Thursday Night Links

• Perhaps the hero of the story is Matt Damon’s character, Leslie Groves, an MIT-trained engineer turned Army general who, unlike Oppenheimer, plays down his intelligence, and appeals to their vanity to manipulate the scientists into completing his project. WASP restraint, manners, and self-control convinced a bunch of prima donna Communist sympathizers to build the atom bomb for capitalist America. An amazing thing about this era is the incredible ingratitude shown by these scientists and other academic refugees from Hitler’s Germany. Beyond their sympathy for the far more murderous Soviet regime, within a decade of American blood and treasure defeating the Nazis, they were attacking the American people with pseudo-scientific works like The Authoritarian Personality, which linked strong fathers, Christian faith, and military service to mental instability leading to support for fascism. The latter led to Left support for the Sexual Revolution to undermine the American family as an insurance policy against these supposed latent fascist tendencies. As is so often the case in history and life, no good deed goes unpunished. [The Tom File]
• We are in a moment in time where parts of the body politic and various legislatures are willing to allow perpetual trusts to exist unmolested and undenounced. Except for a few law professors, tax bureaucrats, and even fewer reform-minded trusts and estates practitioners, society does not seem to care anymore about perpetuities, dynasties, dynastic property, and “baronies.” Why? It is not clear if today’s equivalents of the landed gentry of yesteryear are merely meeting less resistance, if the debate (if there even is one) is asymmetrical, or if the number of folks who want perpetuities is larger than before. Or, it actually may be that the Rule Against Perpetuities has outlived its usefulness. Are economic elites seizing a prosperous moment in time to assure their primacy forever? Rich folks always push for advantage, but at the moment no one is pushing back in the perpetuities arena. Most plain folks see no danger. Why are there so few complaints? [Joel Dobris] 
• I believe that if a unitrust is to be impartial between the income beneficiary and the remainder beneficiary, it should be a 3% unitrust. The retirees or other rentiers who want to turn over to their inheritors what they began with, in real terms, should pay themselves only 3%. The person who does not want to invade principal indirectly should not spend more than 3%. Ultimately, the basis for my belief is outside the scope of this Article and perhaps outside my powers of argumentation. Having said that, let me state the point very simply and ask the reader to accept it and to continue reading. Easily available equity investments cannot be counted on to provide enough to the investor in the form of dividends or capital gain to sustain a larger payment over time without reducing principal. As one might imagine, 3% is not a popular figure. Why do people want to spend more than 3%? [Joel Dobris]
• It sounds weird, but if you look at where the money’s spent at auction, it’s almost all fashionable contemporary crap because if you think about how prices in very high-end art are set, they’re auction prices. How many people does it take to generate an auction price? Two. Just two. So, you have boneheaded Russians who want to have a Picasso on their wall so people will think they’re legit, or hedge fund managers’ wives who’ve been told to buy impressive art to hang in their loft so when people come over, they’ll say, “Oh, look, they’ve got a Damien Hirst.” The way art prices at the very high end are set is almost entirely by deeply bogus people, [laughs] which is great, actually. When I was an artist, I used to be annoyed by this. Now that I buy a lot of art at auction, I’m delighted because it means there’s all this money. You see Andy Warhol’s screen prints selling for $90 million. Yes, I know because I buy them. [laughs] I used to be annoyed by this, and now I think it’s the most delightful thing in the world because there’s all this loose money sloshing around, and so-called contemporary art is like this sponge that just absorbs all of it. There’s none left. Some of the things I buy, I am the only bidder. I get it for the reserve price. No one else in the world wants it, or even knows that it’s being sold, so I am delighted about this. [Paul Graham] 
  
• We just saw today that offshore driller Valaris is borrowing money to buy more ships. When you invest in cyclical industrial companies a constant theme is valuations that are (ostensibly) punishingly cheap but where managements want to expand capacity. If the demand was so great you could theoretically lay the risk off on the customers with long term contracts for the output - but you never see this. (Although the WSJ points out today that small bakeries have figured out that capping croissant production is good for profits.) We keep coming back to the question of producers versus royalties. The conventional wisdom being, "date the producers, marry the royalties." In theory, there is a set of relative valuations at which you should be indifferent between the two business models. And if the royalty companies are selling for 2% free cash flow yields but the producers are 1x EBITDA, you should probably prefer the producers. Where this gets more difficult is when the royalty companies are also cheap (say, double digit yields) and the producers are expanding production instead of returning cash. If we look ahead a year or two, what if that cheap producer ends up expanding, having cost overruns on its expansion, and it and its competitors end up reducing their margins because of the increased capacity? The amount of cash that shareholders ultimately receive may be a lot less than the EBITDA multiple suggests. That would imply that the producers are never as cheap as they look. [CBS]
• The royalty model is just so superior to the producer model. When we looked at coal producer earnings this quarter, we see that they are cheaper on EV/EBITDA than NRP, but they have vastly larger capital expenditure requirements. (They are also more leveraged to the coal price, for better and for worse, since they have production cost and a royalty owner doesn't.) Something fantastic about royalty companies is that they can benefit if the producers foolishly over-expand their capacity and harm their commodity price. Here's the math: suppose that a producer making a 100% margin (cost is half of selling price) expands production by 25%. Their projection was that they would use the lower volumes to drive cost down by 20% thanks to higher volume, and so the greater amount sold at a lower cost would result in 50% higher profit, a huge return on the expansion capex. However, everybody else in the industry has the same idea and inflation causes the cost of production to stay the same (instead of the projected decrease) while at the same time the selling price falls 10% because of the increase in supply. The result is that profits are flat. The expansion capex was completely wasted. But look what happens to the royalty owner: the selling price is down 10% but a 25% production volume increases results in a 12.5% increase in royalty revenue, since the royalty owner has no cost of production. And it happens with no capital expenditure on the part of the royalty owner. (Keep in mind, of course, that the selling price could fall more than enough to offset the production increase, whether because of the increased supply alone or because of other economic factors. But if that happens, the producers will really be hurting.) If it is a tough call whether to invest in the royalty or producer based on valuation, the tie has to go to the royalty owner. The reason is that the royalty stands to benefit from the classic producer management mistake (expanding). [CBS]
• This can only happen with physical books and journals. Database oriented searches are  useful, but there is much encoded knowledge in the physical organization of the library. There is much encoded knowledge in Dewey Decimal Classification just as there is on the physical layout of the place. Nothing like this exists in database oriented systems; the KNN algorithm in libraries allows one to find new things. Random sampling is also vastly more powerful in a physical library. I’ll never forget coming across the Chronicles of the House of Lords and reading about various expeditions, naval expenses and early rail systems installed in the United Kingdom. What a treasure that was; vastly better than slumming it through a bunch of wiki articles on the 19th century. Coming across the The London Times Imperial Trade and Engineering Supplement near my favorite seats in Doe library radically changed my views of economic history and the Great Depression. [Scott Locklin]