Thursday Night Links

• This album stands out for excellent vocals in a wonderful concert hall. Discogs notes it was recorded in the Great Hall of University College School, London. The natural reverb of the voices is amazing. The choir is adult men and women, which is a nice contrast to the first two albums which were boys choirs. If an a cappella choir is not in your listening repertoire, this might be your best first choice. Track 1 might be my favorite rendition of “The Holly and the Ivy” ever. Some of the later tracks do have various instrumental accompaniments, but the fully a cappella ones are my favorite. On the other hand, with 23 songs, maybe a completely a cappella album would lose some of its power and appeal. Track 11, “Oh Holy Night” has a moving soprano section that I love. Similarly, track 16, Hayden's “Messiah” and track 17 “In dulci jubilo” are not to be missed. The Messiah, simply because it's the Messiah performed by an excellent choir. “In dulci jubilo” because of the interesting, almost singing in the round to start, then finishing with a brass horns section in accompaniment. So moving! [@pdxsag]
• Soaring interest rates have crushed the bond market and this in turn has led to many investors scrambling to hedge themselves against further rate hikes. No one wants to own 30-yr mortgage paper if rates rise further, because that means refinancings will grind to a halt and that paper will acquire a significant amount of duration risk: the value of a fixed rate mortgage will decline by more than about 10% for every 1 percentage point increase in mortgage rates. As a result, the spread between mortgage rates and 10-yr Treasury yields has widened to just about its widest point ever: <300 bps. Everything is working against the housing market. Does the Fed really want to crush the housing market by hiking rates further? I think they will come to their senses pretty quickly and back off of their recently-announced tightening pledge. [Scott Grannis]
• Since the start of the 2nd half, WTI is down ~30%, while energy equities are up. Many commentators have attributed this divergence as an indication that energy equities are overvalued, our experience tells us that this is a big signal change in the way investors are perceiving energy equities. Not only do we think this momentum carries forward into 2023, but we also believe this is one of the definitive signals we can rely on to know if we are in a structural bull market or not. [HFI Research]
• Parvini, however, goes farther and concludes that popular action that seeks radical change, whether the (fantastic and excellent) Electoral Justice Protest, the Yellow Vests in France, the Canadian truckers, or other such bottom-up movements emerging from those denied power and harshly oppressed, will necessarily fail. This is, as I noted, his “populist delusion.” I think he is too hasty in this conclusion, because it is easy to demonstrate that under the correct circumstances, the populace can destroy a regime without being led by a counter-elite, or even without the existence of a counter-elite. The people of the tyrannized countries of Eastern and Central Europe (tyrannized less, for the most part, than we are today) did it in 1989 (and not because they wanted blue jeans and rock music, but for much deeper principles, and all this is well discussed in Stephen Kotkin’s Uncivil Society). Sri Lankans did it recently (although I claim no special insight into the politics of that country, or how successful mass action ultimately was), and the unhinged reaction of the extremely punchable Justin Trudeau and his filthy henchmen clearly suggested they feared a similar result from the trucker protests. It only takes a little historical reflection to see that the often-held belief, which is also Parvini’s, that a counter-elite must originate and control such an uprising by the common people for it to be successful is false, the exception rather than the rule, and that this false belief is usually held mostly by eggheads and monomaniacs who incorrectly think that they would be part of such an elite, which could be nothing without them. Yes, it is sometimes true that a counter-elite first organizes, and only then replaces an existing elite; Vladimir Lenin is the best Western historical example. But if you change a few minor variables in 1917, the Russian ruling class is still overthrown, yet not replaced by the Bolsheviks, which suggests it is mere happenstance that Lenin spent decades preparing for the role that history ultimately granted to him. [Charles Haywood]
• We present a simple new explanation for the diversification discount in the valuation of firms. We demonstrate that, ceteris paribus, limited liability of equity holders is sufficient to explain a diversification discount. To derive this result, we use a credit risk model based on the value of the firm’s assets. We show that a conglomerate can be regarded as an option on a portfolio of assets. By splitting up the conglomerate, the investor receives a portfolio of options on assets. The conglomerate discount arises because the value of a portfolio of options is always equal to or higher than the value of an option on a portfolio. The magnitude of the conglomerate discount depends on the number of business units and their correlation, as well as their volatility, among other factors. [Manuel Ammann]
• Since Covid hit the headlines the running gag among myself and a couple online friends has been that everything on my vitamin and supplement shelf is eventually shown to treat Covid. The first OTC Covid recommendation was vitamin D and zinc as immune boosters, and NAC to keep the lungs clear. I thought to myself, “Wow, didn't know that about zinc or NAC. Cool!” I was taking them based on what I'd read in P.D. Mangan's “Best Supplements for Men.” It was a pleasant surprise that they would be associated with improved immune function. As time went on, more and more of my “stack” got mentions as Covid prophylaxes: selenium, berberine, citrulline, iodine. While it's a little bit funny, it shouldn't be too surprising. Everything's correlated. It stands to reason that the supplements that lead to strong, vigorous health are going to benefit the immune system. In fact, there is a school of thought that believes the causality mostly goes the other way: sub-clinical pathogens lead to a loss of health and vigor, which leads to the things we associate with aging. Keep the immune system strong, and good health will follow. [@pdxsag]
  
• The Pardee presence in America was founded by a Parliamentarian ancestor who came to New Haven during the English Civil War. During the 19th century a Pardee got interested in Lehigh Valley anthracite coal, and that is where the story of wealth starts. The one mistake they made, or the reason they did not become a household name like Carnegie, is that they did not follow the coal and steel industry west to Pittsburgh. (The reason for the westward shift was that steel-making using bituminous coking coal made more sense in Pittsburgh, nearer to deposits of that type of coal. Plus the market for steel rails was in the expanding west, not the east.) Ultimately, though, Calvin Pardee did take the cash generated by the eastern PA mines and reinvested it towards the end of the 19th century in lands in Louisiana (timber, later oil and gas), West Virginia, Kentucky, and Virginia (the latter three all coal). The Louisiana lands that were bought based on timber value but proved to have oil were the big winner. That leaves PDER as a family owned resource company that has been mining coal, growing timber, and producing oil and gas for more than a century. I can't think of anything else quite like it. Texas Pacific Land Trust has been around since 1888 but is not actively managed. [Oddball Stocks]
• Cochran: I think that most people writing about international politics don't have much useable history. They keep making the same two analogies (everything is either Munich or Vietnam) because they simply don't know any other history, not that they really know much about Vietnam or WWII either. I also think that they have zero quantitative knowledge. Comparisons of Saddam's Iraq and Hitler's Germany used to bug me, since Germany had the second largest economy in the world and was a real contender, while Iraq had the fortieth largest GNP and didn't have a pot to piss in. I once assumed people were deliberately lying, but now I think that they simply don't have any quantitative picture of the world at all. One, two, three -- many! In the same way, people who equate the dangers of jihadism with that of Nazi Germany or the Soviet Union really don't know big from small, don't know anything about the roots of national power. I think most writers and columnists are innumerate, just like the average American. Perhaps more so. If they could count, why the hell would they have gone into opinion writing? [Greg Cochran]
• Horizon Kinetics has been writing about indexation flaws for a long time. But what would ever “break” indexation? I think it may very well be scammers figuring out that they can loot the index funds, which have abdicated judgment and stewardship of what they own. It looks like the tools to get in the S&P 500 are accounting fraud (to generate four quarters of profit) and call buying gamma squeezes (to get a big enough market capitalization). Some Tesla skeptics think that the S&P 500 selection committee can be talked out of adding Tesla to the index. I doubt it. The market cap is now $350 billion and growing. What are they going to do, not have a top ten (by market cap) company in the index? To exclude it on the basis of skepticism or suspicion would be an active choice of security selection. It would imply that the market could be hugely inefficient, that the entire philosophical predicate of indexation was wrong! No, the whole philosophy of the S&P 500 index is one of freeloading: the active participants in the market are supposed to set prices, which passive investors can then take as fair. So if the market says that Tesla is worth $350 billion, that is not something for index investors generally or the S&P committee to second guess. [CBS]
• If you are incompetent at manufacturing and have to scrap a lot of parts, you can prevent or delay any financial statement impact of this by keeping the parts on the books as inventory even if you have already thrown them away. It is very simple, comically so, and it makes your gross margin and profit figures look better. The only problem is it is a crime! [So, if you were a Silicon Valley company doing this, you would need to provide illegal sex and drugs to accounting firm employees, SEC employees, and journalists. One good time to do this and get them on tape for blackmail would be an "anything goes" festival in the desert, where you could have "boom boom tents". It might also help to learn that trade from a master.] Based on emails that have come out in the Tesla and Martin Tripp litigation (he was a whistleblower whose phone Tesla bugged, and they tried to assassinate him), Tesla distinguished between "physically" scrapping and "virtually" scrapping parts. In an email from Michael Bowling to Chris Lister and Jens Peter Clausen, Michael Bowling wrote to "request permission" to write off an inventory inaccuracy. He said that "during the inventory we realized 1718 modules in WIP that have already been scrapped physically [were] never scrapped virtually." In the email below, it said that for the week of April 2, 2018, scrap for the Model 3 was $1,920 per car! It is strange that "permission" would be needed to do this. If a subordinate tells you that an asset on your balance sheet does not exist, you either write it off or you are a fraud. But Jens Peter Clausen wrote, "We properly want to go deep this quarter?" And Adithya Vijayakumar wrote that Mike was "working with the finance team to get the buy off on scrapping the modules for the second quarter." That makes it sound like actual ground truth is not the final arbiter of what appears in Tesla financial statements. This is not the first time there have been Tesla cost accounting irregularities. Remember that the government indicted someone in Tesla's accounts payable department for impersonating employees of one Tesla vendor (Hota Industrial Manufacturing of Taiwan) in order to substitute their payment information with the payment information of a different vendor, Schwabische Huttenwerke Automotive GmbH (SHW). [CBS]
• Try this: "Your immune system is the police department, and your white blood cells are the police. This morning the police chief handed all the cops going out on duty a mugshot of a very dangerous psychopathic fugitive who was last seen wearing a red hat, with instructions to shoot on sight. Across town, the local city council with the mayor just started handing out red hats to families at a parade." If that doesn't work, maybe get some crayons... [Things Hidden in Complexity]
• Crypto winter be damned — bitcoin and ethereum investors are still laser-focused on an industry in free-fall being rocked by bankruptcies. At least that's what at least one Yahoo Finance in-house metric is revealing as investors continue to check in on beaten-down crypto prices at a high rate as 2022 draws to a close. Despite the entire crypto asset class seemingly teetering on the brink of collapse — or perhaps because of it — the Yahoo Finance bitcoin quote page (BTC-USD) has racked up more than 157 million views so far in 2022, making it #8 on the year's top ten trending tickers list. And this coming during a year that saw war in Europe break out, historic rate hikes from the Fed surprise all summer long, and investors endure the worst environment for the stock market in over a decade. [Yahoo! Finance]
• While it is, relatively speaking, rather straightforward to split an atom to produce energy (which is what happens in fission), it is a “grand scientific challenge” to fuse two hydrogen nuclei together to create helium isotopes (as occurs in fusion). Our sun constantly does fusion reactions all the time, burning ordinary hydrogen at enormous densities and temperatures. But to replicate that process of fusion here on Earth—where we don’t have the intense pressure created by the gravity of the sun’s core—we would need a temperature of at least 100 million degrees Celsius, or about six times hotter than the sun. In experiments to date, the energy input required to produce the temperatures and pressures that enable significant fusion reactions in hydrogen isotopes has far exceeded the fusion energy generated. [Bulletin of the Atomic Scientists]