Sunday, February 28, 2021

What Intellectual Progress Did I Make In The 2010s?

Scott Alexander (blogger of "Slate Star Codex" and now "Astral Codex") recently wrote a post titled "What Intellectual Progress Did I Make In The 2010s?", a stunningly long list of new ideas and mental models - some of which even seem true. (Alexander finished his reflections on the 2010s much more quickly than I did. On the other hand, he only has a one-quarter interest in a girlfriend, so you can see how he has more time to write.)

It made me ask myself the obvious question, what intellectual progress did I make? It seems like a valuable exercise to conduct, and the way that makes sense to write it is as a tip sheet to my 2010 self. What would have been valuable to know then, that I ultimately did figure out over the decade? Here are some of the top themes that come to mind:

(1) Diet/exercise. Ten years ago was before @Mangan150, who has done a fantastic job uncovering important information about health, both theory and practice. (My reading on this topic started with Art De Vany who independently invented the glycemic index and figured out insulin resistance.) I have seen increasing numbers of people benefit from starting some kind of low carb / keto / carnivore program. The precise details of the diet do not matter as much as eliminating sugar and controlling carbohydrate intake.

I ate breakfast cereal, or pancakes, at the start of the decade! Now, I eat far more eggs. I think a good breakfast is 4-6 eggs with a cup of coffee (black or cream, no sugar). Of course you can hard boil, scramble, or poach them but an interesting new idea is to "slonk" them (drink them raw): raw egg nationalism. Egg and butter consumption per capita in the U.S. is lower than it was a century ago, thanks to the mistaken saturated fat hypothesis of heart disease. That was an incredibly lethal scientific mistake, perhaps the worst ever. Taubes' Good Calories, Bad Calories is the story of how that happened.

It used to be well known that high carbohydrate diets caused obesity - see for example William Banting who wrote a low-carb dieting booklet in 1863. Then people like Ancel Keys developed the hypothesis that saturated fats in the diet raise cholesterol and cause heart disease. If you lower the amount of dietary fat, you're going to be eating more carbohydrate. So for the past fifty years, the establishment "consensus science" has been high carbohydrate diets. And we've seen the results: obesity, heart disease, cancer. (Some of which wrongly blamed on smoking.) An unbelievable amount of money has been wasted trying to prove that eating saturated fat causes heart disease or that high carbohydrate diets prevent it. Even more money has been wasted trying to find cures for diseases caused by high carbohydrate consumption.

I do take supplements, but I focus on things that are artificially scarce in our lives and diets: Vitamin D, Omega 3 fats, and magnesium, for example. I do not directly supplement any antioxidants anymore because of hormesis theory. (See: 1, 2, 3, 4.) I wasted a lot of time trying to prevent and cure colds with vitamin C, until I read about how the vitamin-C molecule is similar in configuration to glucose, so glucose and vitamin C compete in the cellular-uptake process, and the uptake of vitamin C by cells is "globally inhibited" when blood-sugar levels are elevated. Having a low carbohydrate diet and maintaining high vitamin D levels seems to prevent colds and keep a lot of other blood chemistry metrics in check. Respiratory virus infections, in particular, seem like a manifestation of hypovitaminosis D. (This is especially relevant in the covid era!)

The estimated per capita consumption of soybean oil increased 1000-fold from 1909 to 1999. Mangan has dug up a lot of evidence that all of these industrial cooking oils need to be avoided. These toxic oils have also been sabotaging the scientific inquiry into low carb high fat diets. If you feed lab animals a "high fat" diet of soybean oil and sugar, you have not demonstrated anything about the effect of a steak and eggs carnivore diet, for example. I've also discovered that these bad omega 6 (seed oil) fats are everywhere, and very difficult to avoid. Restaurants and food manufacturers put them in surprising places like bread or in pizza crust. There is some interesting natural history about why you do not want your body to be made up of these fats:

[P]lants are composed of polyunsaturated omega-6 fats as an evolutionary last resort. In order for plant cells to function normally, the lipids (oils) that make up their cell membranes must remain liquid at all temperatures typical of their natural environments. Since all fats and oils are liquid at high temperatures, plant fats optimize for the extreme colds in their environments. Sunflower must be prepared for the cold of Russia, avocado for a cool Mexican night, and coconut for the occasional lukewarm temperature of the tropics.  As a result, sunflower seeds contain about five times as much omega-6 as avocados, and avocados contain about five times as much omega-6 as coconuts.  Plants evolve to contain the most stable fats possible, which means minimizing omega-6 unless absolutely necessary for their fats to remain liquid at cold temperatures.

But if you delegate your food preparation - whether to a restaurant or a processed food manufacturer - they will use these bad fats because they are much cheaper and also easier to work with. This is one of many manifestations of the principal-agent problem. (The generalized form being one of my intellectual progressions over the past decade.)

Fixing this health stuff makes life a lot better, and more productive. A day feeling sick or lethargic is a day that is not really fully lived, or useful to advance any goals. It is shocking how many Americans are wandering around so fat and sick that they must feel far worse than I ever did. No wonder they watch 40 hours of television per week, and can't think straight.

Which reminds me - the reason that I had to become an entrepreneur was that I could not get a job for a big corporation doing things that I found interesting because I did not have "experience". There must be so few Americans with the intelligence, curiosity, and neuroplasticity to learn how to do something new that big corporations will only hire people who have done the exact function that they need performed for years on end. When you think about how sclerotic the world is, remember that everyone's neural synapses are now made of oxidized fats from soybean oil.

(2) High agency mindset, which is the broader category of taking personal responsibility, for which diet/exercise above is just a subset. And just in the past five years or so, a big fraction of high agency people have taken to Twitter, found each other, and started rethinking entire categories of knowledge. One example of this is diet/exercise Twitter, as seen above.

High agency mindset led me to make an immense investment in reading and general knowledge acquisition, which you can see in the Links and the book reviews. From 2017-2019, I read and wrote up notes or reviews on 229 books. And before that I had written a total of 118 full book reviews.

Another example is wuflu or coronavirus twitter. Smart, high agency people saw this coming early on in January and were always weeks ahead of the government and news media in understanding the implications of new developments. We had guest posts from @pdxsag, other good accounts included @Barton_options, @LokiJulianus, @toad_spotted, @HalifaxShadow, @__ice9.

Unfortunately, advance knowledge of the pandemic and ensuing economic calamity (and then bubble reflation) has not led to particularly useful investment results - not so far. Perhaps our reading TSLAQ autist Twitter will ultimately be fruitful, though. King of the Autists Michael Burry has weighed in on the side of TSLAQ, and it seems like you can always trust bodybuilders and autists to be right about things that they have researched. (Even if market prices can take a long time to reflect this.)

(3) Investing. Here is an investment idea in Callon Petroleum bonds that I wrote a decade ago. I did not understand then, the way I would now, what an attractive idea that was. At the point when I wrote about the idea, $144 million of the company's total $194 million of senior notes had accepted an exchange offer to extend their notes (which were about a year from maturity) by six years. There was a strong likelihood that a holdout bondholder would be redeemed because the company had $30 million of available senior secured borrowing ability. Ultimately, 92% of holders tendered and holdouts made ~60% on a safe bond investment in a year.

Looking back, I spent a lot of time over the past decade trying to predict macroeconomic outcomes rather than hunting for arbitragable mispricings like Callon, Georgia Gulf, or U.S. Concrete. Or rather than buying more companies that people were giving away for free, like Conrad Industries and all of the other net nets, or small banks trading below book value.

So from that experience over the past decade, and also by running the prediction contest for several years in a row, I have learned just how hard the future is to predict. Another example: even as a very early optimist on Trump's chances to be elected president, I did not predict that his term would be a nearly seamless transition from the Bush/Obama years. As I said at the end of the 2020 (final) prediction contest,

The winners of the contest are never the same from year to year. The one constant is that the overconfident do poorly. Having extremely confident predictions (e.g. 90% or 10%) on any event that is contentious among participants (has a high standard deviation) is associated with poor performance in the contest. The better performing contestants seem to have an easier time intuitively feeling the range of outcomes that a trip through life's quincunx can deliver.  What seems to happen specifically is that a very rigid set of expectations, a very definite view, a simple narrative, crashes on the rocks of reality. In fact, I am learning to avoid any kind of simple narrative for thinking about the future. Consider predictions such as, "there's going to be hyperinflation / a crash / a civil war" next year. Reality is a lot more complicated. Bitcoin hit an all time high and oil hit an all time low in 2020. What probability would anyone have given that? And does it fit a simple label like "hyperinflation"?  Since we can't predict, what can we do? The only investing strategy that I can think of for coping with the utter impossibility of prediction is diversification among that which is cheap.

The best investments that I have found can be explained to a financially literate audience in one short blog post. Another good sign is when the mispricing consists of two markets (e.g. debt and equity, or public companies and private companies, or value stocks and growth stocks) that are not talking to each other.

It is probably wise to be skeptical of any extremely verbose investment thesis, investment debate, or macroeconomic view. What is all the verbosity likely to be? Why, an assessment of a series of conjunctive probabilities. And as Kahneman explains, "the general tendency to overestimate the probability of conjunctive events leads to unwarranted optimism" and this is certainly true in investment theses.

I don't think that shorting is unworkable, or that it is as bad as it seems right now (at the top of the biggest bubble ever), or as good as it seemed after 2008-2009. Nothing is ever as bad as it seems at its worst moment or as good as it seems at its best moment. But the frightening persistence and extreme overvaluation of this bubble have made shorting very difficult:

I am out of step with the market this cycle because I truly believe that companies that are not bootstrap profitable - that grow revenue but have to do it by selling debt and equity instead of reinvesting profits - are destroying value. They are Soviet style "negative value added" businesses, they are only worth money as enterprises in a bubble context, and they will eventually have to go away because there is not an infinite amount of wealth in the world to destroy. (Another example that cannot report profits even with the most aggressive accounting assumptions is Tesla.)

Businesses that create value return capital to their owners. The best businesses in history have been able to do this while growing. Think about it: what is a legitimate market signal that many more customers need to be served, and money invested in expanding to serve them, except profits?

Bulls will argue that Netflix could be, will be, more profitable when it raises prices. Why wait? Do you know many real entrepreneurs who borrow money instead of charging more if customers are happy to pay?

I think there will be another handsomely profitable run of shorting when the current bubble in growth stocks (2009-2021?) pops. Imagine shorting unprofitable companies as they fall from 10 or 20 times revenue to 1 times a lower revenue. But after that, I would like to "retire" from it, like Buffett and other successful investors.

The problem with shorting, that true entrepreneurship does not have, is that the profit can only come from a change in what you must believe are irrational opinions of others. As we have seen, even defaulting on debt and going bankrupt does not mean the other investors will give up - not in this cycle. In the future, I would rather make my money cashing dividend checks than waiting for the models in the soybean brains of other people to update on painfully obvious facts.

Shareholder activism is entrepreneurial and does not require a change in others' opinions. It profits from sweat, brains, and muscle. It is like buying a business - you never want to buy a business that is running perfectly. You want to buy one that has problems, preferably so bad that the business is losing money and available for almost nothing, but where you know exactly how to fix the problems.

(4) Staying in the game. I appreciate the importance of this more than ever before. In one sense, every investment decision I have ever made was wrong. Anything that worked I did too small, and anything that didn't work was too big.

At the same time, the sum total of all my investment decisions has been profitable and has kept me in the game through multiple bubbles and crashes. There is a concept from Graham Harman that is applicable here:

I also introduced an intermediate category between constant flux and permanent stasis: the symbiosis, a term I borrowed from the great evolutionary biologist Lynn Margulis. I hypothesized that pretty much any object will experience five or six symbioses during its lifespan: irreversible changes that moves the object to a new stage of existence before it eventually stabilizes, rises, declines, and dies. This has some interesting corollaries. One of the ways we can be sure that the Dutch East India Company is a real object is because it has many early failures: a failure, as long as it does not destroy us, means that we are something real that does not yet fit easily into our environment. Something that immediately succeeds, by contrast, is often just a spare part for something that already exists perfectly well. Notice that important intellectuals often had a very rough time as students, while the "teacher's pet" often has a thoroughly mediocre post-school career. I think the symbiosis model is a powerful tool, one that –among other things– allows us to determine that a great number of supposed objects aren't real objects at all.

"Something real that does not yet fit easily." Remember my idea of investor genotypes in an investing ecosystem? The problem with investing is that this is measured on the wrong timescale. The different parts of economic cycles occur so infrequently that the intervals between them exceed the working lifespans of investors.

Lyall Taylor makes some incredibly important points in this essay about liquidity flywheels and redemption flywheels, but applicable here is this point:

Outperforming in the short term with consistency, by contrast, is extremely hard. The best way to do it is usually a momentum strategy, which works most of the time, but occasionally yields disastrous results on sudden momentum reversals. Momentum is the polar opposite of value - it generates good returns most of the time, and disastrous returns a minority of the time.  The latter strategy is a more remunerative strategy for fund managers, however, even if it often leaves long term investors worse off, which is why it is more popular/common. While the good times roll, large performance fees are banked, and it is investors that are left with the losses when it all turns to custard. This is why value investing remains relatively uncommon, despite its long track record of success, and in my view a combination of agency conflicts, information asymmetry, volatility-phobia, and the desire for quick results, will all but ensure market inefficiencies continue, and considerable opportunities for long term value investors will remain for many generations to come.

That's a principal-agent problem, and what is great is that it implies that there will always be cheap investments somewhere! Which brings me to my next point.

(5) You can't beat something with nothing. The 07-09 crash caused me to overestimate the potential of short-selling as a standalone full-cycle strategy. (Everybody has a susceptibility to this problem; it's called "overplaying your hand".) A related problem was that I was scarred by the slow recovery and difficulty finding a job at the start of the decade. I was in the worst hit age bracket in the worst hit industry in one of the worst hit states in that crash. The reason I did not buy Apple in 2009 was because I thought that $600 and $80/mo for a phone was a lot of money.

Contra Bob Prechter, some investments can be cheap even (or especially) when there is a bubble someplace else. See another point from the same Lyall Taylor essay that I linked above:

Outperforming in the long term is actually not very difficult, but it requires highly lumpy results, often marked by long periods of lackluster returns, punctuated by short periods of spectacular results, which happen alongside liquidity flywheel/momentum reversals, which are inflection points that do not happen very often. Furthermore, usually, the worse value is performing, the closer one is to the end of a liquidity flywheel bubble cycle (value had a woeful time in 1999, for instance), because value is the 'anti-bubble' expression - a Newtonian equal and opposite reaction - of liquidity flywheels driving bubbles elsewhere in markets. It is redemption flywheels that drive value opportunities, and redemption flywheels are often the result of investors pulling money out of unpopular areas of the market in a rush to get exposure to hot areas of markets.

Lyall’s liquidity and redemption flywheel theory would mean that instead of a bubble making it so that you have to sit on your hands because everything is expensive, a bubble causes the tide to go out from investments that are “cold” and you should be looking for those. Based on the redemption flywheel theory, they would be things that had done poorly recently for whatever (possibly idiosyncratic) reasons. The value ideas that we have been looking at lately - resources/minerals, pipelines, banks - have had a bad run and have downward price momentum even though they have stable or improving profits.

Even though late-career Peter Cundill still seems very mediocre, I think he was right that There Is Always Something to Do. When I bought SFBK in 2014, other banks were trading at discounts to tangible book value - Nate Tobik was writing about them. It was good to do activism on one cheap bank, but it also would have been good to buy a basket of other cheap banks. In 2014, WLT and RSH debt was yielding over 50% to maturity. I remember I also did a big cap earnings yield screen in May 2014 that turned up Intel, Microsoft, and Apple all at around 14 times earnings.

At the time I correctly saw what was expensive (overleveraged, unprofitable companies particularly but not exclusively in the resource sector) and what was cheap (small banks and mature tech) but I was so infatuated with the Prechterian idea that Everything Is Correlated that I did not just focus on buying cheap and selling expensive. A couple years later, WLT and RSH were gone and small banks had become overpriced. Microsoft is up 6x since May 2014.

(6) Rich people are long assets. I mean that in both a prescriptive and descriptive sense. The people on the Forbes 400 or living in Pacific Palisades did not get there by being short assets. Sure, as we saw with the previous (#5), put options on worthless equities can be a great hedge. (Let's do a backtest on companies with low revenue volatility and low industry competitiveness trading at high cash flow yields, hedged with the furthest out put options on companies with high bond yields to maturity.)

And if Michael Burry and I are right, TSLAQ will be a historic short the way housing was in 2008. Peak market cap of $900 billion and maybe averages 25% short interest on the way down, maybe a couple hundred billion dollars will be made being short it. But that is peanuts compared to $2 trillion annually of corporate profits in the U.S. And you can't compound tax-free for long periods of time by being short assets. 

Again, the key is Lyall's framework which says that the momentum of the $1.5 trillion cryptocurrency bubble and the $1.6 trillion Robinhood bubble (not to mention the private venture capital bubble which is probably of similar size as those two) have created an anti-bubble, a redemption flywheel, in other areas of the market that became unpopular for their own idiosyncratic reasons.

I want to make money when life catches up with Musk, I want to use his overvalued stock promotion as a hedge against drawdowns, but what I really want over the next decade is to collect dividend checks from my portfolio of real assets: tobacco, hydrocarbons, pipelines, other minerals, land and timber. The more Tubmans they print, the more our businesses will charge for a pack of smokos, a barrel of oil, a ton of met coal, etc.

And because rich people are levered long assets, they do not tolerate deflation. They will scream if they are getting squeezed and the central bank will devalue (Martingale) and only the most leveraged rich (financially and/or operationally) will lose their seat at the table. That is why I am very interested in industries that are concentrated and/or Lindy, with stable revenues, with small enough operational and financial leverage for robustness through panics, and available now at reasonable valuations.

(7) Sort of related to the principal-agent problem and the requirement for high-agency: "Everything is a Scam". Here are some examples I followed over the past decade: modern art, war (2,3), corporate governance (2,3,4,5), health care and big pharma, government (2), and fractional reserve banking. Having to go to college to get a job instead of taking an IQ test and getting applied vocational training is a Scam. That's 2/3 of GDP right there!

You're going to pay a tax every time that you as principal have an agent doing something for you or when you have to engage with something that is a societal Scam. The size of the tax depends on the relative bargaining power - e.g. your alternatives - and your knowledge and ability to monitor the agent or your ability to use your own agency to get around the scam. On the far extreme, we have a literal tax, income tax, where we have no bargaining power and we get nothing in exchange for our single largest annual outlay.

(8) Dissident politics are not going to work. This is because the vast majority of people are low-agency, and all humans, low-agency or not, have primate brains. In our brains, status is all that matters. While Twitter autists and bodybuilders (call them "autodidacts") can read and come to their own conclusions, normies can't.

Normies care only about status, not facts, and when it comes to communications media status comes from high production values. An anti-war newspaper will have no advertisers. A pro-war newspaper will have advertisements from war profiteers. The mass media that works for Scams will always have higher production values than the honest ones, and so they are the ones that normies will believe.

This would also tend to show why revolutions are just a circulation of elites - rulers are not overthrown from below.

Value vs Growth Compilation

Just posted a Lyall quote in the comments of the Value vs Growth post:

the worse value is performing, the closer one is to the end of a liquidity flywheel bubble cycle (value had a woeful time in 1999, for instance), because value is the 'anti-bubble' expression - a Newtonian equal and opposite reaction - of liquidity flywheels driving bubbles elsewhere in markets. It is redemption flywheels that drive value opportunities, and redemption flywheels are often the result of investors pulling money out of unpopular areas of the market in a rush to get exposure to hot areas of markets 

I wanted to pull together some of recent posts on value, growth, and covid reopening.

On the value side:

On the growth/bubble side:

Reopening (part of the VvG inflection thesis):

Pondering some other possibilities as growth/bubble hedges to a value portfolio. Tell me what you think of some of these as potential long-term put plays: BYND, NKLA, SPCE, UBER, DASH.

Saturday, February 27, 2021

Dorchester Minerals LP Retrospective (2007 vs 2020)

We mentioned Dorchester Minerals in our October 2020 post, "What I Would Buy Instead of Tesla". This is a publicly-traded limited partnership that owns producing and non-producing mineral, royalty, overriding royalty, net profits and leasehold interests in oil and gas. At that point the market cap was $358 million (with no debt) and net income for 1H 2020 had been $10 million vs $28 million for 1H 2019.

The stock is up almost 50% since that post - but oil is up 50% too (currently $60/bbl for WTI). The market cap is now half a billion dollars. They distributed $48.2 million to limited partners in 2020. Their average selling prices of oil were high $40s/bbl and for natural gas a bit below $2/mcf.

I looked at an old research report and saw that Dorchester's revenue in 2006/2007 was ~$75 million and ~$65 million with natural gas @ $7 and crude oil in the $60s/bbl. For 2019 and 2020 it was ~$79 million and ~$47 million. Kurt Wulff had a couple interesting observations in his 2007 report:

Normally we would expect a volume decline of about 11% a year for a reserve life index of 9 years. Instead, DMLP’s decline rate is hardly evident despite distributing all of cash flow to unitholders (see graphic from management presentation). The performance enhances the partnership’s status as the oldest and highest quality oil and gas production Master Limited Partnership (MLP) that we know at a time of renewed interest in the organizational format.

The main tax complication of DMLP is that taxable holders must report distributions as partnership income including the separate items furnished in what is known as a K-1 form. For new purchasers, most or all of income in the early years would be sheltered by cost depletion. For depletion purposes conservative reporting of reserves is an advantage because the implied higher depletion means earlier tax shelter.

The share count has increased by about 25% (acquisitions with stock are how they replace reserves) since 2007, but the share price is currently 38% lower, so the market cap is 25% lower. Revenue/mcap back 15 years ago was about 11% and now it's about 14% with crude oil slightly lower and natural gas way lower. Interestingly, at the time the report was written, DMLP was trading for ~$23 and from 2007-2020 it paid $26 in distributions. Currently trading for $14.

Dorchester's PV-10 of reserves at year-end 2020 was only $137 million. However, the PV-10 is based on the 12 month average oil and gas prices which were depressed in 2020. (Oil was $32.43 and gas was $1.)

Remember the most important quote from the book The Shipping Man:

"[H]e who is the most bullish on the market, or has the lowest cost of capital, or has some other personal motivation for doing a deal, or ideally all three, wins the ship. Everyone else does nothing but talk about the very good and rational reasons they have for not doing deals. The simple fact is that you must take a view on the market."

Dorchester is at a big premium to a reserve value - at much lower hydrocarbon prices. To buy it, I think you have to have the view that, while electric vehicle sales may continue to slowly grow, the worldwide ICE vehicle fleet is going to keep growing too. Plus petroleum is irreplaceable for diesel and kerosene prime movers

The result if you believe those premises is that oil (and many other commodities) will need a bull market here in order to recruit commodity investors to expand production again. 

Remember that U.S. explorers and producers lost an incredible amount of money over the past decade. They burned their debt and equity investors, and discipline will be restored by investors who force them to "accept life in a declining industry, slash costs and ramp up returns of capital to shareholders".

Friday, February 26, 2021

Friday Night Links

  • In the past few months, I have stated the market is showing some signs of froth and the speculative growth stocks popular with retail investors are in an outright bubble. My solution was to go long banks and energy stocks, while avoiding high multiple growth stocks. It has worked out swimmingly in 2021. The overall market is more expensive than average, but this isn't an "everything bubble." There are still more opportunities now than there were in February 2020 because many reopening plays haven't fully recovered. [Alex Pitti]
  • The AMLP listed ETF is a collection of the larger fossil fuel MLPs that have not converted to a C-Corp profile. Notwithstanding its disadvantageous tax structure, its current yield of nearly 10%, or about 825bps wide to the T10yr, can only be explained as either a stupendous tax-loss motivated liquidation, or the realization that MLPs are a feat of financial engineering that is inherently flawed. Fossil fuels will not be eliminated in the near future, and their transportation from the ground to the gas tank is a necessary function that at some point must be a profitable venture. It is my fervent hope that MLPs are not the subject matter for Betheny McLean’s next best seller. A 10% dividend for a listed 20-stock Index is the wrong number; either AMLP will rise in price, or the 19.5 cent dividend will be reduced to 14 cents. I suppose it is possible that the underlying MLPs are functionally a $200bn Ponzi scheme that relied upon rising oil prices to maintain the illusion of profitability; but I suspect the answer is a bit more banal. What we likely have here is a mismatch in capital where Retail investors have tossed in the towel and Institutional investors can't or won't buy a (K-1) partnership structure. [Convexity Maven]
  • At the current valuation level, growth stocks trade nearly 12 times the P/B valuations of value stocks. The relative valuation has been close to this level only twice over the 57-year history of our analysis: the peak of the dot-com bubble and the nadir of the global financial crisis. Our decomposition indicates that the change in relative valuation since mid-2007 contributed –7.2 pps per year and turned the 1.1% structural return into the –6.1% per year realized value return. [Research Affiliates]
  • Timber growers across the U.S. South, where much of the nation’s logs are harvested, have gained nothing from the run-up in prices for finished lumber. It is the region’s sawmills, including many that have been bought up by Canadian firms, that are harvesting the profits.  Sawmills are running as close to capacity as pandemic precautions will allow and are unable to keep up with lumber demand. The problem for timber growers is that so many trees have been planted between the Carolinas and Texas that mills are paying the lowest prices in decades for logs. [WSJ
  • My impression is that Antifa foot soldiers tend to be downscale whites with antisocial personalities, ugly, nasty people such as meth addicts and child molesters who have had problems with the law. You could immediately tell that the theory that an Antifa false-flag operation had engineered the foolish Jan. 6 Capitol intrusion was mostly conservative cope because MAGA roughnecks are substantially better-looking on average than Antifa hooligans. On the other hand, Antifa are much better organized. Congressman Jerry Nadler (D-NY) could declare in late July with a straight face that reports of Antifa violence in Portland are “a myth” in part because Antifa is, as Ngo says, a “phantom movement by design.” Project Veritas infiltrated Portland’s Rose City Antifa and found that new members were required to undergo six months of training and vetting. Ngo reprints the fifteen-page syllabus that Veritas obtained, which reads like a college course in how to be a violent leftist revolutionary. Antifa’s tactics are cleverly designed to look mostly peaceful on national TV. For example, demonstrators frequently throw water bottles at the police, which appears almost harmless on TV. But what viewers don’t know is that they’ve frozen the normally flimsy bottles rock-hard. [Sailer]
  • It has been suggested that no other variable in biology accounts for differences in lifespans across species as well as the fat composition of cell membranes, specifically the amount of omega-6 and other polyunsaturated fats that are contained in cells (“peroxidation index”). [link]
  • In September of last year, the fast-food chain Chipotle went through its latest P.R. crisis, after introducing a new item to its menu: the Tex-Mex cheese dip known as queso. It was a risky move, and Chipotle knew it. Among Texans, queso is a subject of deep passion and pride. “When I die, drizzle queso over my grave,” the food writer, editor, and native Texan Helen Hollyman told me recently. “Queso is a Texan birthright,” she added, “the most critical and expected staple at any gathering, besides BBQ.” Its most common preparation, for eating with tortilla chips, consists of just two substances: a brick of Velveeta, Kraft’s highly meltable “pasteurized prepared cheese product,” and a can of Ro-Tel Diced Tomatoes and Green Chiles. Making a batch is not much harder than opening a bag of Cheetos, especially if you do the melting in the microwave, and the payoff is about the same; it’s junk food, in the most satisfying, flattering sense of the term.  Chipotle, though, which bills itself as being somewhat health- and sustainability- conscious, announced its commitment to “cracking the code” of queso made “with only real ingredients.” The cheese in its recipe was aged Cheddar, combined with both tomatoes and tomato paste, plus three kinds of chile peppers and more than a dozen other ingredients. The public’s consensus was swift: real or not, Chipotle’s queso was just plain wrong. [New Yorker]
  • The most important investing theme in the world today is the potential reversion to long term trend of value vs growth (VvG). The covid case numbers are crashing and it appears as though herd immunity (through a combination of vaccines and previous infection) has been reached. The catalyst for the VvG inflection will be the economy reopening combined with shortages stemming from a year of lockdown socialism and the printing of $3.4 trillion in a year. The pent up demand for many types of goods and services is so high that we could see a one-time price spike, almost like a currency devaluation, that benefits old-economy goods producing companies and ends the bubble in the Robinhood fad stocks. [CBS]
  • [M]ost people are only capable of believing some sort of average of what the people around them believe. (Maybe that saves the simulation a lot of processing power on the simulated non-player characters?) So to them, if Elizabeth Holmes is getting magazine covers it would be utterly unthinkable to actually try her testing device (even for n=1 sample) before sinking hundreds of millions of dollars into a business partnership with her. [CBS]

Wednesday, February 24, 2021

Guest Post on "The Road to Revolution" and the Spanish Civil War

Spain (1931 - 1939) and the Spanish Civil War (1936 - 1939) are valuable models for understanding the communist revolution that is unfolding in the United States. Two of the best writers about the Spanish Civil War are Hugh Swynnerton Thomas, Baron Thomas of Swynnerton (21 October 1931 – 7 May 2017) and Stanley G. Payne (born September 9, 1934), American historian of modern Spain and European Fascism, and Professor Emeritus at its Department of History, the University of Wisconsin–Madison.

I was born after the end of the Spanish Civil War. I began reading about the Spanish Civil War during college. I started with Thomas. Lately, I read a lot of Payne and other writers, especially writers who were Spanish Civil War observers or participants. I see parallels between Spain and the US. Here are two sections from a current article by Payne.

The Road to Revolution
by Stanley G. Payne
January 2021

"A threshold was crossed at the beginning of October 1934, when the centrist minority government broadened to include four moderate ministers from the Catholic CEDA, establishing rule by a parliamentary majority and respecting civil guarantees. The socialists responded by launching a revolutionary insurrection in fifteen of the fifty provinces of Spain. This insurrection, much more serious than the activities of the anarchists, produced martial law and two weeks of fighting in the mining province of Asturias. Nearly 1,400 people were killed in the conflict, much of the center of Oviedo was destroyed, large sums were stolen from the city’s banks, and about fifty people were murdered by the revolutionaries, including a group of Catholic seminarians. The troops who put down the revolt also shot a number of prisoners out of hand. More than fifteen thousand revolutionaries were arrested, doubling the country’s modest prison population, though many were soon released. Full constitutional guarantees would not be restored for fifteen months.

This was the most violent, broad-based revolt in the turbulent history of Europe from 1924 to 1939, and it drew considerable international attention. A massive campaign, financed partly by the Comintern, denounced not the wanton violence and destruction by the insurrection but the repression that followed it. In fact, the republican government enforced the mildest repression after a major revolt in Europe since the Paris Commune of 1871. But the revolutionary insurrection was justified in the press as an act of defending democracy against fascism. This agitation, international in scope, marked the beginning of the mythification of the revolutionary process in Spain, an attitude that persists in some quarters to the present day. The portrayal of revolutionary insurrection as a defense of democracy followed Trotsky’s maxim in his History of the Russian Revolution: To have the best chance, revolutionaries must appear to act on the defensive when seizing power.

The failure of direct insurrection required a change in strategy. The left began to seize absolute power through the democratic process itself, advancing revolutionary aims under the cover of legality."

"The elections of February 1936 registered extreme polarization. The liberal center was virtually wiped out, with most of the vote divided almost evenly between the Popular Front and the Catholic right, which, despite renewed violence from the left, continued to respect the rules of the game. The voting was calm and regular at first, but on the evening of election day Popular Front mobs began to gather in the larger cities, in some cases breaking into polling places. Disturbances continued for the next three days. A recent study by Manuel Álvarez Tardío and Roberto Villa García has shown that the results were falsified in at least ten provinces, handing a decisive victory to the left. The centrist caretaker government in charge of elections resigned precipitously, and the hapless Alcalá Zamora, his plans in ruins, found no other way of controlling the rioting than to hand power to a minority government of Azaña and the republican left. Electoral fraud was the decisive step in renewing the revolutionary process. It was followed by three further phases of electoral manipulation, which by May had secured an overwhelming Popular Front majority in parliament."

Forty-thousand foreigners went to Spain to fight in its civil war. Most of these foreigners were leftists. The ones from the United States showed a nostalgia about the Spanish Civil War in US mass media that lasted until the mid-1990s and beyond. Ernest Hemingway made a career of it.

Monday, February 22, 2021

Value vs Growth

The most important investing theme in the world today is the potential reversion to long term trend of value vs growth (VvG).

The covid case numbers are crashing and it appears as though herd immunity (through a combination of vaccines and previous infection) has been reached. The catalyst for the VvG inflection will be the economy reopening combined with shortages stemming from a year of lockdown socialism and the printing of $3.4 trillion in a year. 

The pent up demand for many types of goods and services is so high that we could see a one-time price spike, almost like a currency devaluation, that benefits old-economy goods producing companies and ends the bubble in the Robinhood fad stocks.

I was sitting with the bartenders and managers at my local joint after they closed and for the first time ever they started talking about investments. Some things mentioned: marijuana stocks, BYND, sub-penny stocks, TSLA. All based on momentum. General manager mentioned one of the bartenders made $20k on a sub penny stock and was giving him Apple trading advice. He's at risk for these kinds of employees suddenly quitting when that kind of money falls in their lap.

Another recent anecdote is talking with an early 20s zoomer who is trading Dogecoin on Robinhood. He calls the coins "shares" since the Robinhood UI apparently doesn't distinguish between a crypto coin and an equity share.

These retail folks don't have any self-awareness or irony about what they're doing. It's like how crazy people never think they are crazy; these guys never say "I'm going to put a little money in a momentum strategy and continually rebalance and take profits if it works". If anything, they add capital as the prices go up.

But even though I think the inflection point is here, it does not have to be for value to be a great trade with a cheap hedge. I don't have to call the inflection point or bubble top. I can buy the bottom decile cheap stuff and hedge it with long term put options on the top percentile expensive stuff. 

The reason I think that works is that with record valuation dispersion between value and growth, the top percentile is overvalued by 10-100x. The puts are "expensive" on IV but these represent trillions of dollars of market cap that may vanish in 24 months. Examples: TSLA, ZM, SPCE, NKLA, LI, XPEV, CVNA. Then there are garden variety expensive stocks like CMG, but the IVs on those are cheaper so they could work too.

Meanwhile, the cheap part of the market looks like tobacco (1,2), hydrocarbons, land/timber, pipelines, certain Oddballs, and small banks. All real assets except the banks, but I like the banks as a reopening trade. I think the cheap stuff earns more than enough to pay for the hedge, and I think there's a chance that both legs of the trade perform, where value rallies as the growth bubble pops.

The best writing I have seen on the growth bubble popping is from GMO (linked above) and AQR, which put together a long piece demolishing the idea that value investing is not going to work anymore "because disruption":

Besides just an inherent discomfort with randomness, part of the issue is confusion about why value works at all. It does not depend on getting big events or trends right. It does not depend on having perfect accounting information. Certainly, it does not require a lack of massive technological change over time. No matter what the situation, it simply needs investors to net overreact. Companies that are cheap need to tend to be a bit too cheap for whatever set of facts exists at that time, and expensive companies need to tend to be a bit too expensive. For instance, it’s OK if there’s more monopoly power for a few firms today than before (or any other thing being different this time), as long as humans will still tend to overdo estimates of how powerful and long-lasting those monopolies will be, and vice versa for cheap stocks that lack these advantages.

Some charts that I am watching to measure the growth vs value inflection: Tesla vs Toyota, NASDAQ vs Small Banks, Peloton vs AerCap, Zoom vs Exxon, Carvana vs Penske, and Russell 1000 growth vs value.

Note that R1K value's (IWD) top sectoral holding is 20% financial while the R1K growth's (IWF) top sectoral holding is information technology (45%!). It's Apple vs Berkshire - which is obviously funny since Berkshire has an Apple position.

Sunday, February 21, 2021

Sunday Night Links

  • Unlike all other US energy markets, Texas does not even have a capacity market. By design they rely solely upon the energy market. This means that entities profit only from the actual energy they sell into the system. They do not see any profit from having stand by capacity ready to help out in emergencies. The energy only market works well under normal conditions to keep prices down. While generally markets are often great things, providing needed energy during extreme conditions evidently is not their forte. Unlike the traditional approach where specific entities have responsibilities to meet peak levels, in Texas the responsibility is diffuse and unassigned. There is no significant long term motivation for entities to ensure extra capacity just in case it may be needed during extreme conditions. Entities that might make that gamble theoretically can profit when markets skyrocket, but such approaches require tremendous patience and the ability to weather many years of potential negative returns. This article from GreenTech media praises energy only markets as do many green interests. Capacity markets are characterized as wasteful. Andrew Barlow, Head of the PUC in Texas is quoted as follows, “Legislators have shown strong support for the energy-only market that has fueled the diversification of the state’s electricity generation fleet and yielded significant benefits for customers while making Texas the national leader in installed wind generation.” [link]
  • The D.C. conservative scene is a veritable cornucopia of pear-shaped men. Here are the supposed intellectual elite of the American right—men who know their C.S. Lewis and are, ostensibly, fighting the abolition of men and manliness—without chests to speak of. The chest was Lewis’s metonym for thumos, Plato’s “spiritedness.” Spiritedness guards the intellect as it seeks to transform appetite into philosophic eros, the hunger that draws the great-souled upward to the truth. Thumos, chest, mediates between the head and stomach. A lot of things fell into place with the heavy lift of graduate school. I’m grateful for what my teachers taught me in the classroom, but maybe just as valuable a part of my M.A. was what I learned beforehand in the gym, the discipline of mind and body, the pursuit of excellence, the virtue of self-mastery. The other great pleasure in the flesh’s submission to the rule of steel—itself a rebellion against Weber’s iron cage—is what people call “broscience.” Or, as we would have said before the post-war technological elite that sent men to the Moon became the decadent priests of scientism, just plain old science. An educated guess, experiment, theory, more experiments, always questioning, always seeking, hungry for knowledge, hungry for gains—it’s the gym-bro way. It conquered the planet, it conquered gravity, it can conquer your fat, lazy [posterior]. [TAC]
  • In America, we are heirs to Whig history. The Whig interpretation of history is a four hundred year narrative in which Western civilization progressed from the darkness of monarchy, aristocracy, stasis, inequality, bigotry, and anti-empiricism, toward a world of freedom, democracy, progress, equality, and scientific enlightenment. All mainstream history today is Whig history. Even conservative history, as interpreted by the National Review or Heritage Foundation, is 99% Whig history, with only dissent when it comes to the most recent events and revisionism. For instance, no mainstream conservative is openly on the side of the Tories or Loyalists on the question of the American Revolution. Not only is Whig history the official narrative, we rarely even read the views of the non-Whigs. Whether we take a typical AP History class or endure the Yale Directed Studies survey course, we do not read what the losers and reactionaries had to say. One hypothesis is that the Whigs were in fact the good guys, and good has consistently prevailed over evil. A second hypothesis is that the Whigs were almost always the bad guys, and that evil routinely triumphs over good, and then writes histories to make their faction not seem so evil. A third hypothesis is that sometimes the Whigs were the good guys, sometimes they were the bad guys. Sometimes they won, sometimes they did not. But whoever won wrote the history books, and painted themselves as good guys, painted themselves as the friends of liberty and equality, painted themselves as heirs to the Whig tradition, whether it was true or not. If you genuinely love history, I encourage you to sample some readings from the other side, the losers, the non-Whigs. As you read, keep the all three hypotheses above in mind. On events ranging from the English Civil War, to the American Revolution, to World War I, to the Red Scare, it is time to hear the other side of the story, the side of the story that you never before read. You may end up eventually renewing your faith in Whig-history – but at least by reading the other side your views will now be in full color. You will have replaced the cartoon version of history’s bad guys with a three-dimensional version. [Devin Helton]
  • Social Security should be indexed to nominal national income. In fact, the way to solve the entire social security crisis is to simply state that 12.6% of national income will go to social security, and whatever that income buys, it buys. If the economy produces fewer goods because seniors retire, there is no inflation adjustment possible that can give those seniors the promised income. If the cost of living increases because the economy is shrinking, everyone must bear the pain. Conversely, if the economy grows really fast, there is no reason to exclude seniors from this windfall by reducing their income. To the extent that a changing dependency ratio is a problem, the fix should be to make part of social security income come from the tax payments of your own children. So if you had four children you get a larger payout than if you had zero children. This is fair, since social security is not actually an insurance or savings program. It is a socialization of the age-old method whereby children support their elders in retirement. But as with all socialization, it creates an incentive to freeload. The childless retirees are essentially freeloading off of the work of those who raised the next generation. Thus the childless should get less than those with children. [Devin Helton]
  • Every rat-racer fears dropping out of the race. If a rat-racer fails to put in enough effort, he will fall into the pleb class. I have seen it happen to friends. Maybe they take it easy at work and get laid off. Maybe they do not build the needed career connections. They might have had slightly lower SAT scores, and gone to a less prestigious school, and then failed to get the high powered finance job. They take a crappier job and end up laid off during a downturn in business. Desperate for a job they end up bartending or painting houses. The first few years as a rat-racer are precarious. The worker has not built up unique skills and connections, and is therefore replaceable. Because a rat-race career takes time to establish, rat-racers do not feel comfortable starting families until they near thirty. At that point, their career still requires long hours to maintain, so balancing work and children can be stressful. Thus rat-racers rarely have more than two children. Rat-racers do not want themselves or their children to fall down into the pleb class. So rat-racers must buy expensive homes so that the plebs and the underclass are priced out of the town and its schools. By sending their kids to school and college with other rat-racers, parents can prevent their kids from making friends with underclassers, and ensure their kids pick up the proper polish. However, since rat-racers are bidding against other rat-racers for slots in these towns and schools, the price of the rat-race life keeps going up. Entering the rat-race life used to only require attending college. Now it can require paying for grad school, plus supporting the child through unpaid internships. Having more than two children is quite out of the question - children are too expensive and take up too much time. Given that many rat-racers never feel the urge to have children at all, the total fertility for rat-racers is well below replacement. Rat-racers are good, smart, hard-working folk. That their work ethic is driving them to extinction is tragic and long term catastrophic. The plight of the rat-racer is one of the great problems of our age. [Devin Helton]
  • It may make readers uncomfortable that this essay has put so much emphasis on violence committed by black people. People who focus too much on selecting anectdotes of black crime are often accused of cherry-picking facts to further a racist narrative. I can only hope you believe me when I say that when I first started reseaching the problem of urban decay over a decade ago, the analysis in this post was not something I set out to prove. Rather, I set out to find as many first-hand, narratives accounts of urban decay and “white flight” as I could. I wanted to learn the story from the people who were actually there, or from the people who interviewed the people who were actually there. And these are the stories I found, over and over again. And these were the stories that were almost completely ommitted from my college courses – we only ever heard that white people left because the suburbs were so much better – without hearing why people thought the suburbs were better. We heard about block busters promoting fear – without learning that the fears were justified, not irrational. It should also be pointed out that it is erroneous to single out violent young black men as the villains in this story. I think a lot of American politics is basically manipulating enforcement of the law in order to steal turf from other people. A fair amount of blame goes to the liberal WASP establisment, who in their battle with the ethnic white political power, relaxed enforcement of the law in black areas, hooked them on welfare, and used black people as a tool for claiming political power. Right now we are in a vicious cycle. In academic and policy wonk circles, any criticism of “black crime” is considered victim blaming and possibly racist. The problems of the black community are instead pinned on segregation and racist policing. Yet it is not segregation that causes the crime. And every time we try to integrate, without fixing the crime problem, integration fails because white people flee the violence. And while police misbehavior is a problem, under-policing is also a big problem. When we cannot honestly describe the problem, when we cannot propose proper solutions, the problem only becomes worse. [Devin Helton]
  • I also think that we may have the problem of drug enforcement backwards – rather than the predominantly black ghettos being policed too harshly, they may be policed too lightly. In my white suburban town growing up, if a group of young men were to set up an open air drug market on our police corner, they would be reported, shut down, and sent to juvenile court within days, probably hours. It would be unthinkable that open air dealing would be tolerated. Yet in many ghettos, these markets are in fact tolerated, with minimal punishment, for long times. [Devin Helton]
  • In a dysfunctional society, people acquire wealth via corruption, rent-seeking, and theft. Perhaps they steal it at the point of a sword. Perhaps they acquire wealth through outright corruption. Perhaps they acquire wealth through holding a position in a completely dysfunctional management structure that requires internal politicking and Kabuki make work rather than actual performance. As Adam Smith wrote, "there is a great deal of ruin in a nation" Corruption has always existed in America. But in the past decades it seems as if the dominant paradigm has shifted, so now more and more income accrues via dysfunctional rent-seeking rather than via creating wealth. [Devin Helton]
  • Consider the goods and services that make up a good and comfortable life: high-tech gizmos, gas heating, indoor plumbing, a well-built home, access to a skilled doctor, good restaurants, good beer, parks, well-built infrastructure, a stroll down a street with pretty buildings, etc. If you look at the production process for those goods and services, only a small percent of the workers involved need a college degree. And most degrees granted do not improve the production process – how does granting millions of degrees in “business”, “communications” or “social science” lead to more and better of these products? It doesn’t. And in fact, by channeling so many people into the college pipeline, we have lost out on the skills that did make for the good life. We have lost the artisans that once created beautiful streetscapes and ornate architectural detailing. We have less money to spend on infrastructure. We have more debt, and more stress. Furthermore, even in the engineering fields, much of the know-how exists exclusively inside the productive organization – not inside the textbooks. Every engineer, when getting a job, has a big adjustment period as they learn how things are actually done. They learn why the schoolbook version was simplified or out-dated, and they learn the real techniques and tricks and tooling that they actually need to know to make things work. In the past few decades, America has become more educated in terms of degrees. But in reality, people like my dad were training Chinese engineers to replace them, as the boomers retired and the high-tech job moved overseas. [Devin Helton]
  • I did an inventory of every Supreme Court Justice who served between 1835 and 1870. Among them: 2 of 18 went to Law School. One graduated at age 20, the other at age 22. 11 of 18 graduated college, of those four graduated at the age of 18. 7 of the 18 had no college, they were either self-taught or had an apprenticeship. [Devin Helton]
  • Thus the life of a Philadelphia WASP might go something like this: He would start out being raised in Chestnut Hill, proceed through high school at a local elite day school like Episcopal Academy or a boarding school like St. Mark’s, then move on to college at Princeton, where he would join an exclusive dining club like the Ivy. Returning to Philadelphia, he would live in Ardmore, join a prestigious firm such as Drexel and Company or a family enterprise, assume membership in a city club like the Philadelphia or Rittenhouse Club, and be engaged in various charitable endeavors. He would play tennis at the Merion Cricket Club, attend annual Assembly dances, and spend summers in Cape May. He probably met his wife at her debutante, and would proceed to have a larger-than-average number of children with her, staying together for life. Their children would in turn marry the children of other upper-class families or the children of newly minted wealth as a means of assimilating them into the upper class. Having chronicled this shift from a local and familial to a national and associational upper class, along with describing its social and institutional life, Baltzell observed several troubling developments that by 1940 were casting a cloud over the future of the WASPs. One was the managerial revolution. The country was shifting from a bourgeois (laissez-faire family firms) to a managerial (large publicly traded corporations interlinked with an expanded state) economy, run by professional managers rather than entrepreneurs. WASP heirs increasingly became trust funders rather than business runners. [Aaron Renn]