Monday, November 12, 2018

November 12th Links

  • However, there is one factor above that should be highlighted now, because many inventors and patent owners are unfamiliar with the concept. Continuity and continuations are of the utmost importance; they are a powerful tool for fixing problems, increasing claim coverage, and minimizing risk. If there are no pending continuations, it is unlikely that a lawyer will accept a patent portfolio on a contingent fee representation unless the other factors are extraordinary. Continuations allow the patent claims to be refined over time to improve validity and infringement positions as issues surface or the law changes. If the opportunity to file a continuation has passed, the patent owner cannot continue to obtain issuance of new patents and claims with the same effective filing date. [JDBIP]
  • If you wanted to communicate as much as possible to someone about your worldview by asking them to read just five books, which five books would you choose? [Luke Muehlhauser]
  • Risk cannot be avoided, only managed. The risk-free asset is an illusion. Someday your natural life will end, you need to invest taking that into account, and taking into account that this is true of everything else on this earth that you can put your trust in. If you allocate too much of your portfolio to "safe" assets you're leaving yourself unnecessarily exposed to the risk that this asset will become irrelevant, and failing to take the chances that are actually available to improve your position. [Ben Hoffman]
  • Relatedly, I've long wanted to research, compose, and record a many-hour continuous piece of music that recapitulates the entire history of "Western music" (which is better documented than other traditions). The piece would begin with sections composed in accordance with scholarly guesses about how prehistoric music might have sounded, eventually transition into the earliest styles from recorded history, then evolve into styles covered in e.g. Burkholder's History of Western Music, up to the present day. This is a pretty obvious idea and I'm upset that nobody has attempted it yet. [Luke Muehlhauser]
  • I was looking for clues as to how we could frustrate the Soviet versions of RAND and SAC, and do it in time to avert a nuclear Pearl Harbor. Or postpone it. From the Air Force intelligence estimates I was newly privy to, and the dark view of the Soviets, which my colleagues shared with the whole national security community, I couldn't believe that the world would long escape nuclear holocaust. Alain Enthoven and I were the youngest members of the department. Neither of us joined the extremely generous retirement plan RAND offered. Neither of us believed, in our late twenties, we had a chance of collecting on it. [Luke Muehlhauser]
  • With the outbreak of World War II in late summer, White returned to the United States. He later enrolled at Yale Law School in 1939. In a 2000 interview, White said that he was supposed to enroll at Harvard Law School, but got sick on the train ride there, so he got off the train in New Haven, Connecticut and went to Yale. [Wiki]
  • Economists love Uber like a mother loves her child. They love it like the internet loves cats. They love it like tech bros love Elon Musk. Economists love Uber because it's the closest you can get to taking the pure economic theory of textbooks and summoning it to life. Uber created a massive open market, governed first and foremost by the forces of supply and demand. Along the way it broke up the taxi monopoly, taught people to accept "surge" pricing, and ushered concepts long confined to econ 101 into the popular discourse. [link]
  • Bressloff's model does not only provide insight into the mechanisms that drive visual hallucinations, but also gives clues about brain architecture in a wider sense. In collaboration with his wife, an experimental neuroscientist, Bressloff has looked at the connection circuits between hypercolumns in normal vision, to see how visual images are processed. "People used to think that neurons in V1 just detect local edges, and that you have to go to higher levels in the brain to put these edges together to detect more complicated features like contours and surfaces. But the work I have done with my wife shows that these structures in V1 actually allow the earlier visual cortex to detect contours and do more global processing. It used to be thought that you process more and more complex aspects of an image as you go higher up in the brain. But now it's realised that there is a huge amount of feedback between higher and lower cortical areas. It's not a simple hierarchical process, but an incredibly complicated and active system it will take many years to understand." [link]
  • The intermittent and incompletely predictable solar cycles periodically stress the genomes of all life producing genetic changes which may be harmful or adaptive. The evidence presented in this study indicates that solar cycles, particularly the most irradiant which have occurred over the past 65 years, are fundamental engines of evolution, even underlying natural selection, and we bear their marks even to the end of our lives. [link]
  • Folate, a key periconceptional nutrient, is ultraviolet light (UV-R) sensitive. We therefore hypothesise that a relationship exists between sunspot activity, a proxy for total solar irradiance (particularly UV-R) reaching Earth, and the occurrence of folate-sensitive, epigenomic-related neonatal genotypes during the first trimester of pregnancy. Limited data is provided to support the hypothesis that the solar cycle predicts folate-related human embryo loss. [link]
  • Strange new respect for judicial minimalism. As Harvard Law professor Adrian Vermeule remarked, "Law review editors: brace for a tidal wave of legal academic theories supporting judicial minimalism, Thayerianism, and strong — very strong — theories of precedent. Above all: the Court must do nothing without bipartisan agreement, otherwise it is illegitimate." The past half-century's enthusiasm for judicial activism will vanish, as legal academia turns on a dime to promote theories that will constrain the court until a left-leaning majority returns, at which point they'll turn on a dime again. [link]
  • My friend Satvik recently told me about an important project management intuition he'd acquired: it's a very bad sign to have a lot of projects that are "90% complete". This is bad for a few reasons, including: Inventory: For any process that makes things, it's a substantial savings to have a smaller inventory. A manufacturer buys raw inputs, does work on them, and ships them to a customer. Every moment between the purchase of inputs and the delivery of finished goods is a cost to the manufacturer, because of the time value of money. Smaller inventories are what it looks like to have a faster turnaround. If a lot of your projects are 90% complete, that means you're spending a lot of time having invested a lot of work into them, but realizing none of the value of the finished product. [Ben Hoffman]
  • A key heuristic for confidence seems to be "cards in your back pocket." For example, it's much easier to negotiate salary when you know you have other job offers. It's much easier to confidently give a talk if you've done it before and know you can recover even if you get derailed. It's much easier to be confident in social situations when you're comfortable with your existing relationships, and aren't desperate for new ones. [Satvik Beri]
  • Implicit in this is that good taste helps you eventually become a good artist: by recognizing what good work looks like, you're able to practice and gradually improve your work until it meets your own standards. On the other hand, if your taste is poor then you're subject to a much slower feedback loop: at best, you can ask others to look at your work, which is still useful but introduces a substantial amount of delay. And the gap between practice and feedback has an enormous impact on how fast you learn. So poor taste = slow feedback loop = slow learning, while good taste = tight feedback loop = fast learning. This suggests that one of the most important things you can do is continuously cultivate better taste. [Satvik Beri]
  • If you spend an hour beautifully perfecting the wording of an essay only to throw out the whole paragraph afterwards, then all the time you spent polishing was wasted. It would have been much better to nail down the layout, then focus on getting it to the point where you'd be willing to show it to others. The broader lesson here is to figure out the piece of a project that has the highest uncertainty, and start iterating there, and do this sequentially until the project is done. [Satvik Beri]
  • Another important factor is that the tree of decisive considerations reduces what can seem like very complex values problems to relatively objective questions which can be answered with information. This makes it very easy to narrow in on the actions you need to take. [Satvik Beri]
  • Those of you who know me might know that I tend to get obsessed about things sometimes. And by sometimes I mean I almost always have one obsession that lasts about 1-6 weeks where I spend most of my waking hours thinking about, studying, or working on some topic. These obsessions have included statistics, video games, the history of monogamy, Kaggle contests, project euler problems, Coursera courses, work projects, and more. [Satvik Beri]
  • A simple, but important factor is that I started to take Tyrosine last year, and seriously upped my dosage whenever I felt depressed and unable to act. This didn't have much effect on my mood, but it made me noticeably more able to get things done. I would estimate that I was about 70% as productive in a "down" state as I was in a normal state, which is a huge improvement for me–previously, that looked more like 10%. [Satvik Beri]
  • On behalf of property owners everywhere, I want to thank Jeff for installing 1/4 turn ball valves on his plumbing shut-offs. I've replaced so many seized gate valves over the years (roughly all of the ones I own!) that hearing someone else with a practical bent to real estate makes me very happy. Plumbers love gate valves for reasons that make no sense to me, and I've had them installed in properties I own after I explicitly specified 1/4 turn ball valve (by plumbers that no longer do work for me). That type of attention to detail is key for small scale real estate investment. It costs an extra couple bucks, but it is basically guaranteed to save a $100 service call within the next 10 years. And once in awhile it will save a $10,000 flood issue when something is leaking and the crappy gate valve can't be closed. I doubt that level of attention to detail is available from an outsourced property management firm, but I sincerely wish this company the best. [CoBF]
  • The law surrounding subject matter eligibility under 35 USC 101 used to be clear-cut and well established compared to the law as it stands today. In 1980, the Supreme Court confirmed the historical intent of the law that "anything under the sun that is made by man" met the requirements for subject matter under 35 USC 101. Diamond v. Chakrabarty, 447 U.S. 303 (1980). Thirty-four years later, the Supreme Court changed its mind. [JDBIP]
  • How can a claim be novel enough to pass 102 and nonobvious enough to pass 103, yet lack an "inventive concept" and therefore fail 101? Or, how can a claim be concrete enough so that one of skill in the art can make it without undue experimentation, and pass 112, yet abstract enough to fail 101? How can something concrete be abstract? These problems confound the most sophisticated practitioners in our patent system. People simply don't know how to draw these distinctions. If something is not inventive, then invalidate it under 102 or 103. If something is indefinite, or too broad to be fully enabled or described, then invalidate it under 112. [PatentlyO]

Monday, November 5, 2018

November 5th Links

  • All government, in its essence, is a conspiracy against the superior man: its one permanent object is to oppress him and cripple him. If it be aristocratic in organization, then it seeks to protect the man who is superior only in law against the man who is superior in fact; if it be democratic, then it seeks to protect the man who is inferior in every way against both. One of its primary functions is to regiment men by force, to make them as much alike as possible and as dependent upon one another as possible, to search out and combat originality among them. All it can see in an original idea is potential change, and hence an invasion of its prerogatives. The most dangerous man to any government is the man who is able to think things out for himself, without regard to the prevailing superstitions and taboos. Almost inevitably he comes to the conclusion that the government he lives under is dishonest, insane, and intolerable. [H.L. Mencken]
  • In 2016, TSLA thought its Fremont plant could make 5,000, 10,000 and 20,000 vehicles a week in late 2017, 2018 and 2020, respectively. This can't happen at people speed. Consequently, the cost structure of the Model 3 is much higher than Elon Musk expected when he took deposits from hundreds of thousands of people for a $35,000 car. It's a promise he can't keep. UBS did a teardown analysis and estimated that the cost to make a stripped down version of the Model 3 is $41,000. That's a long way from $35,000, let alone $26,250 – the level needed for TSLA to make a 25% margin. In May, Elon Musk tweeted that the $35,000 version would be launched 3-6 months after the company achieved 5,000 cars a week. That milestone was hit with great fanfare in June. However, investor relations has leaked that the company now expects the $35,000 version in the second quarter of next year. Tellingly, TSLA has stopped taking orders for the $35,000 version, as it may already know that it won't be releasing a $35,000 version anytime soon or ever. The company has changed its policy on refunding deposits so that customers who are tired of hoping TSLA makes a car that doesn't exist and want their money back have to wait 45 days. It reminds us of Jane and Michael Banks in Mary Poppins. We think this may explain Mr. Musk's erratic behavior. He can't make the car without losing too much money and he can't bring himself to cancel the program and refund everyone's deposits. His conduct suggests that he is doing his best to be relieved of his position as CEO to avoid accountability. Quitting isn't an option because it prevents Mr. Musk from claiming he could have fixed the problem had he stayed. [ZH]
  • Several mechanisms can explain the association between visceral fat accumulation and increased risk of prostate cancer. Adipose tissue is a source of specific substances, including adiponectin, resistin, leptin, and adipsin, and secretes a variety of other cytokines, such as tumor necrosis factor‐α and interleukin‐6. There is ample evidence that VF and SF cells differ metabolically. The metabolic products of VF, namely free fatty acids, are delivered directly into the portal circulation to the liver, inducing a significant metabolic disturbance. It is well established that VF accumulation is associated with insulin resistance, resulting in hyperinsulinemia. Insulin can promote the growth of several different cell lines, including prostate tumors, and high plasma insulin levels have been related to prostate cancer risk and stage. In a case‐control study, men in the highest tertiles of waist/hip ratio and serum insulin levels had an 8.55‐fold increased risk of prostate cancer compared with men in the lowest turtles. [link]
  • I reached Sunbury, where the West Branch of the Susquehanna joins the main. About here, I judged, was the limit of Colonial era settlement. Thereafter the infrastructure and artifacts appeared to be Jacksonian era or later. The West Branch arcs northwesterly. The population of the state is concentrated in the east, along the Delaware River valley, and in the west around Pittsburgh, the Ohio River and Lake Erie areas. The central, which is hills or mountains, is less populated, especially north of the West Branch. Here the Alleghenies run southwest-northeast, up from West Virginia and into New York. Mountains are as powerful a metaphor and symbol as they are a physical obstacle. [link]
  • Could the next Senate confirmation hearing of a Supreme Court nominee be worse than the Kavanaugh-Ford hearing? Who would have thought that a hearing could be worse than Chappaquiddick Teddy Kennedy's attack on Judge Bork, or the "high tech lynching" of Clarence Thomas? [Federalist]
  • In 20 years of covering New Hampshire primaries, I crossed paths with candidates who almost immediately revealed their fallibilities. Call it intuition, but when Ernest "Fritz" Hollings, a silver-haired South Carolina senator with a stentorian voice and Dixie accent, strolled into the newsroom at the Monadnock Ledger in Peterborough and requested directions to the restroom by inquiring with all the authority of a world statesman, "Where's your little boys' room?," I sensed his quest for the 1984 Democratic nomination was doomed. [Boston Globe]
  • Norwegian Karl Ove Knausgaard, author of six volumes of autobiographical musings entitled My Struggle, is likely the most celebrated literary writer of the current decade. He's a leading light of the Hapless White Guy literary genre perhaps founded by the late David Foster Wallace. [Sailer]
  • Even with a new year, the pattern of en route delays to the airport at SeaTac [KSEA] continues. A particularly galling aspect of this is that both FAA and the management at this airport have expended a huge effort promoting these so-called 'NextGen improvements', even going so far as to over-use a 'Greener Skies' eco-moniker. To help reveal this propaganda, an analysis was recently done, looking closely at 25 arrivals during a half-hour-long push on the late evening of Thursday, January 14, 2016. [link]
  • This urgent pulling forward of buying has happened before on a large scale in the U.S. in 1999.  The year 2000 fear that software would not be able to handle the switch from 1999 to 2000 due to program limitations triggered both corporate buyers and consumers to purchase new hardware and software that would fix the bug. Sales were pulled forward into 1998 and 1999 then in 2000, sales dropped fast 'like the lights were turned out' the CEO of HP, Carly Fiorina said. [link]
  • Wallace Stegner has published thirteen novels, three short-story collections, sixteen nonfiction titles, and has edited eighteen works in the fifty-three years he has been publishing books. His first novella, Remembering Laughter, won a Little, Brown Prize in 1937, and in 1990 Random House published Stegner’s collected stories. [Paris Review]
  • "Oplan Fracture Jaw has been approved by me," General Westmoreland wrote to Adm. Ulysses S. Grant Sharp Jr., the American commander in the Pacific, on Feb. 10, 1968. (The admiral was named for the Civil War general and president, who was married to an ancestor.) [NY Times]
  • In one of the celebrated scenes of the 1997 movie  Good Will Hunting, Matt Damon's title character gets into a battle of wits with a student from Harvard University, whom he accuses of uncritically parroting the views of the authors on his reading list as a first-year graduate student. He goes on to predict that a little later in his curriculum, he would simply be "regurgitating Gordon Wood." The student begins to respond with a critique of Wood, which Hunting interrupts, completes, and notes is plagiarized from Daniel Vickers' Farmers and Fishermen: Two Centuries of Work in Essex County. [Wiki]
  • The text covers four years of the Kulturkampf - 1936, 1937, 1938 and 1939. Like modern bloggers, the authors wrote more newsletters in the early years,than the later, perhaps because of losing interest, perhaps because everything had already been said, perhaps because of life interfering, or perhaps because of the Gestapo. [Amazon]
  • The civil war has been talked about quite a bit. Some foolishly believe it will follow the template of the previous two, which was largely geographically based because both side fundamentally had the same culture. This won't happen. I live in a so-called "deep blue" state. Does anyone think that if the balloon goes up, I'm going to run out with my AR-15 and join the "Washington State Progressive Stormtrooper Brigade" just because I live here? No, what is going to happen is much more complex and simple at the same time. [American Digest]
  • Given that the brain consists in a mass of connections, whose power depends on the number and complexity of those connections, why is it divided? Or is that just random, and we should give up trying to find a pattern which make sense in terms of evolutionary advantage? [Kenan Malik]
  • Split-brain structure (with the different hemispheres having very distinct structures and morphologies) is common to all higher organisms (as far as I know). Is this structure just an accident of evolution? Or does the (putative) split between a systematizing core and a big-picture intuitive core play an important role in higher cognition? AGI optimists sometimes claim that deep learning and existing neural net structures are capable of taking us all the way to AGI (human-like cognition and beyond). I think there is a significant chance that neural-architectural structures necessary for, e.g., recurrent memory, meta-reasoning, theory of mind, creative generation of ideas, integration of inferences developed from observation into more general hypotheses/models, etc. still need to be developed. Any step requiring development of novel neural architecture could easily take researchers a decade to accomplish. So a timescale greater than 30-50 years for AGI, even in highly optimistic scenarios, seems quite possible to me. [Steve Hsu]
  • Cannabis use is a heritable trait that has been associated with adverse mental health outcomes. In the largest genome-wide association study (GWAS) for lifetime cannabis use to date (N = 184,765), we identified eight genome-wide significant independent single nucleotide polymorphisms in six regions. All measured genetic variants combined explained 11% of the variance. Gene-based tests revealed 35 significant genes in 16 regions, and S-PrediXcan analyses showed that 21 genes had different expression levels for cannabis users versus nonusers. The strongest finding across the different analyses was CADM2, which has been associated with substance use and risk-taking. Significant genetic correlations were found with 14 of 25 tested substance use and mental health–related traits, including smoking, alcohol use, schizophrenia and risk-taking. [Nature]
  • The seven main bearing straight six. The straight axles. The locking diffs. The Biggie interior. Not that Toyota didn’t also build these with cloth interiors, stripped down to the bare necessities of what one would need to drive, say, from here to Uzbekistan. This is the last bridge between the Unkillable Warlord SUV Era and the Maximum Cup Holder Comfy SUV Era. [Jalopnik]
  • Global logistics sites depend on what Jake called "just in time," where ideally the goods don't spend any time sitting around. Ultimately that's the source of this competitive advantage. Time is what potentially gives workers in this industry a lot of power. If you're able to disrupt an industry that is absolutely dependent on moving things quickly there are huge potential losses for the employers. [Jacobin]
  • A lot of commonly-accepted social norms (especially among Blue Tribe, but also in religious Red Tribe settings) have to do with safeguarding against flagrant assholes and sociopaths, but catch overthinking nerd types in the net. [SSC]
  • Short answer: no. It doesn't matter what embryo selection does, it's weak and even what I call "massive embryo selection" (using stem cells for generating hundreds of embryos) will be obsoleted within a generation by iterated embryo selection/genome synthesis/some sort of super-CRISPR. Goodhart's Law in all its forms is irrelevant because so little can be done. More in-depth answer: human traits turn out to be very convenient, and the usual animal breeding solution (selecting on an index of trait PGSes weighted by value) will probably work fine and is already what GenPred would like to do. Doing embryo selection on a single trait would be dumb and inefficient and unnecessary anyway. [Gwern]
  • The Consumer Price Index for Rent in this town is up 30% since I moved here 4 years ago. Nice. In all transparency, my rent only went up 8% this year, which doesn't sound quite so bad. Until I do the math on another 4 years of 8% rent increases (100 * 1.08^4 = 136%) — and realize that I need a 36% increase in income over that same period just to stay flat on nominal take-home savings. Per my first point on Cost Disease, real median household income in the US has only just clawed its way back to what it was in 1999. Certainly it hasn't grown 36% in the last 4 years. But maybe there's some way I can get ahead of the median? Maybe there's some way I can keep my income going up more than 36% every 4 years and actually build wealth too? How much was that MBA, again? [link]
  • Eventually, the US is going to break apart in much the same way as the Soviet Union. I have no doubt of that, although I may not live to see it. But the idea of the 50 individual States being independent nations makes little sense practically or politically. I'm guessing there will be from four to six or seven nations formed out of the current Continental US, with lines sometimes but not always following the current state lines, and some present states being broken into two or more parts. California and Texas are unlikely to stay whole, several New England states unlikely to stay separate, and many arbitrary or geographically odd boundries will be eliminated, such as Michigan's Upper Peninsula. Chunks of Western Canada and Baja California may be part of the new nations as well. Mexico's military is utterly impotent and would not last a week against the California National Guard alone. Canada's is more serious, but even a semiserious revolt against rule by Ottawa and Frogs would succeed in the long run. Big question is: Who gets the nukes and why? [Sailer]
  • What they have in common is that they aren't 19th century river cities. The old-line river cities boomed and became very wealthy hubs for industry. When river/water transport became less labor intensive, they couldn't retool b/c their local economies were built around the rivers. St. Louis, Cincinnati, Cleveland, Pittsburgh, Buffalo, New Orleans, Louisville, Evansville -- all of these saw population declines. In some cases, populations were cut in half. Memphis is one of the few big river cities that never saw meaningful population decline. Its business leaders actually deserve some credit for reinventing the city as a logistics hub. Air cargo, trucking, rail -- Memphis escaped the river city curse by adapting. [link]
  • If you're manufacturing car parts or providing landscaping services or running a restaurant, how is it useful to hear from the CEO of a company that has had, essentially, a monopoly for 5-15 years? The regulated Bell System monopoly had its drawbacks, but at least Americans were spared from having to purchase and read books by its managers offering purported secrets of their success. Nobody who ran a business exposed to competition was forced to watch a Bell System executive being interviewed on TV with fawning questions about how he or she had made the company so profitable. [Phil G]
  • Anyone who is on the West Coast can basically attest Asian women are displacing White women as partners for upwardly mobile White guys. The guys like the low drama, femininity, and intelligence. [Sailer]

Thursday, November 1, 2018

Updated - Thoughts On Tesla

[This is an update to our July 7th post on Tesla.]

Tesla is just one of the many overvalued companies – mistakenly considered "tech" companies and to which normal rules do not apply – that have been in business for a decade or more but have shown no ability to generate and return cash to shareholders. Yet Tesla seems to be closest to the precipice of failure than any of the others, and perhaps it will be the first domino to fall in a series of long overdue revaluations.

Tesla is not profitable and so it has been (and will be) dependent on continually raising capital in order to survive. It sells an expensive product that will sell poorly in a downturn. The Tesla customer base consists to an unusually high degree of engineers at overvalued NASDAQ companies - hence the San Francisco Bay area is the premier market for Tesla vehicles. In this way, Tesla is something of a "derivative of itself." That property seems to be a hallmark of manic entrepreneurship - so you also have Musk's ownership of Tesla augmented by margin loans against his stock, which is a pattern with company managers whose businesses tend toward the unsustainable: Michael Pearson, Aubrey McClendon.

If a bear market, recession, or NASDAQ revaluation occurs, we would expect to see Tesla shares significantly decline in value and therefore the trade makes a nice hedge against long ideas. But it is not clear that Tesla will survive even if the current boom or bubble continues. Since our previous writing about Tesla, the Chairman and CEO Elon Musk announced – on Twitter – that he would be taking Tesla private at $420 per share.

After taking some time to think about it, we decided that we would not be bullied out of our bearish view by his announcement. The normal pattern with a management buyout is that an insider or founder decides that the public market is undervaluing the (normally profitable and cash-generating) company in question, and so essentially swaps the public investors out of the capital structure and replaces them with debt financing. Obviously management wants to get a good price on the purchase, so in addition to the normal considerations of honesty and legal compliance it is intelligent to disclose any problems in the business to the market, so that the market price (which the takeover offer is compared to) will discount them.

Even the biggest Tesla believers would have to admit that with dusty Tesla inventory piling up in lots all over the country, very short wait times after relatively few Model 3s from the big reservation list have been delivered, quality problems, signs of working capital shortages such as mechanic's liens on the factory and unpaid state taxes... the operation is not running as smoothly as a nice gasoline engine.

So why paint a rosy picture and inflate the purchase price for the business? Why complain so bitterly about short sellers driving down the price of something that you want to buy? It looked like the buyout price of $420 that Musk floated was chosen as the highest price that he thought anyone would find plausible, not as an attractive price to actually pay for the business. And it did turn out that the buyout was a hoax, and in the short period of time since we last wrote about Tesla, Musk not only conducted this hoax but was also sued by the Securities and Exchange Commission and then settled the claims against him pertaining to the fake buyout, though not the other investigations which appear to be ongoing. [Worth reading the fake buyout SEC complaints against Musk and Tesla.]

The best way for Musk to "burn the shorts," which seemed to be his purpose in conducting the buyout hoax, would be to demonstrate high demand for his cars combined with an ability to earn a profit. Resorting to fraud to try to burn the shorts suggests to us that good operating results will not be forthcoming, and that Tesla may be closer to collapse than anyone realizes.

You might ask, would not Musk and Tesla disclose any impending financial difficulties or restructuring if things had gotten that dire? There are two episodes from his business career that suggest he would not. According to the Ashlee Vance biography of Musk, Tesla came close to failing in 2013.

Excerpt from Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future

By the middle of February 2013, Tesla had fallen into a crisis state. If it could not convert its reservations to purchases quickly, its factory would sit idle, costing the company vast amounts of money. And if anyone caught wind of the factory slowdown, Tesla's shares would likely plummet, prospective owners would become even more cautious, and the short sellers would win. The severity of this problem had been hidden from Musk, but once he learned about it, he acted in his signature all-or-nothing fashion. Musk pulled people from recruiting, the design studio, engineering, finance, and wherever else he could find them and ordered them to get on the phone, call people with reservations, and close deals. "If we don't deliver these cars, we are fucked," Musk told the employees. "So, I don't care what job you were doing. Your new job is delivering cars." He placed Jerome Guillen, a former Daimler executive, in charge of fixing the service issues. Musk fired senior leaders whom he deemed subpar performers and promoted a flood of junior people who had been doing above-average work. He also made an announcement personally guaranteeing the resale price of the Model S. Customers would be able to resell their cars for the average going rate of similar luxury sedans with Musk putting his billions behind this pledge. And then Musk tried to orchestrate the ultimate fail-safe for Tesla just in case his maneuvers did not work.

During the first week of April, Musk reached out to his friend Larry Page at Google. According to people familiar with their discussion, Musk voiced his concerns about Tesla's ability to survive the next few weeks. Not only were customers failing to convert their reservations to orders at the rate Musk hoped, but existing customers had also started to defer their orders as they heard about upcoming features and new color choices. The situation got so bad that Tesla had to shut down its factory. Publicly, Tesla said it needed to conduct maintenance on the factory, which was technically true, although the company would have soldiered on had the orders been closing as expected. Musk explained all of this to Page and then struck a handshake deal for Google to acquire Tesla.

While Musk did not want to sell, the deal seemed like the only viable course for Tesla's future. Musk's biggest fear about an acquisition was that the new owner would not see Tesla's goals through to their conclusion. He wanted to make sure that the company would end up producing a mass-market electric vehicle. Musk proposed terms under which he would remain in control of Tesla for eight years or until it started pumping out a mass-market car. Musk also asked for access to $5 billion in capital for factory expansions. Some of Google's lawyers were put off by these demands, but Musk and Page continued to talk about the deal. Given Tesla's value at the time, it was thought that Google would need to pay about $6 billion for the company.

As Musk, Page, and Google's lawyers debated the parameters of an acquisition, a miracle happened. The five hundred or so people whom Musk had turned into car salesmen quickly sold a huge volume of cars. Tesla, which only had a couple weeks of cash left in the bank, moved enough cars in the span of about fourteen days to end up with a blowout first fiscal quarter. Tesla stunned Wall Street on May 8, 2013, by posting its first-ever profit as a public company—$11 million—on $562 million in sales. It delivered 4,900 Model S sedans during the period. This announcement sent Tesla's shares soaring from about $30 a share to $130 per share in July. Just a couple of weeks after revealing the first-quarter results, Tesla paid off its $465 million loan from the government early and with interest. Tesla suddenly appeared to have vast cash reserves at its disposal, and the short sellers were forced to take massive losses. The solid performance of the stock increased consumers' confidence, creating a virtuous circle for Tesla. With cars selling and Tesla's value rising, the deal with Google was no longer necessary, and Tesla had become too expensive to buy. The talks with Google ended.
So we know that at least once before when Tesla was close to failing, Musk did not disclose that to investors and in fact lied about shutting down the factory to save cash. Musk gave a speech in 2011 where he commented on the failure of Solyndra, a photovoltaic solar company which had been given loans by Obama's Department of Energy:

"The most you could say is that Solyndra executives were too optimistic. They presented a better face to the situation than should have been presented in the final few months, but then, if they didn't do that, it would have become a self-fulfilling prophecy of - as soon as a CEO says I'm not sure if we'll survive, you're dead."

Musk believes that it is appropriate to lie about a company's condition if it is dependent on accessing capital markets to survive, and if being honest would result in loss of access.

Tesla is being sued by shareholders in Northern District of California federal court in a case called Wochos v Tesla, and the allegations there are telling as well:
"[T]here is a difference between knowing that any product-in-development may run into a few snags, and knowing that a particular product has already developed problems so significant as to require months of delay." In re Apple Computer Sec. Litig., 886 F.2d 1109, 1115 (9th Cir. 1989). As 2017 started Tesla faced an existential crisis. It had burned through more than a billion dollars in 2016 developing the Model 3, diverting profits from its existing luxury cars to satisfy the cash demand for the Model 3. By the beginning of the Class Period, Defendants disclosed that they would mass produce the Model 3 by the end of 2017 despite contemporaneous facts and warnings from executives, suppliers, and vendors that Tesla's timeline was impossible to meet. Tesla had to build and operate automated production lines for the Model 3 body in its Fremont, California facility, and mass produce 5,000 batteries per week in its "Gigafactory" in Reno, Nevada.

First, the Complaint adequately pleads material falsity. In May and August, 2017, in SEC filings and in earnings calls with analysts, Defendants reported on their progress in first building, and then operating, automated production lines in Fremont and at the Gigafactory. Defendants leveraged these statements of present progress, claiming to be on track to meet Tesla's mass production goal by late 2017. These statements of present progress were materially false. Tesla was building small numbers of Model 3s by hand in its beta shop, where prototypes were constructed. In May, 2017, the automated line, itself, was in the very early stages of construction. Tesla continued to build Model 3s by hand as neither the automated production line, nor the body in white line, would produce a single Model 3 in Fremont until at least October, 2017. As with the Fremont facility, it was only in October, 2017 that the first car-ready battery came off an automated line at the Gigafactory. Similarly, supply issues abounded, and workers constructing the automated production line were regularly idle, lacking parts and instructions.

Defendants' statements that they were "on track" to meet mass production goals are actionable representations of present or historical fact. See Mulligan v. Impax Labs., Inc., 36 F. Supp. 3d 942, 946, 964 (N.D. Cal. 2014); Westley v. Oclaro, Inc., 897 F. Supp. 2d 902, 918–19 (N.D. Cal. 2012); In In re MGM Mirage Sec. Litig. , No. 2:09-CV-01558-GMN, 2013 WL 5435832, at *8 (D. Nev. Sept. 26, 2013). Further, Defendants are liable for expressions of opinion when they know facts undermining the positive statements. See In re Atossa Genetics Inc Sec. Litig., 868 F.3d 784, 802–03 (9th Cir. 2017) dismissal of opinion because it did not fairly align with facts in possession at the time).

By August, 2017, Tesla was, by its own timeline, supposed to have been in the second month of automated production at both facilities. Again, Tesla told investors about progress they claimed had already occurred in Fremont and at the Gigafactory that supported its readiness to mass produce the Model 3 in 2017. And, again, Tesla repeatedly lied. About automated production, Tesla told investors that a "gigantic machine" meant to produce 5,000 vehicles weekly was—at that time—"producing a few hundred vehicles a week." Directly contrary to that statement, not a single complete Model 3 had been produced on the still-incomplete production line in Fremont, necessary robots were not even on site, and all Model 3s continued to be built by hand. Similarly, at the Gigafactory, no automated production occurred until September, 2017, and as late as October, 2017, only two batteries per day were completed. There had been no "great progress." Defendants' warnings of risk to their mass production goals were meaningless in the context of the facts they knew to be true no later than May 3, 2017. Their statements were provably false, and therefore, not forward-looking. Oclaro, 897 F. Supp.2d at 918-19 ("a statement about a past or present fact can demonstrably be proven false" and is not forward-looking). Warnings about possible problems is insufficient to rebut falsity allegations when the risks are no longer theoretical, but have materialized. Nor do Defendants' remaining arguments undermine the falsity allegations. The cases they cite in support of their claim that Plaintiffs must produce Tesla's specific timelines for specific tasks offer no support for this assertion. The "on track" cases they cite are distinguishable; almost all concern financial projections, and not statements of existing fact, on the ground.
So we must look to our own clues about how the company is doing, like the inventory piling up in lots across the country, and the staggering number of high level executive departures from Tesla. Our favorite one recently was David Morton, who joined as a new Chief Accounting Officer on August 6th, only to quit a month later. He had worked at his previous employer Seagate Technologies for 23 years. The previous Chief Accounting Officer Eric Branderiz had resigned this March after being in that job for a year and a half. But those are just a start. This year, the company also lost its President of Global Sales and Service, Treasurer and Vice President of Finance, Vice President of Autopilot, Chief People Officer, Senior Vice President of Engineering (Doug Field), and numerous others. The latest Chief Accounting Officer to resign walked away from a $10 million stock grant that would have vested after four years.

At the current price of $345, the market capitalization of Tesla is $59 billion, and it is trading at 15 times book value. Valuing it at one times book value (which would be a $23 share price) would give them full credit for their acquisition of Solar City (which was on the verge of insolvency when acquired and is now in shutdown mode) and for their investments in automotive assembly facilities (such as their assembly line in an open-air tent) which produce cars that require more rework than any auto manufacturer in recent memory. (Buyers of new Model 3s report long waits for service appointments. Why do brand new and ostensibly mechanically simpler electric vehicles need so much service?)

The Honda plant in Lincoln, Alabama that makes the Odyssey minivan can produce as many vehicles as Tesla on just one of its two lines, and Honda has 12 plants in the United States alone. Their market capitalization is about the same as Tesla. They sold about 2 million cars in the U.S. last year and 3.7 million worldwide, at an overall average annual profit margin of about 5 percent. Honda automotive plus their other businesses (like motorcycles and small engines) earn three to four billion dollars a year. The market capitalization of Ford is $43 billion, which is only 6 times last year's earnings. They too have a 5 percent automotive operating margin. They sold 2.6 million cars in the U.S. last year and 6.5 million worldwide.

Ford and Honda each earn about $1,000 net per car sold. For Tesla to justify a higher valuation than either company, it either needs to match that profit per car and sell more (far more cars than it does today), or else have a smaller market (but still much larger than current production and sales) and an order of magnitude higher profit per car than the established automakers.

Ferarri earns about $500 million a year selling cars at a 15% net margin. They sell under 10,000 units annually at an average of about a quarter million dollars apiece. But Musk's idea has been to move away from high price and margin, low volume, to compete head-to-head against mass market manufacturers like Toyota and Honda.

Speaking of Toyota, it produces 10 million cars per year – more than any other manufacturer. The market capitalization of Toyota is $190 billion. If Tesla could steal Toyota's crown to become the biggest manufacturer of automobiles with unparalleled reliability, the upside would not be all that high as a multiple of Tesla's current market valuation.

A naive comparison of the Toyota and Tesla valuations would say that Tesla shares could perhaps quadruple if it surmounted Toyota, but this ignores the massive amounts of capital, and therefore dilution, that would be needed in order to be able to grow production. Toyota has $94 billion invested in property, plant, and equipment, net of depreciation. Toyota trades at about book value, as do Ford and Honda. (Again, Tesla trades at 11 times book.) Whatever valuation lens through which we look at the valuation of Tesla, it always seems to be too high by an order of magnitude.

The other automotive manufacturers trade at price to sales multiples of less than one. Tesla had $3.4 billion of automotive revenue in the second quarter. If you annualized this to $13.6 billion and assumed that Tesla deserved to trade at an opulent multiple of 0.4x sales, that would value the car operations at $5.4 billion, which is not sufficient to cover Tesla's $7.7 billion of recourse debt. (There may be value to compensate from the Solar City assets, but the point is to show that on a comparable price to sales basis Tesla is worth nowhere near the current market capitalization.) By the way, we might have used the Q3 revenue figure except that the 10Q is not out more than a week after the conference call, and anyway the Q3 revenue figure will probably be a high water mark from a burst of Model 3 deliveries.

What owners of Tesla shares fundamentally do not seem to realize is what a legitimate premise of a $50 or $100 billion market cap electric vehicle company would be: a new battery chemistry. If you had invented that and obtained patent protection on it, and assuming it resulted in significantly better energy density and lower cost per kilowatt-hour of storage than current batteries, you would be able to sell a lot of vehicles at an above industry average profit margin.

But... why would you want to? If you invented this better battery, you did not disrupt automobiles. You disrupted oil. The share of oil used for ground transportation, which would be disrupted by a battery breakthrough, is a $2 trillion annual market. Inventing that battery and then building vehicles yourself would require you to raise vast amounts of outside capital to build automotive assembly plants. (Again, look at Toyota: $10,000 of property, plant, and equipment for each of the 10 million vehicles produced annually.) Honda and Toyota are fantastic at building vehicles and they do it at a 5 percent profit margin. What you would want to do is license your battery to these experienced manufacturers and collect royalty checks based on disrupting owners of oil reserves, not manufacturers of vehicles.

The Tesla battery is a modification of a cell called the 18650, which is a 20 year old laptop battery technology. Now you see why they are not doing a licensing model – there is nothing for them to license. Instead, with Tesla you are seeing the end result of the very arrogant Silicon Valley mentality best expressed by two tweets by venture capitalist Benedict Evans from September 2016.
A decision to take an electric battery innovation and go into automotive production would make even less sense when you look at the base rate of success in that industry. Check out the Wikipedia page “list of defunct automobile manufacturers of the United States,” there have been hundreds of failures; not to mention the equity-extinguishing bankruptcies of some of the brands that have survived. The licensing model would make much more sense – again, if you had something to license.

Tesla not only did not do a battery licensing model, but they effectively did the opposite. Consider the parts of the vehicle industry that they have decided to in-source versus the ones they have decided to outsource. As we know, they decided to in-source and compete head-to-head on manufacturing. The results have shown that they are worse than their more experienced competition. They decided to in-source the automotive retail, which had not been done before and was not legal in most states. (And still is not legal in eight states). This had been a huge distraction from the manufacturing side and has resulted in abysmal customer service. But of all things to outsource, they outsourced the battery production to a joint venture with Panasonic. What should be the entire premise of an electric vehicle company is not even enough of a competitive advantage to do in house.

The valuation discrepancy of Tesla versus the expert existing automotive manufacturers reminds us of the 2000s tech bubble, and maybe especially the story of eToys and Toys R Us. A firm called O'Shaughnessy Asset Management wrote an essay a couple years ago called "Stocks You Shouldn't Own" and described those two companies this way:

eToys had an initial public offering in 1999. The stock was listed at $20 but by the end of the day, the stock price had climbed to $77. Valuation peaked in late October 1999, giving it a market cap close to $9 billion - over two and a half times Toys "R" Us - making it the 64th largest company on the NASDAQ exchange. Think about how astonishing that is: eToys had revenues of $30 million versus sales at Toys "R" Us of $11 billion, yet eToys had the higher overall valuation and would have qualified for the NASDAQ 100.

This is what we are seeing now with Tesla. The fad of "disruption" and adulation for "tech" companies has reached the point where a company can have a bigger market capitalization with orders of magnitude less revenue and output than well-run competitors. (And no profits!) Nothing is more "technological" than making jet engines or drilling horizontal oil wells, yet companies in those industries do not get a free pass when it comes to making money. Even regular ICE auto manufacturing is highly technological, yet very unlike the software industry. Consider this point made by Daily Kanban:
Automakers like Ford are rightly frustrated by the public and market's readiness to believe Tesla's narrative about disrupting automotive manufacturing, but there's reason to believe that the wildly different standards to which Tesla and other automakers are held actually hurts the would-be upstart. After all, one of the main reasons that KTP [Kentucky Truck Plant] operates so efficiently and with such high quality is that it has no choice. Whereas Tesla has been able to count on investors and analysts to forgive its "production hell" fiascoes, KTP is the beating heart of Ford's business, building some of the most high-margin and in-demand vehicles Ford has ever made.

With the new Expedition and Navigator flying off lots, the vehicles made at KTP are absolutely critical to the financial performance that markets demand. Since every minute of downtime means that at least one margin-padding truck or SUV won't be delivered on time, the people of KTP know that the company's financial performance depends on their perfect execution and attention to detail. Were Ford able to raise capital from the markets whenever its financial performance fell short, it's easy to imagine a plant like KTP cutting corners or making excuses about "production hell." But because Ford isn't coddled like the self-described "disruptors," workers here at KTP know that downtime and poor quality simply aren't an option.
The indulgence of investors towards Tesla has created a hothouse flower that simply cannot compete over the long term in the competitive, for-profit automotive market. Also, amusingly, the "kanban" in Daily Kanban refers to Toyota's scheduling system for lean manufacturing and just-in-time manufacturing, but according to the recent article on Musk by Lora Kolodny, the kanban system is verboten at Tesla:
Behind his back, employees turned to a method pioneered by Toyota, known as "kanban," to solve their problems. In its simplest form, workers using "kanbans" put up workflow charts, schedules and cards around a production line to help keep track of items they have and items they need.

In this case, workers took all the parts out of the boxes around the Model X line, arranged the parts with a clear sequence and labels, and put the parts back into the boxes. If one part was out of sequence or damaged, they'd remove a card and leave it in a box or bag to let the supply team know what needed to be replenished.

The cards helped the teams reduce the clutter, keep a small stock of spares nearby, and find the right parts quickly.

But because kanbans were pioneered by Toyota, workers thought they had to hide their kanban cards from Musk during his visits to the factory. Half a dozen current and former Tesla workers say that supervisors in Fremont warned them that if Musk discovered kanban cards posted around their work areas, they were in danger of being fired.
The bullish theses for Tesla (at the current $50-$75 billion price range) involve the company growing to a $500-$1000B titan like Google, Amazon, Facebook, or Apple. That is actually one of the main expected value calculations that keeps the tech mutual funds invested. They know that Musk is a loose cannon and they could not justify holding without the possibility of 10x upside. But what trillion dollar company ever spent its first fifteen years insulated from concern about profitability?

We referred to the missing 10Q for third quarter 2018, and this is worth developing further. Last week Elon published summary results for Tesla that were the company's best ever, and bulls (and even many skeptics) embraced these unquestioningly. Yet, see the following tweetstorm by Ryan Doherty on Twitter about how Musk's behavior was so at odds with a quarter of good performance.
I want to review the last three months (as of 11/1/18) and see if “The Story” we are presently being told ($TSLA turned a corner in Q3 and is now a highly efficient, well-run, profitable car manufacturer) makes sense given what was happening at the time.

August 7: Elon tweets that he is thinking about taking Tesla private. He follows this up with a blog post explaining his thinking, citing short sellers and avoiding quarterly reporting as reasons. This is a month into Tesla's greatest quarter to date.

August 16: A NY Times article about Elon and his fateful tweets quotes Mr. Musk as saying, "But from a personal pain standpoint, the worst is yet to come." This is halfway through the greatest quarter Tesla has ever had.

September 4: CAO Dave Morton resigns, effective immediately, after less than a month on the job. At this point, Tesla is two months in to a great Q3 in spite of high numbers of employee turnover and executive departures.

September 27: Elon calls off a settlement that had been agreed upon with the SEC, and he tells the BOD that he'll quit on the spot if they don't publicly support him and "extol his integrity". The best Q3 he could have hoped for is wrapping up in 4 days.

September 30: Musk emails his employees and states, "We are very close to achieving profitability, but to be certain, we need to execute tomorrow." This is the last day of a quarter in which Tesla reported net income of $311 million dollars.

October 24: Tesla releases their Q3 numbers; they're great. They've gone from a cash-burning enterprise to one of the most efficient car manufacturers on the planet. On the earnings call, they have no prepared statements about operational adjustments and instead talk about safety.

October 26: Mr. Musk uses twitter to question the FBI's investigation into Tesla, as well as claiming that the tweet that cost both him and $TSLA $20M was "worth it". At this point, Elon is antagonizing regulators even though his company is finally performing at a high level.

October 30: Elon Musk tweets that he has relinquished the roll of Tesla CEO "just to see what would happen". $TSLA is now a profitable and growing enterprise that had the CEO remove his title and confuse the corporate governance structure for kicks.

This is obviously not an all-inclusive list and you could explain away any one of these examples. (Miscommunication, personal reasons, etc) But all of them combined paint a pretty vivid picture. (At least, to me they do) And that picture doesn't match "The Story" we're being told.

Why try to go private? Why pick fights with regulators or threaten to quit when your company is finally executing? Why are so many executives leaving the company during one of the greatest turnarounds in automotive history? Why remove your title of CEO "just to see what happens"?

Why wouldn't Elon, who promised "the short burn of the century" and called the boss of a Tesla critic in an effort to shut him up, spike the ball during the Q3 conference call? Why wasn't he bragging about the operational improvements he made that ruined the short thesis?
It is especially strange how little explanation the Q3 results and business trends got in the Q3 summary release and conference call. And now the 10Q is not materializing. It seems as though the reason the summary results were released in the first place was to get in front of the WSJ article that came out on Friday, "Tesla Faces Deepening Criminal Probe Over Whether It Misstated Production Figures":
In recent weeks, FBI agents have contacted former Tesla employees asking them for testimony in the criminal case. The former employees received subpoenas earlier in the probe, and FBI agents recently have sought to interview a number of them, the people said.
For whatever reasons, the bulls are just not bothered by this. Maybe it is because the civil penalty for his buyout hoax was so low in relation to the damage it caused - $40 million vs billions in damages is a penny on the dollar. It is probably also relevant that Silicon Valley "disruptors" have been allowed, this cycle, to break the law with impunity.

But take a look at this Tesla forum poster's "mega panel gaps" on a Model 3 that was delivered in August. This is a new car that is going immediately from the customer's hands back to the manufacturer's body shop! How "disruptive" is that? And how is that being accounted for exactly?

This is an unbelievable situation: the poor quality of these expensive cars, the executives quitting, the lying management, the bad balance sheet, the paltry sales, and yet the stunningly high valuation. When you add in the ~5:1 returns possible if this garbage pile goes to zero between now and January 2021, it is reminiscent of the opportunities that were available in the spring of 2007.

Monday, October 29, 2018

W.A. Mozart Requiem in D minor KV 626: XII. Benedictus

October 29th Links

  • Lake Agassiz was an immense lake, bigger than several U.S. states and Canadian provinces. It was formed when enormous, miles-thick glaciers melted, near the end of the last ice age. A dam formed from glacial ice held back this immense lake. But the dam melted. This may have been the biggest dam failure yet. Much of the water of Lake Agassiz may have emptied in a few weeks. Some of the water escaped to the Arctic Ocean. Some surged across what is now present-day northern Minnesota, emptied into Lake Superior and went out through the Great Lakes to the Atlantic Ocean. A lot of the water escaped to the Gulf of Mexico. It made a river that stretched, unbroken, from the Arctic Ocean to the Mississippi River. This river gouged a canyon 800-feet deep at the site of present-day Fort Snelling, right at the point where the present-day Minnesota River empties into the Mississippi River. Silt has partly filled this canyon, but it is clear, even today, that something stupendous happened. Glacial melt water also made the Mississippi River Valley, north of Dubuque, Iowa, as much as four- or five-miles wide, with steep, abrupt bluffs--one of the most beautiful places on our planet. [CBS]
  • Reglaciation relies on warm, moist air circulating into the northernmost latitudes, cooling and dropping as snow in the way of a conveyor belt. Once begun, the process of turning the oceans into snow is so efficient ocean levels drop by a couple of meters, perhaps more, in the first decade. [link]
  • The ratio of cash spent on content in relation to the amount recognized as a depreciation expense can be used to determine if NFLX is "stretching out" the amount depreciation recognized on its GAAP income statements in relation to the amount that it is spending on content. In general, this ratio should remain relatively constant over time. For 2014, 2015 and 2016, this ratio was 1.42, 1.69 and 1.80 respectively. When this ratio increases, it means that NFLX is spending cash on content at a rate that is greater than the rate at which NFLX is amortizing this cash cost into its GAAP expenses. If NFLX were using a uniform method of calculating media content depreciation, this number should remain fairly constant across time. However, as content spending increases and GAAP depreciation declines relative to the amount spent, this ratio increases dramatically – as it has over the last three years. A rising ratio reflects the fact that NFLX has lowered the rate of depreciation taken in the first year relative to previous years. [link]
  • An intelligent man I recently met advises wealthy families and pension funds in the field of private equity. A booming business. He genuinely solicited my views. I simply told him that such asset class didn’t exist when I was his age even though people invested in privately-held firms for generations. But I also told him that private equity would not have been possible were it not for another word that also didn’t exist back then: EBITDA—a word that owes its very existence and relevance to dishonest money. I suggested that he contemplate the outcome of that certain compound error that undoubtedly undergirds this entire new asset class. [link]
  • The fact that an age-related clinical event developed in approximately 1 out of 3 healthy individuals in the upper tertile of insulin resistance at baseline, followed for an average of 6 yr, whereas no clinical events were observed in the most insulin-sensitive tertile, should serve as a strong stimulus to further efforts to define the role of insulin resistance in the genesis of age-related diseases. [link]
  • Most of the spots on the above list are filled by what I'd call good-government states, known for competent civil servants and evidence-based policies (the states with the lowest roundabout-to-driver ratios are a motlier crew, led by New Jersey, Massachusetts, Illinois, Oklahoma and West Virginia). This makes sense, given that evidence is what has driven the rise of the roundabout. Decades of data from Europe and elsewhere has shown that traffic flows more smoothly through roundabouts than through signaled intersections, and that accidents and especially injury accidents are rarer. [Bloomberg]
  • I'm writing this because my 2013 Model S is about to go back to the shop because the motor sounds like it wants to die (again). You can also take my experience as a warning that you probably shouldn't buy a used Model S and/or why you shouldn't be an early adopter (or even why you shouldn't buy a Tesla at all). [Tesla Motors]
  • They made this forecast of where global food production would be relocated to if the world rises four degrees Celsius above the 1990 baseline, which of course the Intergovernmental Panel on Climate Change uses. Where today the world's largest food producers are the United States, Brazil, China, India, Australia and so forth, it could be that 30 years from now or less, the world's largest food producers are Canada and Russia. [WaPo]
  • He never held a true 9-5 job, so his days were pretty free to be whatever he made them. In the mornings, he'd work out, running and doing a certain number of kicks, jabs, punches, etc. The afternoons were reserved for either reading or making social calls. And in the evening, he'd spend time with his family, lift weights a few times a week, or continue his reading. He cultivated both mind and body, every single day. [Art of Manliness]
  • A friend ordered a Tesla Model 3 five weeks ago. It is ready for delivery in Florida today. If we assume a two-week transit time to get from The Land of Virtue (TM) to The Land of Permanent Alimony, the factory backlog is only three weeks. This is a "performance" model with an after-tax-credit price of about $70,000 (actually less because she is getting free super charging for life). Maybe Tesla will still have a backlog of orders for the basic Model 3, but I wonder if they will soon simply run out of orders and customers. If they've already sold a Tesla to every virtuous American, what then? [Phil G]
  • The solar roof tile scam is one of many schemes Musk has employed to keep his hype machine going. The increasing frequency of new business ventures he's promoted over the past few years are a sign of desperation; his narrative must keep expanding to bring in more cash to keep the Tesla dream alive. Everything from new models (long-haul semi trucks, a pickup truck...) to solar roof tiles and batteries to stabilize the grid. [link]
  • I don't think I go a day without seeing an XJ driving around (not including my own) and often I see several in the course of a day. Since the XJ model ended in 2001, that means every one I see is AT LEAST 17 years old. I live in a tough state to pass inspection, so junky vehicles that are barely drivable don't pass. This means the many XJ's I see are in pretty decent shape. [link]
  • Owing to its durability and reliability, the Land Cruiser, along with the smaller Toyota Hilux, has become popular among militant groups in war-torn regions. U.S. counter-terror officials enquired of Toyota how the extremist group Islamic State of Iraq and the Levant had apparently acquired large numbers of Toyota Land Cruisers and Hiluxes. Mark Wallace, the CEO of the Counter Extremism Project said, "Regrettably, the Toyota Land Cruiser and Hilux have effectively become almost part of the ISIS brand." [Wiki]
  • I live in the Napa Valley of marijuana, the Southern Oregon/Northern California legal grow region known as the "State of Jefferson". Almost everyone I know from monied professionals to shiftless layabouts is involved in the weed business. At this time of year, the entire area smells like pot because it is harvest time. Thousands of people, working mostly in cash, harvest hundreds of thousands of pounds of marijuana. Some of it is legally grown and legally distributed. Most of it is taken across state lines and sold illegally. Everyone operates in cash. Almost everyone is stoned out of their minds. What this has led to is an entire community of people who may not be physically at risk but who wander around in what is definitely a compromised state mentally. Everyone wants to put things off until tomorrow; it is a sort of a cultural conspiracy of perpetual adolescence that nobody really wants to talk about. Those of us who don't smoke pot are often frustrated by the degree to which it has sedated our environment. And while people talk about legality as though it is a libertarian birthright, it's actually about a license to get high and lie around. Pot now is so engineered to give you an intense high that it's more like acid than a simple plant. This will be the next meth....there is not enough money to regulate such a huge and unregulated industry. [NY Times]
  • These rapid rises in atmospheric 14C concentration (henceforth, Miyake Events) inhere a combination of features that make them unique for high-precision chronometry. Firstly, they are easily distinguishable from the normal equable patterning of 14C in the atmosphere. In fact, the first year of a Miyake Event takes the form of an almost vertical spike in atmospheric activity. Secondly, the exact calendar year in which a Miyake Event occurred is easily ascertainable, because tree-rings retain the 14C signal from the year in which they grew, and dendrochronological archives exist in which the growth year of every tree-ring is exactly known. Finally, Miyake Events are precisely synchronous and of comparable magnitude all around the Earth. The spike in 775 CE, for example, has already been found in tree-rings from Germany, Russia and the USA) and New Zealand. Crucially, the enriched concentrations will also have been absorbed by all other growing plants at the time, including those latterly fashioned into cultural items. [link]
  • I recently read Steven Johnson's fun new book "How We Got to Now: Six Innovations that Changed the World". Of course, Johnson claims one of those six critical innovations is artificial light. Johnson references a very interesting study from Yale economics professor William Nordhaus: In 1994, Nordhaus studied the historic pricing of artificial light across the eons, as a way to normalize the buying power of a worker's wage throughout history. In his paper "Do Real-Output and Real-Wage Measures Capture Reality? The History of Lighting Suggests Not", he created a fascinating table of historic light pricing. [Lucept]
  • Everyone in the lighting industry knows Richard Kelly's "three elemental kinds of light": Focal Glow (make it easier to see), Ambient Luminescence (make surroundings safe and reassuring), Play of Brilliants (stimulate the spirit). [Lucept]
  • The tale of 3620 Sweetwater Mesa Road began in 2011 when the Justice Department sought to seize the property and other assets — including a Ferrari, a private jet and the jacket Michael Jackson wore in the "Thriller" music video — from Teodoro Nguema Obiang Mangue, the son of the president of the African nation. Located within the gated Serra Retreat, the property's centerpiece is a Spanish-hacienda compound reached by a winding driveway lined with palm trees. A circular motor court and a pond sit at the end of the drive; a three-hole golf course replete with fairways, greens and sand traps surrounds the home. [LA Times]
  • We have made use of, as has been discussed in prior reviews, of a superior mechanism to be exposed to the earnings optionality of precious metals without the balance sheet risks or dormant asset risk of mining companies. This is through precious metals royalty companies like Franco Nevada, Royal Gold and Wheaton Precious Metals. They are simply discounters, whose assets are contracts. They buy future production from the miners at a present discounted value that typically works out to about a two-thirds discount to the price of gold and silver. They constantly generate ROE and they have long term optionality. None of those three companies, even with market values of $12 billion, $5 billion and $8 billion, will be found in the S&P 500. [Horizon Kinetics]
  • I was in Germany for four years and couldn't help but notice that any guy who had married a German and stayed there became a shell of what they would have been at home. Being blue pill types they, of course, were not aware of the glaring reality that they had entered their wife's frame for life, with no potential of escape once kids are involved. [Pushing Rubber]
  • I don't know about the wife being near her family for support, especially for kids. On one hand, it makes sense. Then there's reality. We did that when my first was born. Moved halfway across the country to be closer to her family for 'support'. Turns out, they were mostly useless. [Pushing Rubber]

Monday, October 22, 2018

October 22nd Links

  • Former Tesla service supervisors and regional managers said Tesla's disparate homemade programs made it hard to know when their purchase orders were going to be approved and when spare parts were coming in for them to fix customers' cars. Across the many programs, it can be easy to lose track of information about people, expenses or any particular part and its whereabouts. Some service employees said they were surprised to learn that when they sent mechanics to help out with "bursts" to build new vehicles in the Fremont factory, their time was billed either to "training" or "research and development," rather than service or vehicle assembly. One said he was relieved that travel, per diem expenses and overtime wasn't charged to his region. [CNBC]
  • We have to completely rethink and rebuild the social sciences. Steven Pinker said: "For most of the twentieth century it was assumed that psychological traits were caused by environmental factors, called nurture." This was completely wrong. Problems like p-value fishing and the current 'replication crisis' are nothing compared to the tsunami that's coming. Indeed, social scientists have done such a terrible job that it's hard to see how the field can be repaired. They wanted the false results they got, and they still do. I'm sure their descendants will as well. Isn't heritability grand? We need a different kind of social science researcher, smarter, less emotional, and more curiosity-driven. [West Hunter]
  • A year ago, a buyout fund financed the acquisition of company G by one of its portfolio companies with 100% debt and took out a dividend for itself. The deal was marketed with an adjusted EBITDA figure that was 190% of the company's reported EBITDA. Based on the adjusted figure, total leverage was more than 7x, and based on the reported figure it was 13.5x. The bonds are now trading above par, and the yield spread to worst on the first lien notes is below 250 bps. [Howard Marks]
  • Koum stayed. He would accrue time toward his final stock grants, even if he rarely went to the office ("rest and vest," in Silicon Valley parlance). Koum was "able to get through it," finally leaving this April, the month after Acton's #deletefacebook tweet, announcing via a Facebook post that he would focus on collecting air-cooled Porsches. In August 2018, when Forbes sat down with Acton, another source said Koum was sailing on a yacht in the Mediterranean, far away from everything. [Forbes]
  • During these years, the Manhattan was also running a path from "up" drink to "rocks" drink. By 1959, you could order a Manhattan on ice aboard Capital Airlines. A decade or so later, with New York lurching toward financial ruin, newspaper jokesters began to refer to the drink as a Lindsay, after the city’s beleaguered mayor John Lindsay. (Manhattan on the rocks—get it?) [link]
  • As long as I live under the capitalistic system, I expect to have my life influenced by the demands of moneyed people. But I will be damned if I propose to be at the beck and call of every itinerant scoundrel who has two cents to invest in a postage stamp. [link]
  • Raising the issue 10 years later was unfair and disingenuous: unfair because, while she may well have been offended by his coarseness, there is no evidence that she suffered any emotional or career damage, and the punishment she belatedly sought was in no way commensurate with the offense; and disingenuous because she has lifted a verbal style that carries only minor sanction in one subcultural context and thrown it in the overheated cultural arena of mainstream, neo-Puritan America, where it incurs professional extinction. If my interpretation is correct, Judge Thomas was justified in denying making the remarks, even if he had in fact made them, not only because the deliberate displacement of his remarks made them something else but on the utilitarian moral grounds that any admission would have immediately incurred a self-destructive and grossly unfair punishment. [NY Times]
  • Judge Kavanaugh always takes law students from Yale. The symbiotic relationship there is that Yale can say their students always get great clerkships, and in exchange Yale law professor Amy Chua makes sure Kavanaugh always has a stream of female law school students who look like models. [link]
  • The combination of naiveté and hubris on the part of U.S. companies seeking to enter the Chinese market, coupled with a sophisticated Chinese effort to extract technology has been a lethal combination. [WSJ]
  • The rapid federalization of traditionally state- created and state-enforced areas of criminal law is reflected in both the scope and substance of the modern federal criminal code. There is now the potential for the exact harms the Double Jeopardy Clause was designed to prevent – retrial after acquittal and double punishment after conviction – for countless crimes that were traditionally the states’ responsibility to define and punish. And neither sovereign’s interests nor the federalist system is well-served as a result. This Court should overrule its prior decisions upholding the due sovereignty doctrine as no longer consistent with the interests of federalism nor the liberty protections of the Double Jeopardy Clause. [SCOTUS]
  • There will be no swing justice in the mold of Anthony M. Kennedy, Sandra Day O'Connor or Lewis F. Powell Jr., who forged alliances with both liberals and conservatives. Instead, the court will consist of two distinct blocs — five conservatives and four liberals. The court, in other words, will perfectly reflect the deep polarization of the American public and political system. [NY Times]
  • Putting strict constructionists, relatively young, on the courts for lifetime appointments is the best way to have a long-term positive impact on America. And today is a seminal moment in that effort. [Politico]
  • The rich non-haters of Santa Monica (80 percent voted for Hillary) say that they want affordable housing. They also want to get rid of the crazy rich folks enjoying their Gulfstreams so they're shutting down their local airport. Will the 227 acres of land free up by closing the airport be used to build public housing? As it happens... No! At the density of Co-op City in the Bronx (47,000 per square mile), the 0.355 square miles of the former airport would hold 16,685 people. That's a healthy fraction of the homeless population of LA County. [Phil G]
  • Lotka's law, named after Alfred J. Lotka, is one of a variety of special applications of Zipf's law. It describes the frequency of publication by authors in any given field. It states that the number of authors making x contributions in a given period is a fraction of the number making a single contribution, i.e., an approximate inverse-square law, where the number of authors publishing a certain number of articles is a fixed ratio to the number of authors publishing a single article. As the number of articles published increases, authors producing that many publications become less frequent. There are 1/4 as many authors publishing two articles within a specified time period as there are single-publication authors, 1/9 as many publishing three articles, 1/16 as many publishing four articles, etc. Though the law itself covers many disciplines, the actual ratios involved (as a function of 'a') are discipline-specific. [Wiki]
  • People don't understand maintenance. German approach to maintenance is "we will engineer our car to a specific maintenance schedule, and everyone will follow it", Japanese approach to maintenance is "we will overbuild our cars on old and proven platforms, because people won't maintain them anyway", American approach to maintenance is "maintain it or not, we couldn't care less, we sell you a product". All of those require different mindset when you maintain your car. People don't understand depreciation. The repair costs don't diminish progressively as the car depreciates. If a guy spent $15k to get a 350 hp twin-turbo luxury car that originally cost $70k, and it needs $5k spent on a new turbo, a fuel pump, and a few coils, should he really be that surprised? It's not a $15k car, it's still a $70k car that's seen some wear and is more likely to need service. People don't understand reliability. If a $150k E55 AMG needs to have a $15k supercharger rebuild at 100k miles, it's not because it's unreliable. A $250k Ferrari isn't unreliable because it needs a $20k engine-out service every 20k miles. People get high-maintenance luxury cars for a price of a new Civic and then expect them to be equally as cheap to run. Upon realizing their mistake, they throw a bitch fit and blame the car rather than themselves. That's not how reliability works. [Reddit]
  • Suppose that you wanted to create a generation of people who did not enjoy working and whom employers did not want to hire. What would you do? You'd provide financial incentives for people without jobs to have as many children as possible, e.g., free apartments with extra bedrooms as extra children are born, free health care, free food, and a free smartphone. You'd provide disincentives to people with demanding jobs to have children by concentrating jobs in a handful of cities with expensive market rents (even a two-income couple in a coastal U.S. city probably can't afford a 3 BR or 4 BR apartment) and providing comfortable welfare benefits to anyone who might otherwise have been motivated to work as a nanny for working parents. [Phil G]