Tuesday Night Links

• Government can be seen, in a fallen world, as the necessary submission to a monopoly of violence to prevent random and unstructured violence. It is no different than paying protection money to a local mobster, often necessary in failed, semi-sovereign states. That monarchs, with their honest and straightforward exercise of power, can demand less protection money than the manufactured consent of democracy is a bug, not a feature, from the perspective of government (though a feature for the tiny minority of rational subjects). Democracy, then, is a superior technology of government that allows greater extraction of resources from the host population by elites, through the farce of voting. The downside is that instead of an honest elite based on the honest exercise of power, it breeds a rather amoral elite who compete on the basis of propaganda and manipulation of irrational voters. Morally, it is inferior, but as an extractive technology, it is superior. Democracy is like fracking applied to elite rentier efficiency. People would rather give half of their resources in taxation if they feel they have a voice than a tenth otherwise. The advent of fiat currency, as a form of stealth taxation, represented a further technological advance in the ability to exploit the productive. [The Tom File]
• Why are solar PV panels so cheap? Solar panels are essentially large sheets of glass containing a thin layer of silicon configured so that light will push electrons through in one direction, generating electricity with no emissions, no fuel, no noise, no dust, and no moving parts. Built in factories refined continually for the last 50 years, solar panels have followed a similar cost curve to Moore’s Law for computers: ever greater volumes at ever lower prices — and no end in sight. Last year, the world installed about 437 GW of solar electricity, or roughly one acre of panels every 10 seconds. Earlier this year, panels fell to a record low of just $0.12/watt, and that record is certain to fall before long. In just the last decade, solar has fallen in price by a factor of 10. No other energy source has ever gotten that cheap that fast — and all indications are that both deployment and cost declines are accelerating. Fresh water production is just one of dozens of industries being upended by cheap solar, but the general rule applies. If it’s possible to use lots of cheap energy to make something, then sooner or later solar will be cheap enough to bring that product to a particular market at scale. For water in the US Southwest, that time is now. Solar can deliver power for about $0.02/kilowatt-hour (kWh), batteries for 24-hour utilization increase this to $0.12/kWh, meaning that the 1.8 kWh required for each cubic meter of water costs only $0.20 — and this is falling about 15% per year. [Casey Handmer]
  
• On May 8, 2024, Natural Resource Partners L.P. (the “Partnership”) executed a negotiated transaction with holders of the Partnership's Class A Preferred Units ("preferred units") pursuant to which the Partnership repurchased an aggregate of 40,000 preferred units (the “Subject Units”) for $40,000,000 in cash, plus any accrued and unpaid distributions in respect of such units. Following the repurchase, the Subject Units were retired and are no longer outstanding, and all rights of the holders thereof have ceased with respect to the Subject Units. Of the originally issued 250,000 preferred units, after giving effect to this redemption and all prior redemptions, 31,666 preferred units remain outstanding. As a result of this negotiated transaction, holders of the remaining preferred units have waived their right to convert up to 33% of the outstanding preferred units for six months from the date of the negotiated transaction. [Natural Resource Partners L.P.]
  
• Watching the slowly-developing advance of Russian forces across the line in Ukraine I've been brought back in mind of an excellent book I've read several times - Military Power by Stephen Biddle. Using mathematical modeling, Biddle predicted that future wars would move slower at the tactical level than we were used to from the experience of WWII.  This was due to technological trends in the range and effectiveness of modern weaponry forcing armies to operate in a more dispersed, methodical fashion so as to minimize their exposure to fire in a sort of neomodern reversion to the conditions of WWI.  He also predicted that failures to do so would be punished with increasing severity as anything that could be discovered by increasingly omnipresent battlefield surveillance could be engaged effectively with precise and deadly weapons. His recommendation on the optimum rate of advance for an army attempting to break through an enemy front line under modern conditions was a mere one kilometer per day; similarly he recommended that reserves be moved into position quite slowly to block such an advance to avoid their destruction by interdiction fire.  Only once that breach in the front is slowly levered open can forces then mass into fast-moving columns to strike into the enemy's lightly-held rear areas. [Armchair Warlord]
• This bank just confuses me. I think that’s as succinctly as I can put it. To start with they have branch/office locations in California (the wealthy areas), Texas, Nevada, Hawaii, and Florida. And while this sounds fun (especially for exec PJ travel) and I understand catering to the wealthy, I have rarely seen this kind of geographic spread work for a small bank. They also tout a wealth department with AUM/AUA at $6.6b, which is admirable but small all things considered. I know zero about their platform, but in the RIA shuffle going on right now I don’t know what their differentiator is above and beyond a Raymond James type (great platform) or a PE buyout (higher payout). Their M&A move into Florida hurt EPS but then so did rates up and seemingly very little balance sheet management. Their NIM is in the low 1s and their COF in the mid to high 6s. Their L/D ratio is pretty bad too although to be fair their California Multi Fam loans have been performing really well. All in all, it all just feels confusing or maybe distracted. Like they’re trying to do a lot of things all at once, and maybe none of them great. Like Bruce Lee said, “I fear not the man that has practiced 1000 kicks, but rather the man that has practiced one kick 1000 times”. Oh, and I recently found out their COO spends at least some of his time with a YouTube channel and talks about his T levels on X while promoting some supplement company. [Victaurs] 
• The bank isn’t even doing terribly on their mortgage book thus far, but they evaluate the decision in terms of EV. Most recreational gamblers associate having an edge with being up or down. How can you not have an edge if you’re winning? Or at least that’s how they think. So I like that the movie focuses on EV. They make a decision that’s unhindered by their prior errors and also unconstrained by convention. I mean wouldn’t that be a great way to go through the world? We should all be so lucky to be able to do that. Instead we often double down on errors and act within the confines of what might seem like reasonable approaches. The scene highlights the conflict between these approaches, and the clear decision making prevails. [Risk of Ruin Podcast Newsletter]
• I talked with Jeremy Siegel. We reminded each other that the Value Line index was a geometric index. We remembered that the equation for the pricing of stock index futures contracts on a geometric index required an additional term to accommodate the peculiarities of the geometric computation. But what was this other term? We asked Krishna Ramaswamy of Wharton and Suresh Sundaresan of Columbia, both of whom had been partners in The Free Lunch Club. Sundaresan had coauthored an article on the pricing of stock index futures (Modest and Sundaresan, 1983). They pointed out that the appendix gave a formula for pricing a futures contract on a geometric index. We looked at the formula. The missing term was 1/2{average unique risk} of the stocks in the index. How much was this? A typical unique risk is about 10% per year. So one-half of this is 5% per year. Holy Smoke! I had a multi-million dollar position in a futures contract that the market was pricing using the wrong formula, and now the market was moving towards pricing it using the correct formula that includes the extra term! Instead of (1 + r - div) being +3%, (1 + r - div - (1/2{average unique risk }) is -2%. So instead of the theoretical basis being +1.78, it should be -1.21. By this time, five days had gone by, and I had already lost $25,000. And the basis had moved only one-third of the way towards its new theoretical value, so I stood to lose another $50,000 if I couldn't unwind my position. There was only one problem with unwinding our position. The positions that Jeremy Siegel and I had were 100% of the long positions in the March contract. The only party on the other side had obviously figured out the correct formula, and this party wasn't about to let us out at the "market" price. We had discovered what an "illiquid" position meant. [Jay Ritter]
• We mailed letters to non-existent business addresses in 159 countries (10 per country), and measured whether they come back to the return address in the US and how long it takes. About 60% of the letters were returned, taking over 6 months, on average. The results provide new objective indicators of government efficiency across countries, based on a simple and universal service, and allow us to shed light on its determinants. [Andrei Shleifer]
• Joe Biden is about to slap 100% tariffs on Chinese-made electric vehicles. A 100% tariff is an absolutely huge tariff. It means that Chinese EV makers would have to sell their EVs in the U.S. at half the price of EVs manufactured elsewhere in order to be competitive. That just isn’t going to happen. A 100% tariff will probably be enough to keep essentially all made-in-China EVs out of the U.S. The Rhodium Group recently came out with a report called “Ain’t No Duty High Enough”, arguing that Europe would need 40-50% tariffs to keep Chinese EVs out. [Noah Smith]