Thursday Night Links

• Goodhart is one of my favorite economic thinkers because of “Goodhart’s Law,” which states when a measure becomes a target, it ceases to be a good measure. This is because people will take shortcuts to artificially boost the measure once they know it’s being tracked. One of my “laws” of business is that managers should have measures they track, but keep them secret, only using the measure to trigger deeper investigation into possible problems. [The Tom File]
• "Disinflation." No fewer than a dozen times on Wednesday did Federal Reserve Chair Jerome Powell say the word "disinflation" during his latest press conference. And Powell's repeated discussion of this dynamic helped supercharge a stock market rally following the central bank's decision on Wednesday to raise interest rates by another 0.25%. [Yahoo! Finance]
• Powell effectively blessed the current market action by not acknowledging that financial conditions have eased. [@simon_ree]
  
• Longtime CEO Akio Toyoda called himself a spokesman for “a silent majority” of people in the auto industry who questioned a single-minded focus on EVs. He argued that hybrid gas-electric vehicles like Toyota’s Prius could be just as environmentally friendly, and said other companies were pushing consumers to make a leap into EVs that they might not be ready for, without a charging infrastructure fully in place. [WSJ]
• Conventional wisdom these days is that in order for the Fed to bring inflation down, they are going to have to kneecap the economy. So with the Fed continuing to talk tough, it's no wonder that a majority expect to see a US recession some time this year. Wrong. As I've been explaining for a long time, inflation has already dropped significantly, and the economy remains reasonably healthy. In fact, a healthy economy and a vigilant Fed are a tried-and-true prescription for low inflation. The facts back me up: Real GDP growth for Q4/22 came in slightly above expectations (2.9% vs. 2.6%), and inflation, according to the very broad GDP deflator, was also slightly above expectations (3.5% vs. 3.2%), although it was substantially less than the 9.1% rate of just six months ago. Looking back at last year as a whole, real GDP shrank at a 1.1% annualized rate in the first half of the year, and grew at a 3.1% annualized rate in the second half of the year. Inflation, according to the GDP deflator (the most inclusive index we have), was running about 8.7% in the first half of the year, and 3.9% in the second half. So inflation fell by more than half over the course of the second half of the year, even as real growth almost tripled! So much for "conventional wisdom." [Scott Grannis]
• A good company is a carefully-constructed bubble of negentropy; it's an environment in which high returns, on capital and people, are sustained over long periods, creating a company that’s worth more than the sum of its parts. But fighting entropy is hard, and only gets harder with scale; the bigger a company becomes, the more of its surface area is exposed to uniqueness-sapping, ROI-depleting problems. Some of these are internal; it's hard to maintain a distinctive company culture while adding massive headcount. Some are external: if the company does something special and profitable, competitors will try to figure out how they can do it, too, and other companies in the supply chain will try to weaken this advantage so the high profits accrue to them, instead. So the end conclusion of searching for the ability to continuously reinvest at high returns is a search for companies that have beloved brands, favorable regulations, or a relentlessly paranoid management team that's obsessed with delaying the onset of mediocrity. [The Diff]
• Following the Covid-19 pandemic, U.S. labor force participation declined significantly in 2020, slowly recovering in 2021 and 2022 -- this has been referred to as the Great Resignation. The decline has been concentrated among older Americans. By 2022, the labor force participation of workers in their prime returned to its 2019 level, while older workers' participation has continued to fall, responsible for almost the entire decline in the overall labor force participation rate. At the same time, the U.S. experienced large booms in both the equity and housing markets. We show that the Great Resignation among older workers can be fully explained by increases in housing wealth. MSAs with stronger house price growth tend to have lower participation rates, but only for home owners around retirement age -- a 65 year old home owner's unconditional participation rate of 44.8% falls to 43.9% if he experiences a 10% excess house price growth. A counterfactual shows that if housing returns in 2021 would have been equal to 2019 returns, there would have been no decline in the labor force participation of older Americans. [Jack Y Favilukis]
• "Buffalo buffalo Buffalo buffalo buffalo buffalo Buffalo buffalo" is a grammatically correct sentence in English that is often presented as an example of how homonyms and homophones can be used to create complicated linguistic constructs through lexical ambiguity. It has been discussed in literature in various forms since 1967, when it appeared in Dmitri Borgmann's Beyond Language: Adventures in Word and Thought. [wiki]
• We strongly believe that Canadian heavy oil producers will be the best-performing subsector of the energy sector this year. The thesis is primarily driven by the following: Incoming Transmountain pipeline expansion by end of 2023, ~2 million b/d of refinery additions by year-end (focused primarily on sour crude), Years of underinvestment in non-OPEC ex-US production, Potential Russian crude export loss. There are clear and obvious catalysts this year, and when these catalysts materialize and result in compression in the differentials we see in WCS-WTI, the market will rerate the heavy oil producers, and investors will be rewarded. We believe the main driver of the thesis this year, however, will be centered around the incoming refinery additions. [HFI Research]
• Magellan does not intend to provide specific financial guidance beyond 2023 at this time but currently expects modest growth in DCF over the next few years, with potential upside if commodity prices remain similar to current levels. Our 2023 DCF guidance of $1.18 billion would represent an increase of 13% over our DCF of $1.044 billion in 2020, the year we initiated unit repurchases. Assuming no additional repurchases in 2023, DCF per unit for 2023 based on our guidance would equate to approximately $5.80 per unit, an increase of 25% over 2020. Given management's current expectation that FCF after distributions will generally be used to repurchase units (subject to the considerations noted in "Capital allocation" above), DCF per unit is expected to continue increasing at a higher rate than DCF. [MMP]
• “Turn Every Page” is one step away from turning into a Herzogian monument to obsession or plunging into crazed psychodrama. Instead, it is merely a great profile, filled with wit, affection and detailed stories of how the books came to be. While the film is nominally a dual portrait, the overall impression is that Lizzie Gottlieb has gravitated ever so slightly toward the Caro mystique, which might be inevitable. (Her father, as an editor, is supposed to work more invisibly.) [NY Times]
• At the Lotos Club, after telling some of those stories, I said, “Tom and I are here because Tom is the house eagle and I am the company mule. I say that with no false humility. I say it as plain fact. I would not know how to light a bonfire if someone handed me the match. I write about geology. In a sense, I am selling rocks. In Union Square, I know a sucker who will buy them.” [John McPhee]