Friday Night Links

• I think the more plausible is you bring incomes up through rising nominal GDP, through government redistribution, and that offsets the disinflationary pressures, and you push to an inflationary environment that allows incomes to catch up. That’s how 1965 and 1905, how incomes came in line with asset prices. With negative real returns and assets high, but not necessarily down in nominal terms, and high wage growth and nominal GDP growth that brings cash flows in line with asset prices. So that’s my best guess of what policymakers will stumble their way towards, and are stumbling their way towards. It’s not like there’s a grand plan to create inflation in order to reconcile incomes with the asset prices, but one way or the other, you get to choose every day. [Greg Jensen / Grant Williams]
• A consequence of these failures is raging cognitive dissonance among the elite, and a substitution of the means for the end. Last year, it was locking down itself that became the highest policy goal. Governments schemed less about how to get cases down, than about how to reduce the Google-certified mobility of their citizenry by margins great enough to satisfy their court astrologers. The same is now true of the vaccines, which in their failure to do much about anything, have become the focus of nearly all Corona policy everywhere in the world. All that our governments want to do now is vaccinate more and harder. They want to vaccinate all of the unvaccinated, and when that grows tiresome they will want to triple and quadruple vaccinate the already-vaccinated. And they especially want to vaccinate that last demographic that has so far remained largely exempt from vaccination, namely children. This would be little more than a global comedy at the expense of our worthless public health establishments, if we did not have abundant evidence that the vaccines are more dangerous than is normal for vaccines; and if SARS-2 did not pose such an infinitesimal risk to children, as to make even totally safe, ordinary vaccines an unacceptable measure in this context. [eugyppius]
• The primary driver of quality returns is growth in assets. Profitability decreases, which makes sense as profits across the economy mean revert and high profits should get competed away. Valuation multiples improve, which is perhaps surprising, as they generally begin at elevated levels, but this improvement only just offsets the contraction in profitability. High quality companies mostly deliver returns by getting bigger. The top decile of the value factor delivers returns through change in multiples. The companies have anemic asset growth, and profitability does not improve. But multiples do. This reflects our understanding of how value works. Low multiples often reflect poor earnings. But while earnings may continue to be poor, they are not as bad as was priced, so multiples improve. Value is the racecar, hard to beat, but prone to accidents around the curves. Quality loses to value much of the time but is much more consistent and performs better when growth slows. There is one final difference that matters to investors. Because value derives from market valuations, which are volatile, while quality derives from company profitability, which changes more slowly, companies in the quality portfolio tend stay in the quality portfolio with lower turnover than companies in the value portfolio. In our dataset, quality companies were likely to still be in the portfolio three years after being added, while value companies were likely to be out of the portfolio after two years. Value requires more frequent rebalancing than quality. [Verdad]
• Why does a newspaper company typically own an editorial content production business AND a printing business, when it could be two firms - the content firm outsourcing the printing of the newspaper to the printing firm? The usual transaction cost explanation does not work very well here. Also, book publishers and magazine publishers tend not to do their own printing. And that is the clue that leads to the Alchian "appropriable rents" explanation. The newspaper printing press is more specialized to the printing of the newspaper than other presses are to books and magazines, because newspapers are far more time sensitive than those other types of publishers. Also, the newspaper is more vulnerable to "opportunistic" behavior by the owner of the press than a book publisher would be. Even if the terms of the printing arrangement are contractually very well specified, an independent press owner would more easily be able to hijack the newspaper's profits through threats of production delays or by alleging higher production or maintenance costs. Thus, Alchian's theory is that if a substantial portion of the value of an asset is dependent on some other particular asset, both assets will tend to be owned by one party, forming a vertically integrated "firm". [CBS]
• The above central bank gibberish about inflation, ostensibly the most critical negative externality of their efforts to artificially sustain the economic sandpile that they’ve tasked themselves with propping up, is just one of endless examples of the failings of the tools and understandings with measuring risk within complex adaptive systems. [link]
• Mexico is, and always will be, a middle income country whose living standards and performance reflect their low 90s IQ. Better than Africa, worse than Denmark. With a few ups and downs depending on the relative competence of leadership and the boon and crash of commodity prices. [MR]
• Any sect at all that is leaner, meaner, and more survivalist than the mainstream will eventually take over. If one sect of rats altruistically decides to limit its offspring to two per couple in order to decrease overpopulation, that sect will die out, swarmed out of existence by its more numerous enemies. If one sect of rats starts practicing cannibalism, and finds it gives them an advantage over their fellows, it will eventually take over and reach fixation. If some rat scientists predict that depletion of the island’s nut stores is accelerating at a dangerous rate and they will soon be exhausted completely, a few sects of rats might try to limit their nut consumption to a sustainable level. Those rats will be outcompeted by their more selfish cousins. Eventually the nuts will be exhausted, most of the rats will die off, and the cycle will begin again. Any sect of rats advocating some action to stop the cycle will be outcompeted by their cousins for whom advocating anything is a waste of time that could be used to compete and consume. [SSC]
• Although FDA is not required to meet a particular public health standard to deem tobacco products, regulation of the newly deemed products will be beneficial to public health. The Agency has concluded, based on scientific data, that the newly deemed products should be regulated due to their potential for public harm (e.g., 79 FR at 23154-23158) and regulation is necessary to learn more about that potential. Greater regulatory certainty created by premarket authorizations should help companies to invest in creating novel products, with greater confidence that improved products will enter the market without having to compete against equally novel, but more dangerous products. For example, a company wishing to invest the additional resources needed to ensure that its e-cigarette is designed and manufactured with appropriate methods and controls will be more likely to do so if the product is not competing against products that are more cheaply and crudely made, yet appear to be identical to the consumer. Over time, since the “appropriate for the protection of the public health” standard involves comparison to the general tobacco product market, FDA believes the employment of the premarket authorities could create incentives for producers to develop products that are less dangerous when consumed, less likely to lead to initiation of tobacco use, and/or easier to quit. Further, FDA's premarket review of the newly deemed products will increase product consistency. For example, FDA's oversight of the constituents of e-cigarettes cartridges will help to ensure quality control relative to the chemicals and their quantities being aerosolized and inhaled. At present, there is significant variability in the concentration of chemicals amongst products—including variability between labeled content and concentration and actual content and concentration. Without a regulatory framework, users who expect consistency in these products may instead be subject to significant variability in nicotine content among products, raising potential public health and safety issues. Implementation of the premarket review requirements also will allow FDA to monitor product development and changes and to prevent more harmful or addictive products from reaching the market. [Federal Register]
• During the third quarter of 2021, Magellan purchased approximately 8.1 million of its common units for $390.7 million, depleting the remainder of its previously-approved $750 million repurchase program. "Since early last year, Magellan has fully executed on our equity repurchase program at what we believe to be attractive valuations," said Michael Mears, chief executive officer. "Magellan's distribution coverage has improved as a result of these repurchases, and that, along with the recovery of Magellan's business from the effects of the pandemic and our expectation of financial strength for years to come, has allowed us to increase our distribution this quarter and extend our record of annual distribution increases to 20 years." The partnership's board of directors has also approved a $750 million increase in Magellan's authorized equity repurchase program, to a total of $1.5 billion, and extended the program through 2024. [MMP]
• Stockpiles at the biggest U.S. crude depot are quickly approaching critically low levels. The last time that happened, crude cost more than $100 a barrel. The storage tanks in Cushing, Oklahoma, require a minimum level of oil to maintain normal operations, which  traders generally believe is around 20 million barrels. Unusually for this time of year, stockpiles declined more than 4 million barrels over the past two weeks to 31 million and are expected to keep dropping rapidly due to the world's insatiable demand for U.S. light sweet crude. [Bloomberg]
• The situation today is radically different from when Qian first returned to China. In a decade or two China may have ~10x as many highly able scientists and engineers as the US, comparable to the entire world (ex-China) combined. Already PRC human capital depth is apparent to anyone closely watching their rate of progress (first derivative) in space (Mars/lunar lander, space station, LEO), advanced weapons systems (stealth jets, radar, missiles, jet engines), AI/ML, alternative energy, materials science, nuclear energy, fundamental and applied physics, consumer electronics, drones, advanced manufacturing, robotics, etc. etc. The development of a broad infrastructure base for advanced manufacturing and R&D also contributes to this progress, of course. [Steve Hsu]
• During the third quarter, the Bank repurchased 480 shares of its common stock on the open market at an average price of $8,257.63 share. For the first nine months of 2021, the Bank purchased a total of 989 shares of its common stock at an average price of $8,152.22. The purchases were made as part of a stock repurchase program announced in April 2020, under which the board of directors authorized the repurchase of up to $20 million of the Bank’s common stock. [Farmers & Merchants Bank of Long Beach]
• Nicotine makes caffeine look like mid-afternoon naps for powers of concentration, and is a more intense experience to quit. There are delightful forms of it which wouldn’t even involve a risk of cancer or lung damage: I favor Freiborg and Treyer snuffs. It would actually be daring for a Michael Pollan to do this, as it violates the folkways of the twittering pustules in his social circles, who all probably think nicotine is some dangerous carcinogen (it’s not). [Scott Locklin]