Friday Night Links

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