and stirring the DOJ from a 3-Ambien slumber. [Galloway]
• High-powered shootouts are not unusual in Brazil. Despite tighter gun regulations than the U.S., in the poorer neighborhoods of many Brazilian cities, armed gangs and police trade fire with high-caliber assault rifles, machine guns, pistols, and sometimes even grenades and rocket launchers. Rio averages 24 shootouts per day. Large hours-long gun battles often don’t even make the headlines. Yet the shootouts leave a mark: piles of dead bodies. [link]

Tesla Enterprise Value Exceeds $80 Billion Despite "Pending or Prospective" FBI Investigation Regarding "Drug Cartels and Accounting Fraud"

Just in case anyone was doubting that we are living through the biggest bubble of all time, here is a chart of the Tesla enterprise value:

which just hit $81 billion. And here is a recent letter from the FBI regarding a FOIA request into any investigations regarding "drug cartels and accounting fraud" at Tesla:

December 16th Links

• Most real-world problems are big enough that you can't just head for the end goal, you have to break them down into smaller parts and set up intermediate goals. For that matter, most games are that way too. "Win" is too big a goal in chess, so you might have a subgoal like don't get forked. While creating subgoals makes intractable problems tractable, it also creates the problem of determining the relative priority of different subgoals and whether or not a subgoal is relevant to the ultimate goal at all. In chess, there are libraries worth of books written on just that. And chess is really simple compared to a lot of real world problems. 64 squares. 32 pieces. Pretty much any analog problem you can think of contains more state than chess, and so do a lot of discrete problems. Chess is also relatively simple because you can directly measure whether or not you succeeded (won). Many real-world problems have the additional problem of not being able to measure your goal directly. [Dan Luu]
• We begin our study of tactics with double attacks, or forks: moves that attack two enemy targets at once. And we begin our study of double attacks with knight forks. In the skeletal diagram to the left, White's knight has forked Black's king and rook; in other words, it attacks them at the same time. Why start with the knight? Because it is an especially vicious and common forking tool. First, it can threaten a wide range of targets. The knight is roughly comparable in value to a bishop, and so is less valuable than a rook or queen; thus a knight not only can attack any unprotected (or "loose") enemy pieces but also can be exchanged favorably for enemy queens and rooks regardless of whether they have protection. Second, the knight's unique, non-straight pattern of movement creates two advantages: it allows a knight to attack other pieces without fear of being captured by them; and it enables a knight to make jumps and deliver threats that are surprising to the eye and so are easy to overlook. [link]
• The corollary of that rule—the rule that the great people are never on the market—is that the bad people—the seriously unqualified—are on the market quite a lot. They get fired all the time, because they can't do their job. Their companies fail—sometimes because any company that would hire them would probably also hire a lot of unqualified programmers, so it all adds up to failure—but sometimes because they actually are so unqualified that they ruined the company. Yep, it happens. [joel]
• The end result of Bagehotian banking is that, without any government protection, it is incredibly unstable and will melt down at a drop of the hat. With full government protection, it is stable, and it drives down long-term interest rates - just as if the government itself had been making the loans itself. The lender of last resort might as well be a lender of first resort. (There are no modern schools of economics which believe, as far as I know, that governments should print money and lend it.) And with wishy-washy, informal, wink-and-a-nod protection - which is what we had until the other day - these toxic qualities are combined. And this is how we continually stumble forward with a broken, Victorian-era banking system, suffering the slings and arrows of bad financial engineering. The whole thing needs to be rebooted, if not reinstalled, and we simply don't have a political system - or an intellectual system - which is capable of this. [moldbug]
• I've spent my life exploring the outdoors and our country's National Park system. I've always been excited to open the map I'd get at the entrance of a new national park I didn't know so well. Those maps were more than just directions around the national park, they'd help awaken me to the beauty and adventure that was about to come. Like so many, I saved those national park maps as mementos of my trips. Unfortunately, they'd usually end up in a box, or somewhere else where I'd forget about them. Finally, after a trip to Yosemite National Park I decided to design a map that wouldn't get lost. Using soft color palettes and clean design I created versions of National Park maps meant for walls, not just as art, but as reminders of the places we love most. Since opening Muir Way in 2013 we have added hundreds of new map designs of National Parks, mountain ranges, hydrology, historic maps, and more. [muir]
• Separately, could the relationship between Jews and those who currently experience anti-Jewish feelings be repaired? I think so. After 56 years and 50 states (see Travels with Samantha for some of these conversations), I can't remember meeting anyone in the U.S. who hated Jews as individuals, even those who expressed negative views about the actions of Jews in politics, Jews in media, and/or Jews in finance. Suppose, for example, that in response to any question on low-skill immigration, upper-income degree-holding Jews said "We don't have any special insight into migration-into-a-cradle-to-grave-welfare-state issues as a consequence of our Jewish heritage and therefore we should let the low-wage native workers who will bear the cost decide policy." [Phil G]
• 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 ability 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." [CBS]
• The largest individual-level correlate I've ever calculated (macrolevel correlations tend to be bigger) deals with sexual attraction: Using data I collected myself on 330 people, the point biserial correlation between being male and level of attraction to females is .82. For women being attracted to men, it's .84. Those are huge numbers. Another way of describing it is in terms of standard deviations: the gap between male and female attraction toward females is 3.6 standard deviations. The difference between the two sexes on liking males is just as big--3.6 sds. You've probably heard that the black-white IQ gap is big. It is, at ONE standard deviation. The attraction gap is enormous. [Inductivist]
• Another realistic touch is that the father, once his lawyer tells him that he is almost guaranteed to lose, seeks a different lawyer. This is consistent with the near-universal loss aversion cognitive deficit described in Thinking, Fast and Slow (Kahneman), in a chapter on why lawsuits aren't more frequently settled when the parties are pretty sure how it is likely to turn out. [Phil G]

Guest Review: @pdxsag on Bottle of Lies: The Inside Story of the Generic Drug Boom by Katherine Eban

[This is a guest review of Bottle of Lies: The Inside Story of the Generic Drug Boom by CBS reader @PdxSag.]

I bought this book thinking it would fill-in the vague, almost memory-holed story of an Indian generic-drug company that the FDA had shutdown a few years ago. I recalled seeing occasional mention of the topic by Steve Sailer (1) (2), but nothing at any other media sources.

I quipped to my Dad, “I'm not sure what the take-away on this one is going to be. Sordid tale of our government selling us out to globalist crony-capitalists for legalized kickbacks of pennies on the dollar? Yeah, I've heard. Or a warning that consumers should avoid generics in favor of the Big Pharma brand-names? Um, 1995 called, they want their insurance back.”

As it turns out, it was both of those and much more. Indeed, I'd say the book has something for everyone:

• Regulatory capture – close followers of the Boeing and Tesla fiascoes are advised to keep a stiff drink on hand
• Jurisdictional in-fighting and glacial responses by regulatory agencies – again, stiff drinks for our friends short the Boeing and Tesla equities
• Bald-faced fraud on the part of foreign-born corporate executives
• US bureaucrats, contra their reputation, all bark and no bite – and chipping away at US credibility in eyes of regulators and frauds alike in the rest of the world
• Globalization fleecing American citizens
• Clinton Foundation (Really. Albeit mostly a cameo, but still... no coincidences?)

At times this was a hard book to read. The sense of deja vu I got from it was relentless. It has been 10 years since the fraud that is the primary subject of the book took place, and yet the characters and events are no different, save for the names, than I see happening at Tesla and Boeing. At times I wonder if the financial fraud of Enron presaged the financial fraud of the banks leading to the GFC, and perhaps now we're seeing a similar situation where the product fraud of Ranbaxy presaged the product fraud of companies like Theranos, Tesla, and Boeing.

Americans are getting fleeced by globalization and there's nary a thing citizens are able to do in response. It's not mere apathy by our government, from all appearances it's active antipathy. As Sailer often remarks: privatize profits (by a well-connected clique at the top) and socialize costs (across a segmented and antagonized base).

With regard to outsourcing, I was given pause to wonder how exactly pharmaceutical manufacturing is supposed to benefit from offshoring. Ostensibly globalization is leveraging – some say exploiting – cheap labor to lower the price on a finished good. It's easy to see the large relative labor component in a consumer non-durable: shoes, clothes, toys, etc. In contrast, pharmaceutical production should be a very expensive chemical engineering plant with very little human labor per unit-mass of finished product. If that is the case – and the book didn't exactly explore this point – then on the face of it, it should be obvious offshoring pharmaceutical production isn't about labor arbitrage. Rather, it has to be about regulatory arbitrage: specifically escaping over-sight to make it easier to cut-corners – some say cheating – without getting caught. Where is the fig leaf of plausible deniability that American patients stand to benefit from outsourcing prescription drugs? So far as I can tell, there isn't one. It's a shameless money grab that could not withstand a rational scrutinization if our media and government weren't in on the con themselves.

In the book we read about the rank-and-file front-line inspectors of the FDA doing commendable work under circumstances where the deck is stacked against them. They persevere against the odds and expose egregious fraud. Then, their work ends all for naught as the FDA's higher-ups stifle, water-down, and neuter any significant consequences bowing to political considerations. Again, anyone following along the NHTSA, the SEC, the DoJ, the EPA, CAL-OSHA, and a half-dozen other Federal, California, and New York regulatory agencies' impotent oversight of Tesla knows this story all too well. Or, for our aerospace friends, the FAA's lackadaisical over-sight of Boeing.

Despite my misgivings that the book was going to be yet another accounting of a sordid industry, it more than redeems itself by offering an informative look at an industry – pharmaceutical manufacturing – that I think most people take for granted.

My naïve assumption, and I think most people's as well, was that generic drugs are following “solved” chemical engineering processes – cookbook chemistry as it were – to create chemical compounds that are identical in every way to what the brand-name manufacturers are producing (bioequivalent is the technical term). With brand-names, as the conventional wisdom goes, you're paying for drug discovery research and development (and marketing and advertising), but manufacturing quality is not an independent variable between products. The truth of the matter is neither one of those assumptions is correct.

First, generic drug companies must create their own, unique, manufacturing process. Drug patents apply to the active chemical compounds, as well as to the process one follows to create the chemical compounds. The patent exemption for generic drugs is only for the final, active chemical compounds. The process, or recipe, to create the chemical compounds is still covered by patent held by the brand-name. In fact, the patent-holding brands routinely use this fact to dispute generic drug company's applications for patent exemption. Thus, by-definition generic producers are required to come up with a unique recipe to create a drug that will, nonetheless, produce an identical result.

A rough analogy is the brand-name company has patented selling bus rides from New York City to Chicago. The patent covers the route as well as the destination. The generics are granted an exemption to also sell bus rides from New York to Chicago, ie. the destination, but they must come up with their own unique route. Obviously where this analogy breaks down is that it's trivial to come-up with a non-infringing route between two distant cities. It's not trivial to come-up with a non-infringing process to cost-competitively manufacture a complex chemical compound that otherwise is identical in every way. To abuse the analogy, the generic's route may be such that the destination is not even Chicago. It's Gurnee, or perhaps more aptly, Gary.

Second, quality control is vitally important and anything but “cookbook chemistry.” Remarkably, quality control is so variable that generic manufacturers, as a matter of course, grade their finished products and decide post-hoc upon the market into which they will be sold. Literally, the same drug from the same plant will be destined to an end-market differently from one day to the next based on final manufacturing test results. The product a market receives is directly proportional to the strength of that market's regulators. Africa, India, and developing world nations are at the bottom. China, Latin America, and Eastern Europe are next up in quality. Western Europe is third. United States and Canada (owing to US proximity more than actual Canadian regulatory muscle) at the top. But, make no mistake, like the best house in a bad neighborhood, the FDA is failing miserably. US consumers are merely getting the best of the worst when it comes to Indian and Chinese produced generics.

In lieu of a synopsis the book, I'll share some of the more remarkable excerpts.

• The whistleblower that ultimately caused the complete shutdown of the Indian pharmaceutical firm Ranbaxy sent his first email to the FDA on August 15, 2005. It would be 8 years of gross fraud on the American public right under the nose of the FDA and DoJ before the final settlement was signed and a $500 million dollar fine paid. Soon after the company shutdown. However, no executives or management were held personally liable, either financially or criminally. All of them, save the CEO, found work in other generic Indian pharmaceutical companies. Supposedly they were highly sought-after given their considerable experience maneuvering against the FDA.
• FDA's head of Office of Compliance, Deb Autor, had 10 years prior to that time worked at the law firm that was now representing Ranbaxy, and was on first-name basis with the partner who served as Ranbaxy's outside counsel. Based on the text of emails Autor sent to the enforcement folks in the FDA, one would be forgiven for thinking she was still working on the side of her old firm, and not the FDA.
• “[In 1989 Mylan] had heard rumors [FDA Chief Chemist] Chang was getting his reviewers to slow down reviews or to fabricate excuses to block certain applications. Finally, the Mylan executives hired private detectives, who found a motive in his trash. [tickets for round-the-world airline trip and receipts for expensive furniture] Corrupt generic drug companies appeared to be bribing Chang with trips and furniture in exchange for approving their own applications and blocking those of competitors.”
• “John Dingell's (D-MI) committee uncovered corruption that seemed to have no bottom. Generic drug executives has roamed the FDA's halls, dropping envelopes stuffed with thousands in cash onto the desks of reviews... Representative Wyden (D-OR) [now Senator] called the generic drug industry 'a swamp that must be drained.' [heh]”
• “One of the companies involved in the scandal [in 1989] was Quad Pharmaceuticals, an Indianapolis-based company whose CEO, Dilap Shah, had given Chang $23,000.”
• “Although the scandal in the 1980s had implicated American companies, those companies had largely been run by South Asians, such Quad Pharmaceuticals."
• In an event reminiscent to the baby-formula scandal: “Nobody understood why the heparin – which is made from the mucosal lining of pig intestines, most of which come from China – was suddenly making patients sick. In February 2008, the FDA discovered the likely source of the contamination: a Chinese plant supplied the crude heparin to Baxter. In a clerical blunder the FDA had completely overlooked and failed to inspect the facility, Changzhou SPL, located 150 miles west of Shanghai. Instead it inspected and approved a plant with a similar sounding name. Predictably, once the FDA officials finally traveled to Changzhou in February 2008 to make an on-the-ground inspection, they found serious problems... nuclear magnetic resonance spectroscopy revealed a synthetic substance called oversulfated chondrotin sulfate (OSCS). The ingredient mimicked heparin, was almost impossible to detect, and produced life-threatening reactions. The FDA formally named OSCS as a likely contaminant and concluded that it had been added, somewhere along the supply chain, to increase the yield and profitability of the drug.”
• Concerning one of Ranbaxy's manufacturing plants in India: “There was only one entryway, secured by a well-staffed guard post. The guards there, former military policemen, seemed proud to confirm that they logged all employees and visitors in and out through the gate. No one got past them. This gave [the FDA inspector] the opportunity he needed. By examining checkpoint records at the gate, he learned that the supervisors who had signed off as present for the manufacturing of key tacrolimus batches had not actually been at the plant on those days. They had not signed in to the security gate logs. The dates, times, and signatures of the batch records were fake and had been filled in after the fact.”
• “Inside the FDA, despite murky and chaotic deliberations over Ranbaxy's fate, it seemed clear to some that the agency would never allow a company so saturated with fraud to keep exclusive rights to launch the nation's most important generic drug... But an argument had begun seeping into the government's internal deliberations. Because the generic drug company operated on razor-thin margins, it needed the profits from exclusive rights in order to pay the record-breaking fine it deserved.”
• “This time, because the inspection was so vital, the FDA's India office had given Ranbaxy only a few hours of advance notice – less time to conceal evidence. But Baker and Argawal wound up in the wrong town and had to backtrack, which took hours and bought Ranbaxy additional time. The investigators finally arrived, but a corporate executive from Ranbaxy's headquarters had beaten them there. The executive had taken the first flight from New Delhi that morning, which meant the company must have gotten word of the inspection the night before. Someone in the FDA's India office had almost certainly leaked it.”
• “[Generic drug manufactures] worked to make their formulations look perfect on paper, regardless of their actual quality. They jury-rigged the result by fiddling with the tests, retesting already proven batches, or even testing the brand-name products instead. Only then would they move the data to the computer system the FDA was going to examine. Until [FDA inspector] Baker showed up in India, only Ranbaxy had gotten caught – because of the whistleblower Dinseh Thakur... The finished doses manufactured at Wockhardt and other Indian plants were shipped straight from those factories to American wholesalers and drugstores. People had the right to know what they were taking and to choose what they didn't want to take. But American patients had no idea of the subterfuge that went into the manufacturing of their low-cost medicine, and the FDA had no plans to tell them.”

This wasn't in the book, but I feel it warrants mentioning. From my own experience and from news events many times I see reliable distinctions between foreign nationals that went to college in the US, got their first jobs in the US, and have deep social ties in the US, and foreign nationals that went to school and began their careers in their countries of origin, then transferred to western companies or began selling their foreign-sourced products into western markets. In the former case, as a group I have experienced nothing to indicated they are any less trustworthy than any other westerner. Indeed, the whistleblower at Ranbaxy was a South Asian who started his career at Bristol-Myers Squibb. As for the executives at Boeing responsible for the 737MAX, they are Americans through and through. Obviously no country or region has a corner on frauds and liars. What is obvious is that the vast majority of people are products of their culture. At present, the professional business culture in China and India and Russia, and what it selects for in executives able to get ahead in it, is not the same as the US, Canada, and Western Europe. As such, American consumers gain very little benefit when our markets and businesses are opened up to people who are products of those other cultures.

As for my grade of the book, I give it 5 stars for a comprehensive telling of an important story that has been deliberately ignored in the mainstream. The globalist system wants Americans to believe all prescription drugs are the same, and the FDA and the media are willing accomplices in that charade. The message in book needs to be known to the American public.

On the other hand, the story as-presented by the author was closer to 4 stars. It suffers slightly from choppiness, too many names and characters (though that is probably unavoidable given the events), and less than sensational recounting of what really are some sensational events. I was left wishing for a modern “The Jungle,” but this book wasn't up to that challenge. In the final acknowledgements Eban writes, “I am indebted to Mark Lee Hunter for his advice on how to turn years of reporting and mountains of information into an actual story at a moment when I felt stuck.” I can completely understand where that statement came from. This book was no easy task, and 4 stars for quality of writing and story-telling is no shame. In the end, I averaged the two to rate it a 4.5 out of 5.

Post-script: while in the process of writing this review the book's author, Katherine Eban @KatherineEban, shared a story from New Zealand where the state-sponsored pharmacy board was running a public relations campaign on the “nocebo effect,” in which supposedly patients imagine their generic prescription drugs are not as effective as their brand-name equivalents. At the same time, they pulled approval for a pair of brand-name epilepsy drugs in a cost-savings bid. Since August of this year, 4 patient deaths have occurred which are suspected of being linked to the change to generic medications. Again, we see globalization privatizing profits, socializing costs, and the best interests of citizens in developed countries being actively subverted by their government.

4.5/5

December 9th Links

• At any instant in time there is a certain level of tolerance for borrowing from the future (private and public debt), and merely by changing this level of tolerance one can in effect create money out of thin air ... This level of tolerance is a completely emergent phenomenon and no one fully controls it. [Steve Hsu]
• We paid no cash taxes in the third quarters of 2019 and 2018 and continue to expect that the utilization of our NOLs will reduce our federal and state income tax liability to 0 until the NOLs are fully utilized or expired. We expect this will continue to drive significant free cash flow conversion over the next several years. [HCC]
• When we talk about repurchases, we obviously do find current pricing very attractive. And so we're definitely paying attention to what's going on related to our various securities, including our second lien notes. And we still have the same philosophy and strategy in place to reduce long-term debt as we go forward, so nothing's changed there. [PYX]
• As the hermit crab grows in size, it must find a larger shell and abandon the previous one. Several hermit crab species, both terrestrial and marine, have been observed forming a vacancy chain to exchange shells. When an individual crab finds a new empty shell it will leave its own shell and inspect the vacant shell for size. If the shell is found to be too large, the crab goes back to its own shell and then waits by the vacant shell for up to 8 hours. As new crabs arrive they also inspect the shell and, if it is too big, wait with the others, forming a group of up to 20 individuals, holding onto each other in a line from the largest to the smallest crab. As soon as a crab arrives that is the right size for the vacant shell and claims it, leaving its old shell vacant, then all the crabs in the queue swiftly exchange shells in sequence, each one moving up to the next size. [wiki]
• The other striking thing about U.S. universities is that they easily have the facilities to handle several times more students than they are currently enrolling. I was at Princeton earlier this year, which apart from being very posh, has a campus that is probably three times the size of McGill's, with certainly quite a few more buildings. As a Canadian, if you asked me to look at their physical infrastructure and guess how many students they have, I would have said 35,000. The fact that they have fewer than 5,500 is ridiculous. And Princeton is not even that big. Duke is enormous, like a vast, sprawling country club. It seems to me they should be able to handle 50,000 to 60,000 students without batting an eyelash. Part of the problem stems from the fact that these schools are private non-profit enterprises. One of the problems with non-profits is that they tend to become overcapitalized. They have to earn sufficient revenue to cover their expenditures, but because they have no owners or investors they do not have to cover the "cost of capital." As a result, the capital tends to just pile up over time, since no one cares whether it is being put to good use. Whenever I walk around a fancy U.S. university, the one word that always springs to mind is: overcapitalized. [link]
• In general, the PBGC's unfunded benefit liability claim will be treated as a nonpriority general unsecured claim except to the extent that the PBGC can establish that a portion of the claim is attributed to services rendered post-petition or within the 180 days prior to bankruptcy up to the section 507(a)(5) cap (in which case, such portion may be entitled to administrative expense priority or priority unsecured claim status). [link]
• If you discover something new, there's a significant chance you'll be accused of some form of heresy. To discover new things, you have to work on ideas that are good but non-obvious; if an idea is obviously good, other people are probably already working on it. One common way for a good idea to be non-obvious is for it to be hidden in the shadow of some mistaken assumption that people are very attached to. But anything you discover from working on such an idea will tend to contradict the mistaken assumption that was concealing it. And you will thus get a lot of heat from people attached to the mistaken assumption. [Paul G]
• The dashcam video from the Uber crash has been released. It's really bad. The pedestrian is slowly walking their bike left to right across a two lane street with streetlights, and manages to get to the right side of the right lane before being hit. The car doesn't slow down at all. A human driver would have vision with more dynamic range than this camera, and it looks to me like they would have seen the pedestrian about 2s out, time to slow down dramatically even if not stop entirely. But that doesn't matter here, because this car has LIDAR, which generates its own light. I'm expecting that when the full sensor data is released it will be very clear that the system had all the information it needed to stop in time. [link]
• "If we see a problem, wait and hope it goes away". The car was programmed to, when it determined things were very wrong, wait one second. Literally. Not even gently apply the brakes. This is absolutely nuts. If your system has so many false alarms that you need to include this kind of hack to keep it from acting erratically, you are not ready to test on public roads. "If I can't stop in time, why bother?" When the car concluded emergency braking was needed, and after waiting one second to make sure it was still needed, it decided not to engage emergency braking because that wouldn't be sufficient to prevent impact. Since lower-speed crashes are far more survivable, you definitely still want to brake hard even if it won't be enough. [link]
• Alon also spends a fair bit of time on one particular issue with this set-up: mutant cells which mismeasure the glucose concentration could proliferate and take over the tissue. One defense against this problem is for the beta cells to die when they measure very high glucose levels (instead of proliferating very quickly). This handles must mutations, but it also means that sufficiently high glucose levels can trigger an unstable feedback loop: beta cells die, which reduces insulin, which means higher glucose "price" and less glucose usage throughout the body, which pushes glucose levels even higher. That's type-2 diabetes. [link]
• My (very wild) guess is that in the end psychiatric disorders will mostly turn out to be computational conditions. That is, something like "the learning rate of this system is set too high" or "the threshold for errors in this error-detector is too low". There will be lots of different things that will cause that, from biological (because these computations are implemented on biological systems including the usual range of things like serotonin and dopamine and synapses) to psychological (because the brain is plastic enough that its computational parameters can change with experience) to environmental (because if you pour a bucket of battery acid onto a computer, probably its computational parameters will change in some way). This is just my personal bias towards computational explanations speaking, and it could be that these disorders will be better explained by regional stories (ie "the amygdala is broken" or "the hippocampus is broken"), by biochemical stories ("there's too much serotonin"), by structural stories ("there are too few synapses"), by some combination of these, by something totally different, or by something that's on a totally different level than any of this. [SSC]

Frontier Communications Inc. Distressed Debt

Frontier Communications is a broadband internet, cable, and telephone company, formerly known as Citizens Utilities Company until May 2000 and Citizens Communications Company until July 31, 2008. (Interestingly, Citizens Utilities Company of Minneapolis was formed from remnants of Public Utilities Consolidated Corporation created by Wilbur B. Foshay.) Citizens Communications acquired the Frontier name and local exchange properties from Global Crossing in 2001. In May 2008, they changed the holding company name to Frontier Communications Corporation.

They provide service in 29 states to 4.2 million customers and 3.6 million broadband subscribers at an average monthly revenue per customer of $88.45. Their customer count was down 8% from third quarter 2018 to third quarter 2019, which is brutal in a high fixed cost business, although revenue per customer was up 4% year over year. The result was that revenue was down 6%.

Is this kind of like the tobacco business, with falling customer counts but rising prices? Cable companies ought to have some properties of good businesses: lack of competition and stickiness. How many choices do customers have, and how often do people switch their phone, cable, or internet providers, even when they have a choice?

The fixed cost structure is bad when customers are leaving. That's not a problem that the tobacco companies have. However, Frontier was able to cut some costs. Network access costs declined 13% year-over-year in the third quarter. And their own "network related expenses" were down 3%. The third category of recurring cash expenses, SG&A, was flat. The result was that EBITDA for Q3 was $781 million, versus $852 million the prior year - down 8.3%. That is more than the revenue decline - thanks to operating leverage. The current EBITDA figure would be $3.1 billion annualized. At the current run rate, this year's capex will be $1.2 billion, for a projected FCF of $1.9 billion before allowing for further customer declines.

We have previously mentioned that Frontier's debt is distressed, and that hedge funds are prodding the company to file for bankruptcy. You can readily see the unsupportable leverage of Frontier by the market value of its equity (only $68 million) compared to its total liabilities ($21.7 billion in Q3 2019), or by the trading prices of its unsecured debt. The capital structure consists mainly of $10.9 billion of unsecured holding company debt (which is the fulcrum). Senior to that is $5.7 billion of secured debt, which consists of $2.45 billion of bank debt and then $1.65 billion of first lien secured notes (8% due April 2027) and $1.6 billion of second lien secured notes (8.5% due April 2026).

The total debt load is $17.5 billion. There is also $2.1 billion of pension, post retirement benefits, and other liabilities; and $1.7 billion of non-debt current liabilities, against $1.6 billion of current assets (excluding assets held for sale).

One thing you will notice is that the unsecured holding company debt maturing between 2021 and 2046 is trading solidly in the 46 range, with the exception of a couple tiny pieces and more notably with the exception of the two pieces that mature in April and September of 2020. It is a distress indicator when you have debt of higher and lower coupons all trading at the same price, based on an assumption of what the recovery will be. Even the fat 10.5% coupon on the September 2022 debt is not enough to budge the price from the same level that a January 2025 6.88% bond is trading at. Another good distress indicator is the fact that the $10.9 billion principal amount of unsecured debt trades at a market value of $5.1 billion - a $5.8 billion "hole" in the capital structure. The higher price for the 2020 debt suggests a small chance that the company will limp along for another year.

As Moody's commented on November 12:

Frontier's credit profile is supported by the company's large scale of operations, its predictable cash flow and extensive network assets. The rating is also supported by the company's improved ability to generate cash following the elimination of its common dividend in early 2018. Moody's expects Frontier to have adequate liquidity to retire the remainder of its outstanding unsecured debt maturing prior to 2022. Frontier has been meaningfully reducing its refinancing risk hurdles in the near term, including through a March 2019 refinancing of short-dated first lien term debt with a first lien bond offering. Though Frontier expects gross proceeds of $1.352 billion from the sale of western state operations in first half 2020 (subject to closing adjustments), the use of such proceeds remains undisclosed but will likely facilitate capital structure enhancement efforts.

They just sold their "Northwest Operations" (Washington, Oregon, Idaho, and Montana) for $1.35 billion, which represented 7% of revenues, but chose not to disclose what proportion of operating profit these operations represent. Considering that this would value the entire enterprise at $19 billion, it is likely that this company followed typical "circling the drain" behavior and sold one of its better divisions in order to buy time. It's always easier to sell a better division. 

It may be possible to use some of those $1.35 billion proceeds to pay the 2020 debt maturities and interest payments, which include something like $333 million on March 15 and $381 million on April 15). On the other hand, there are leverage covenants in their secured debt that apparently step down from 1.5x EBITDA to 1.35x EBITDA in Q2 2020. They have $4.1 billion of first lien secured debt, so the 1.35x limit would be iffy given the recent $3.1 billion of annualized EBITDA. So if the company decides not to restructure, it may need to take a good chunk of the proceeds to pay down first lien debt with covenants before it could use any to buy back unsecured debt at a discount.

So we can guess that this company will restructure in 2021 if not next year, and we know that the unsecured is the fulcrum security. The question is: what should the unsecured debt be trading for. In order to estimate that, we need to think about the value of the enterprise and the liabilities that are ahead of the unsecured debt. Frontier itself attempts to assess its enterprise value, as disclosed in its filings:

We use a market multiples approach to determine Frontier’s enterprise fair value for purposes of assessing goodwill for impairment. Marketplace comparisons, analyst reports and trends for other public companies within the telecommunications industry whose service offerings are comparable to ours have a range of fair value multiples between 4.1x and 7.6x of annualized expected EBITDA as adjusted for certain items.  At September 30, 2019, we estimated the enterprise fair value using an EBITDA multiple of 4.4x.

Using a 4.4x multiple on $3 billion of EBITDA would imply that the enterprise is worth $13.2 billion. Enough to cover all of the secured liabilities and structurally senior subsidiary debt of $6.6 billion, but not enough to cover the unsecured debt and other unsecured liabilities, which appear to total $13 billion. This would leave unsecured creditors with ~50 cents on the dollar, just north of where the bonds are trading right now. When was the last time we even saw a pre-bankrupt company with  unsecured debt that stood to recover something?

Of course, we should not take the company's EBITDA projection or multiple at their word. Here are some competitors in the space (CenturyLink, Cincinnati Bell, and Consolidated Communications Holdings) and their enterprise value multiples.

	Market Cap	EV	EBITDA (ttm)	EV/EBITDA
CTL	15,590	51,290	9,180	5.6
CBB	325	2,580	392	6.6
CNSL	263	2,630	462	5.7
FTR*		13,000	3,100	4.2

The FTR is for the enterprise value of the debt only, at approximate market values of the debt. Notice that CBB and CNSL have very small market capitalizations in relation to their enterprise values. As one analyst we read pointed out, "at some point, all industry players will not be able to service their unsecured debt and will need to restructure". That analyst also pointed out that the CBB and CNSL stocks are probably inappropriately valued:

Unsecured debt of CBB and CTL is being created at substantially higher multiples, compared to those of CNSL and FTR. The same pertains to the market creation of unsecured debt plus equity. Why? Just because these companies are paying dividends.

So here is how the FTR unsecured recovery would look for the following pairs of EBITDA and EBITDA multiples, and assuming that $6.571 billion of liabilities would be in front of them and they would share with $13 billion of total unsecured liabilities:

	4.25	4.5	4.75	5	5.5
2,400	28%	33%	37%	42%	51%
2,600	34%	39%	44%	49%	59%
2,800	41%	46%	52%	57%	68%
3,000	48%	53%	59%	65%	76%
3,200	54%	60%	66%	73%	85%

The big questions are: what is the EBITDA that this business will earn going forward, and what multiple would the enterprise be worth. On the EBITDA question, it is alarming how rapidly the company's business is shrinking. They went from 4.85 million customers at the end of 2017 to 4.2 million now, a 13% drop in under two years. With that level of customer exodus, the chart of historical EBITDA by quarter is not too pretty. 

The analyses that I have seen are pretty complacent about EBITDA. They take a >$3 billion level as a given and then assume that since CBB and CNSL's debt (which both trade close to par) create those enterprises at >5x EBITDA, FTR will do the same. The problem is that if the ice cube continues to melt, not only will EBITDA be lower, but it will probably be worth a lower multiple. In the 2x2 matrix of unsecured recoveries above, there's really only a line of realistic outcomes: low EBITDA, low multiple; or high EBITDA, high multiple.

Unless you can have reason to believe that the decline in customer losses is about to stop, there does not seem to be a margin of safety in the unsecured debt. If 13% of customers (net - more after figuring churn) left over the past two years, they probably went somewhere, since they are not likely just canceling their internet entirely. There must be competitors in Frontier's markets that are better or cheaper and are eating their lunch. For all we know, the most alert or savvy customers are the ones who just left and it is the beginning of an S-curve of the slower to react customers leaving too.

Ideas for 2020 Prediction Contest?

Our contestant Barbarian Capital (mentioned in previous contest post) has some suggestions for the upcoming 2020 prediction contest. Anybody else? Leave a comment below...

Financial (NEW)

- One or more cease to exist in its current form: Grubhub, Uber Eats, Postmates, DoorDash

- Adam Neumann and/or Patrick Byrne is formally charged by the SEC and/or the DOJ

- Bloomberg's stake in Bloomberg LP is sold (agreement signed, not close date)

- Any legal (ie court case) or governmental curtailment of index investing 

- At least one Ivy endowment makes a direct allocation to crypto

- At least one major VC fund ($1 bn+ AUM) is charged by the SEC or DOJ for any reason (ie mis-marking of investments, anti-competitive behavior, aiding and abetting fraud at a porfolio company, etc.)

- UBER + LYFT LTM GAAP loss exceeds $3 bn (as of Dec 2020) Q319 combined was ~$1.5 bn

- Formal anti-trust action against any "Big Tech" member by a federal agency

- Saudi Aramco fails to IPO or loses more than 30% of market cap at any time during 2020

- Sheryl Sandberg is no longer at FB as of 12/31/20

- BRK makes a single $50 bn+ cash acquisition (current cash is $128 bn) 

- Altria writes down JUUL by an additional $4.5 bn+ (invested $12.8; took a $4.5 hit)

- WeWork defaults on any bond or loan 

- At least 2 of the following go into restructuring: CHK WLL ASNA JCP TUP PRTY FTR

- MJ (pot etf) trades below $10 at any time in 2020 ($17 currently)

Finance x Politics (NEW)

- Donald Trump or a family member with confirmed $10+ million in short term capital gains 

- Means testing of any kind introduced for Social Security (for any birth year cohort)

- COLA for Social Security is substantially modified (ie chained CPI)  (for any birth year cohort)  

- Congress passes a bill that presents a major curtailment of cash returns to shareholders (limitations on buybacks and/or dividends)  

- A named executive officer ("NEO") of any US S&P 500 company is detained in Mainland China, Hong Kong or Macau for any reason  

- One or more states establish an "exit tax" for any group of former residents 

- One or more major state pension plans ($50 bn+ in obligations) are placed in any kind of special status 

- At least one new issue sovereign bond goes into default before first scheduled interest payment

- latest FRED for "all transactions house price index for NY-Jersey City- White Plains" is down by 10% of more (current: 295.72)

Politics (NEW)

- Donald Trump selects someone other than Mike Pence for VP candidate 

- One of the two major party presidential candidates endorses UBI

- Bloomberg runs as an independent/third party 

- Hillary Clinton runs for president 

- Rep. Ilhan Omar (D-MN) is not in office by 12/31/20

- Rep. AOC (D-NY) is not in office by 12/31/20

- Sen. Romney (R-UT) votes for DJT impeachment 

- NY Governor Andrew Cuomo is formally charged by the DOJ with corruption-related charges

- NYC Mayor Bill de Blasio is formally charged by the DOJ  with corruption-related charges

- Any current US state votes on secession from the union (referendum or state reps)  

- Alberta becomes the 51st US state 

- Greenland becomes a US territory

- Turkey de facto or de jure leaves NATO

- US and UK sign a comprehensive trade deal by 12/31/2020 

- US introduces a special immigration program for Hong Kong SAR passport holders 

- More than 500 US military and/or law enforcement personnel are deployed in Mexico at once at any time in 2020 

Other (NEW)

- Greta Thunberg is hospitalized for mental or undisclosed/generalized ("exhaustion") reasons 

- At least two Epstein associates are charged with Epstein-related offenses by any government

- US life expectancy declines for a fourth consecutive year (based on most recent data)

- At least one major league pro athlete (NFL/NBA/NHL/MLB/MLS) is involved in a sports betting scandal of any kind 

- Number of Americans giving up US passports is over 5,000 on an LTM basis (sub-3000 LTM now)

- San Francisco poop reports over 35,000/yr on most recent data (25,000 in 2018)

- China wins more medals than the US in the 2020 Olympics (2016: 70 vs. 121)

- Most recent data on the Harvard class Asian ethnicity percentage goes above 28% (22.9% prior year and 25.3% most recent) 

- Median SAT move by 20 pts +/- (2019 at 1059, 2018 at 1068)

- Martin Shkreli commutation or pardon (by 1/20/2021)