Monday, May 10, 2021

Guest Review of The Hungry Brain: Outsmarting the Instincts That Make Us Overeat by Stephan J. Guyenet Ph.D.

A correspondent writes in with a review of The Hungry Brain: Outsmarting the Instincts That Make Us Overeat by Stephan J. Guyenet Ph.D.

P.D. Mangan still emphasizes low carb but grudgingly admits Guyenet has the best overall hypothesis.

Guyenet does an excellent job explaining why carbs are not the primary culprit, but rather hyper-palatable junk food. I think there's something to the carb hypothesis, just not sufficient to explain. He cites, for example, hunter gatherer populations who consume 70% of calories from honey, pure sugar, but boring, with no ill effect on body composition. It's food palatability and variety, guided by a Darwinian unregulated food market that identifies flavor combinations that exploit our natural evolved preferences, that causes leptin resistance and thus obesity. I would order the causes in the following order:

1. Hyper-palatable, cheap ubiquitous processed foods of various macronutrient profiles. Fat + carbs to be what seems to be what really shuts down the leptin system.

2. Polyunsaturated fats causing additional systemic inflammation

3. Overconsumption of sugar driven by novel flavor combinations (see #1) driving additional inflammation through fatty liver

4. Hyper-palatability and endogenous opiates of wheat bread in particular

I think between those four causes, the rest of carb consumption lacks further explanatory value. Pasta and rice consumption, for some reason, don't seem to be associated with obesity despite populations that consume a lot of both. Both rice and pasta lack the surface area to give the same hedonic pleasure as wheat bread. Flour vs. rice is like snorting cocaine vs. chewing a coca leaf.

Thursday, May 6, 2021

Thursday Links

  • I decided to do some research on pickups. Hmmm. My local Ford dealer has precisely three new F150s in stock. Odd. They usually have 40-50 on the lot. I bet it’s that damn chip shortage again. The Toyota Tundra is nice. My local Toyota dealer had a few more of those. Interestingly, they had some used Tundras in stock as well. Maybe I’d get a better deal buying used. Huh. A brand-new Tundra for $50k. Pricey, but in this market, I’m just glad they had some stock to choose from. Oddly, a similarly-equipped 2018 Tundra with 20,000 miles on it is listed for $44k – something is up in the used car market. At that price, why wouldn’t I just buy new? I guess if there’s not much new to choose from… feels like new car prices are likely to go up, and soon. [Doomberg]
  • In the first Doomberg essay, Reflections from the Lake, I emphasized how the convergence of easy fiscal and monetary policy with supply chain disruptions was potentially made more dangerous by the toxic weaponization of social media by apps like Twitter, TikTok, Instagram and Facebook. I argued that viral videos and memes threatened to shorten the path from elevated to hyperinflation in a way our leaders almost certainly don’t understand. The Dogecoin phenomenon offers strong evidence for this hypothesis. A group of highly influential social media titans accumulated a healthy helping of Dogecoins for themselves, then used their online power to amplify Doge memes and converted Dogecoin into the phenomenon we observe today. Egged on by the seductive powers of Robinhood, hordes of retail traders are piling in, happily risking US dollars for the latest speculative mania. At a minimum, the signal I am hearing loud and clear is that if and when inflation memes replace Doge memes, and certain bad actors wish to accelerate the downfall of the US dollar, the infrastructure exists to take things to levels unthinkable by most people today... and quickly. Not even the sky is the limit. Not for this doge. [Doomberg]
  • Stable prices provide a sense of security. They help define a reliable social and political order. They are like safe streets, clean drinking water and dependable electricity. Their importance is noticed only when they go missing. When they did in the 1970s, Americans were horrified. During most of these years, large price increases were the norm, like a rain that never stopped. Sometimes it was a pitter-patter, sometimes a downpour. But it was almost always raining. From week to week, people couldn’t know the cost of their groceries, utility bills, appliances, dry cleaning, toothpaste and pizza. People couldn’t predict whether their wages and salaries would keep pace. People couldn’t plan; their savings were at risk. And no one seemed capable of controlling inflation. The inflationary episode was a deeply disturbing and disillusioning experience that eroded Americans’ confidence in their future and their leaders. [The Great Inflation and Its Aftermath]
  • The money supply has increased by 4.85 times since the end of 1979 and prices have only increased by 2.32 times, which means that there’s a latent inflation of about 109%, by these calculations. That inflated money, I would say, is mainly in the debt markets because you find that even Federal debt securities are pretty close to zero percent interest, which is very contrasting to the situation you had in the past when outbreaks of inflation were occurring. Interest rates when higher than 10% for instance. So, that’s where I think the money is that’s been pumped out and the question is, when does that money start to come back from debt securities into goods. [Dying of Money
  • The Fed has adopted a new, softer target of average inflation of 2%, meaning it can overshoot for years to make up for the past decade’s misses. Furthermore, it has shifted from focusing on trying to act in advance of inflation based on its forecasts, to waiting until inflation actually arrives. With monetary policy’s effect on the economy famously having long and variable lags behind, as Milton Friedman emphasized, this raises the probability that the Fed acts too late to rein in rising inflation. Under both Janet Yellen, now Treasury secretary, and current Chairman Jerome Powell, the Fed has also emphasized what it had previously treated as a secondary target of full employment. In particular, it is focused on the benefits for marginalized workers. [WSJ]
  • I think if you were an early career researcher in public health and sceptical about the prevailing beliefs, there basically isn’t much of a way for you to speak your mind at all and even if you did, if global pandemics happen every 100 years, you could have lived your whole life before being proved correct. The experts can stay wrong longer than you can stay alive. The scary lesson in all this is that for unusual risks like pandemics, where the real-life test of expert theories occurs very rarely, we should expect many expert consensus views to be completely back-to-front wrong, because the in-group incentives will drown out any real-world test of their theories and beliefs. This is obviously an argument against planning, or at least an argument for making those plans as flexible as possible, because early planning will just entrench the weird and wrong political views of the relevant expert class (see the UK pandemic flu plan above). If we know that they were this wrong about something as important as a global pandemic, what other horrors are hiding in the expert consensus on every other rare event? [Lessons From The Crisis]
  • My neighborhood is fussy, but reports from colleagues and friends living elsewhere in the city — in Park Slope, Crown Heights, Harlem and Morningside Heights — suggested a continued high compliance despite the relaxation of mandates. In this way, it is easy to see the mask evolving as an expression of cosmopolitanism long past its necessity. If defiance was the style of one kind of culture warrior, mask commitment, regardless of the science, would be the ritual of another. New York is not Daytona Beach. [NY Times]
  • Liberals who aren’t quite ready to let go of pandemic restrictions. For this subset, diligence against COVID-19 remains an expression of political identity—even when that means overestimating the disease’s risks or setting limits far more strict than what public-health guidelines permit. [The Atlantic]
  • My mental model of cryptocurrency competition is still the one Jerry Brito and I developed for our 2014 article on cryptocurrency in the New Palgrave Dictionary of Economics (here’s an ungated version, related blog post). One question this model addresses is whether you can simply clone a cryptocurrency and expect it to have much value. Our answer was generally not, because the cloned cryptocurrency will have the same technical feature set as the original currency but with inferior network effects and likely inferior governance. More generally, you can think of each cryptocurrency as being characterized by a multi-dimensional set of attributes: security, transaction cost, network size, governance quality, robustness of scripting languages, and several others. My mental model is that when one coin is better than another on some attributes and no worse in any other, then it dominates the other coin. A dominated coin can have no value in equilibrium. The market is roughly winner-take-all between dominating and dominated coins (roughly because equilibrium isn’t achieved instantaneously). This doesn’t necessarily imply the market will be winner-take-all generally. There may be coins that neither dominate nor are dominated by certain other coins. This can happen if cryptocurrency characteristics reflect tradeoffs between the set of attributes. It can also occur if certain characteristics are not unambiguously good. For example, more of one characteristic may be considered better for one application and less of that characteristic may be considered better for another. These complications imply that single-chain maximalism is not a necessary outcome. But winner-take-all-ness between dominating and dominated coins used for the same application is a sure thing unless you want to bite the bullet and say that the value of all coins should fall to the marginal cost of creating them, i.e., zero. [Eli Dourado]
  • When you fund a company in its early stages, you might want a founder who will microdose LSD at work, because that’s just the sort of imaginative, aggressive, independent thinking that might change the world or whatever. (“Narrative violation: This CEO drops acid,” etc.) But when you are looking to take that company public, you want a CEO who would never microdose LSD at work, because that’s the sort of thing that stodgy institutional investors and regulators will find unsettling. If the founder-CEO has been microdosing acid all along, and you have been encouraging him to do so, there will be an awkward transition when you tell him to stop. [Matt Levine]
  • This is by far the largest population‐based study investigating the association between smoking status and total and free testosterone levels. Smoking men had significantly higher levels of total and free testosterone compared with men who never smoked. In previous smokers, total and free testosterone levels were almost the same as in men who never smoked. Furthermore, both total and free testosterone levels increased gradually with increasing number of cigarettes smoked daily. [link]
  • Just how did "certain key executives and directors" acquire the grotesque sum of $18 million that sits on PFBX's balance sheet as a liability?  Since the Company disclosures are so spotty, it would be great for the insiders to spell out just what they've been doing.  Nevertheless, working with the little information made public, here's our educated guess as to how the insiders got that $18 million from our Company. Page 22 of the Company's proxy states that the Directors' Deferred Income Plan pays the insiders 10% ANNUALLY on fees they defer.  If that's how they all got so much of the Company's money, they should hang their heads in shame and not show their faces in Biloxi ever again.  To extract 10% annually, when you are supposedly a fiduciary, is repugnant. [Joe Stilwell]
  • It may sound like the plot to some absurdist “Brave New World” knockoff, but in some corners of the Chinese internet, radical, self-proclaimed feminists are serious about what they call zigong daode — “uterine morality” — and they’re not willing to accept anything but the very best genetic material. The earliest use of uterine morality I’ve found was in a 2013 thread on the Baidu Feminism Tieba forum titled, “Women Should Establish ‘Morals of the Uterus.’” In it, the author makes a modest proposal: “The uterus is a holy site of human evolution, not a toxic factory for churning out garbage or petulant kids. Because women bear this huge responsibility, they should establish a system of uterine morals. For instance, births should be ‘neither random nor rampant,’ and (women should) ‘bear and rear better children.’” [link]
  • From an investment perspective, I think it is clear that even with a compelling EV alternative (which we don't have yet), the installed base of gasoline engine vehicles is going to be with us for some time. One thing Murphy does not really address but that I find captivating is the effect of increasing populations and development in the exporting countries: the Export Land Model. We see this right now with Nigeria, for example. Nigeria exports ~2MM bbl/d and is the 4th most important source of U.S. imports. Nigeria has a very young population and a total fertility rate of close to 6, with the result that their population is doubling roughly every 20 years. Combine that with increasing development (only 30 cars per 1000; even Cuba and Iraq have more) and you will see a ferocious increase in oil consumption. During our lifetimes, Nigeria will transition from oil exporter to oil importer. Back to energy return on energy invested (EROEI). When EROEI falls from 100:1 to 10:1, as the energy requirements of oil production roughly have over the past century, it means that producing 100 barrels requires 10 times as much capital expenditure. Deeper wells, more days spent drilling, more materials. [CBS]

Sunday, May 2, 2021

Sunday Night Links

  • Because Mr. Laccinole's twenty-two successive Complaints violate the claim-splitting doctrine, the Court will exercise its broad discretion and dismiss all of his Complaints except the first Complaint and allow Mr. Laccinole thirty (30) days from the date of this Order to amend the first Complaint to encompass his entire claim, should he so choose. [Laccinole v. Diversified Consultants, Inc.]
  • From a design perspective, they got so many things right. The lip is thick. The mug is heavy. The handle is wide enough so your fingers aren't mushed and accidentally burn against the cup when drinking. Even the surface has a distinct matte look—like something ancient and serene. I'm mesmerized by the beauty of it all. But it is not symmetrical. Perfect symmetry is for fools who haven't peered below the surface. Symmetry is for fools trying to imitate God. The true aesthetic isn't afraid to bend. The handle of the Teavana mug is slightly curved, because the mug is slightly curved. It's shaped to fit a human hand well. Compare to Ember mugs which were designed by robots for robots. [link]
  • With the development of the internet it becomes possible for arbitrarily large groups of people who are geographically distributed to spontaneously form hive-minds and to communicate with one another at speeds and latencies approaching those which previously only had been possible in direct teamwork. The internet largely solves the scaling problem involved in direct teamwork, and totally eliminates the effects of geographic distribution of participants. In the "global village" of the internet, everything is right next door. Some degree of hierarchization is still usually required, to solve the scaling problem of N^2 growth of interpersonal links as a group increases in size. If that's not done, then as the total number of members increases, each individual members has more fellow members to talk to and spends more time doing so, and thus the time available to do anything else decreases. At a certain point, the organization grinds to a halt because everyone spends all their time talking to one another, and they still can't transmit all the information they need to, let alone find any time to actually engage in useful work. But hierarchization can be used in internet-based hive minds just as it is in existing organizations, and most members of such hive-minds won't need to communicate directly with one another. We know this can happen, because it's already happening. "Open Source Software" is one example and result of formation of that kind of hive-mind. Political blogging is another. When it comes to blogs, power-law distribution tends to spontaneously induce creation of hierarchical organization, with contributors to high-traffic sites becoming de-facto leaders. At any given instant, there will be a myriad of such hive-minds exhibiting a broad range of behaviors and capabilities. New ones would form all the time and old ones would falter and die. Some will only "think" in very restricted realms, while others may range broadly. In terms of observable intelligence level they would fall on a continuum. Some might be "geniuses", some "morons", some might operate at the level of animals or even plants. There will be the equivalent of diseases (i.e. chain letters). There will be the equivalent of parasites (file sharing networks pirating music and movies). Some will be valuable and constructive, some will be trivial and useless, and some will be insane. Some of those will be dangerously insane. Sometimes hive-minds will form in response to others in order to oppose them. Hive-minds will compete and contend. Some will cooperate, forming coalitions. Sometimes that will cause them to merge. Some hive-minds will break into pieces, yielding children whose contributing members sort themselves based on their disagreements. And generally they'll be self-organizing, and many will be able to adapt to changing circumstances. Memes are the thoughts of hive minds. [Steven Den Beste]
  • For the first time in history, it actually required less work to produce and distribute a copy of something than to find and destroy it. Movable type printing made widespread dissent practical. On a technological level, it gave the edge to spreaders of information over those who tried to censor it. The process of spread of "dangerous" information was slow and inefficient when that was either done orally or via hand-produced written copies, and the process of suppression could largely keep up. But when a small shop with a handful of employees could produce hundreds of copies of something in a week, and any printer elsewhere who got one copy of that could produce further hundreds of copies, then it became impossible to prevent the broad spread of political and religious dissent. Luther was a child of the printing press; he would be no more than a footnote in history were it not for the fact that his ideas spread through Europe like wildfire, in the form of thousands of copies produced by printers everywhere. The great intellectual revolution in Europe of the 15th-17th century was solidly built on top of millions of books and pamphlets. And ever since, "dangerous" knowledge has been increasingly difficult to totally suppress by those most threatened by it even when they were in power. And we're at the beginning of the fourth explosion which computers and networks will bring about. When knowledge could only spread by speech, it might take a thousand years for a good idea to cross the planet and begin to make a difference. With writing it could take a couple of centuries. With printing it could happen in fifty years. With computer networks, it can happen in a week if not less. After I've posted this article to a server in San Diego, it will be read by someone on the far side of a major ocean within minutes. That's a radical change in capability; a sufficient difference in degree to represent a difference in kind. It means that people all over the world can participate in debate about critical subjects with each other in real time. With speech, the collaborative process of creation of knowledge expanded from the person to the tribe. With writing, it spread to the level of citystates. With printing it encompassed nations and even continents. With computer networking, everyone in the world is involved whether they like it or not. There's nowhere left to hide. We're already seeing some of the political, technological and cultural effects of the Internet, and this is just a start. What this means is that drastic cultural shakeout cannot be avoided. The next fifty years are going to be a very interesting time as the Internet truly creates the Global Village. [Steven Den Beste]
  • In order for "alternate energy" to become feasible, it has to satisfy all of the following criteria: 1. It has to be huge (in terms of both energy and power) 2. It has to be reliable (not intermittent or unschedulable) 3. It has to be concentrated (not diffuse) 4. It has to be possible to utilize it efficiently 5. The capital investment and operating cost to utilize it has to be comparable to existing energy sources (per gigawatt, and per terajoule). If it fails to satisfy any of those, then it can't scale enough to make any difference. Solar power fails #3, and currently it also fails #5. (It also partially fails #2, but there are ways to work around that.) The only sources of energy available to us now that satisfy all five are petroleum, coal, hydro, and nuclear. [Steven Den Beste]
  • Power-law distributions are, as we have seen, impressively ubiquitous, but they are not the only form of broad distribution. Lest I give the impression that everything interesting follows a power law, let me emphasize that there are quite a number of quantities with highly right-skewed distributions that nonetheless do not obey power laws. A few of them, shown in Fig. 5, are the following: *The abundance of North American bird species, which spans over five orders of magnitude but is probably distributed according to a log-normal. A log-normally distributed quantity is one whose logarithm is normally distributed; see Section IV.7 and Ref. [32] for further discussions. *The number of entries in people’s email address books, which spans about three orders of magnitude but seems to follow a stretched exponential. A stretched exponential is curve of the form e−axb for some constants a,b. *The distribution of the sizes of forest fires, which spans six orders of magnitude and could follow a power law but with an exponential cutoff. This being an article about power laws, I will not discuss further the possible explanations for these distributions, but the scientist confronted with a new set of data having a broad dynamic range and a highly skewed distribution should certainly bear in mind that a power-law model is only one of several possibilities for fitting it. [Power laws, Pareto distributions and Zipf’s law]
  • In the midst of his Italian campaign, Napoleon Bonaparte stole a painting from a monastery in Venice. Cynthia Saltzman has turned this forgotten episode into a highly original work of history. “Plunder: Napoleon’s Theft of Veronese’s Feast” interweaves several overlapping themes, delving into military and political history as well as the evolving function of public art displays in Europe. She guides us through the fading gem that was Venice in the mid-16th century, when “The Wedding Feast at Cana” was painted. She introduces us to the artist, Paolo Veronese, a stonecutter’s son and a highly regarded colorist, and to the ambitious abbot who chose the painter’s subject—the feast at which Jesus performed the miracle of turning water into wine. [Roger Lowenstein]
  • Coeur d’Alene, Idaho, was a depressed logging and mining town of about 25,000 when Duane Hagadone opened an 18-story lakeside resort there in 1986. The resort features turrets, steeply sloped copper roofs and a suite whose glass ceiling provides an underwater view of a rooftop swimming pool. Forbes magazine called it a “study in excess” erected in “the middle of nowhere” and warned it might become a white elephant. [WSJ]

Thursday, April 29, 2021

Thursday Night Links

  • Save like a pessimist means you acknowledge the cold statistics of how common bad news is. It’s common at the global, national, local, business, and personal level. Save heavily, knowing with certainty that you’ll need a cushion to deal with the next banana peel. Be a little bit paranoid, knowing the assumptions you hold today could break tomorrow, and you’ll need enough room for error to make it to the next round. More people and businesses try to solve problems than fudge success or get into trouble. Not by much. But the odds tilt ever so slightly toward long-term progress amid frequent setback. It’s been happening for thousands of years: millions of people solving one problem and moving on to the next, bit by bit, experiment by experiment. Since progress is cumulative (we don’t forget past innovations) but setbacks are temporary (we rebuild), the long-term odds tilt towards growth. [link]
  • What they learned, and what lots of suppliers, restauranteurs, and others are learning, is that demand is not as elastic as they had thought; that everyone wants a lower price but they’ll pay for the value of the product if they need the product. That, with more money in the system, raising prices a little doesn’t hurt business very much at all. [link]
  • Me: “Yes, paper towels. I can almost guarantee you the price of paper towels will increase 3-5% over the next year. So in theory, if you buy paper towels today, you’ll receive a 3-5% holding gain on your inventory!” Chris: “You can’t be serious! That’s it?” Me: “Well, no, not exactly. In theory, you can apply this to many of the things you need that are rising in price. In other words, my best idea today is to buy things!” [Eric Cinnamond]
  • Given the size of the profitability gap, why did corporations historically deploy almost half of their earnings into investment? Why didn’t they instead deploy all of their earnings into dividends, or use all of their earnings to buy back shares (after doing so became legal)? That’s the question that we have to answer. To frame the question in terms of the cost of equity and the return on equity, if the corporate sector’s average cost of equity was 3.48% higher than its average return on equity, then why did it expand its equity by retaining and reinvesting its earnings? Why didn’t it instead contract its equity, shrink it, give it back to its shareholders? If the calculated numbers are correct, that would have been the most accretive thing to do. [OSAM]
  • "This is an important milestone in the development of a new source of reliable green helium supply, and long-term sustainable helium production industry in Saskatchewan," NAH Chairman and Chief Executive Officer Nicholas Snyder said.  "Our company will continue working with our partners and relevant stakeholders to ensure that we can grow our nitrogen-based helium production as a replacement for declining legacy sources of hydrocarbon-linked helium supplies in the lower 48 states." [NAH]
  • We committed to fighting back against patent trolls in a way that would turn the normal incentive structure on its head. In addition to defending the case aggressively in the courts, we also founded Project Jengo — a crowdsourced effort to find evidence of prior art to invalidate all of Blackbird’s patents, not only the one asserted against Cloudflare. It was a great success — we won the lawsuit, invalidated one of the patent troll’s other patents, and published prior art on 31 of Blackbird’s patents that anyone could use to challenge those patents or to make it easier to defend against overbroad assertion of those patents. And most importantly, Blackbird Technologies went from being one of the most prolific patent trolls in the United States to shrinking its staff and filing many fewer cases. [Cloudflare]
  • "Today,we are in no better position to cure polio or massive myocardial infarctions than we were a thousand years ago. But we can prevent these diseases entirely (vaccines), reduce incidence (dietary changes, statins), or mitigate severity (stents, thrombolytic agents) and thereby make a major impact on morbidity and mortality. This focus on curing advanced cancers might have been reasonable 50 years ago, when the molecular pathogenesis of cancers was mysterious and when chemotherapeutic agents against advanced cancers were showing promise. But this mindset is no longer acceptable." Instead, it seems important to figure out how to prevent more cancers via better diet and lifestyle, and to detect tumors earlier so that surgery can remove them before they have metastasized. [CBS]
  • After over 8 years of hard-fought litigation, the Blue Cross and Blue Shield Association, together with its 36 Blue Cross/Blue Shield members (“the Blues”), recently announced a proposed settlement of class action antitrust litigation (In re Blue Cross Blue Shield Antitrust Litigation) brought against them by a nationwide class of subscriber members. The settlement terms, summarized in the plaintiffs’ motion seeking the Court’s approval of the settlement, includes both the payment of substantial monies to the plaintiff class ($2.67 billion) and significant agreed-to changes to the way in which the Blues operate. The action, begun as a single case in 2012 and subsequently converted into a multi-district proceeding in the Northern District of Alabama after numerous similar cases were filed across the country, centered on the contention that several of the Blue Cross Blue Shield Association (“BCBSA”) rules pertaining to the use of its trademarks unlawfully impeded competition among its Blue members, causing consumers to pay higher rates for health insurance. Notably, almost 1 in every 3 Americans with private health insurance currently obtains health insurance from 1 of the 36 Blue members. The Blues defended the existence of these rules as being reasonably necessary to protect the value of the Blue Cross trademarks. The litigation was particularly hard-fought and expensive, with the production of over 15 million pages of documents, over 120 depositions, and over a dozen motions to dismiss the plaintiffs’ claims. After those motions to dismiss were denied, and the 11th Circuit Court of Appeals refused to consider those rulings on an interlocutory basis, settlement discussions between the parties accelerated. [link]

Friday, April 23, 2021

Looking at Gold Miners

Last week, we mentioned Gold Miners and the Net Issuance Anomaly. The gold miners are profitable, have low debt, and are paying dividends and buying back stock. Investors were slow to respond when the airline industry consolidated down to four players with better discipline - until Buffett, who had always badmouthed the industry, bought big stakes in all four of them at single digit earnings multiples.

Mining (and maybe especially gold mining) has been a long bear market. The gold miners ETF (GDX) has been in a bear market since 2011 - a decade! - and is trading where it was 15 years ago. The junior gold miners ETF (GDXJ) is trading for half of what it was at inception in 2009.

Producers of natural resources - energy and metals - have the worst trailing performance of all the industries in the entire economy. Trailing performance this poor means that they should be cheap:

A fund manager might have a huge number of very cheap stocks they would love to buy, but if they do not have any available cash, they do not get to 'vote' on the market price by buying in the open market, as they lack the liquidity to do so - in the short term at least (longer term, you can reinvest dividends). Furthermore, if the said manager is suffering investor redemptions due to recent returns being poor, then regardless of the underlying managers' views on the long term attractiveness of individual securities, they will be forced to sell. It is therefore not uncommon for those most informed about the opportunities in undervalued securities to be actually selling them rather than buying, in direct contradiction to the EMH.

The market cap of Dogecoin ($31 billion), the sixth most valuable cryptocurrency, is twice the AUM of the GDX ETF. I would much rather own the entire energy production, energy transportation, and mining industries than all cryptocurrencies and the Robinhood 19 stocks (probably about $4 trillion combined!) Let's look at some possible gold miners.

  • Kirkland Lake Gold Ltd (KL) - market cap is $10 billion. They have no net debt. In 2020 they made $1 billion net, selling gold at an average price of $1.7k per ounce. They had $1.6 billion of operating cash flow, spent $582 million on capex and $848 million on share repurchases and dividends. They say that $400 million of last year's cap ex is "sustaining", so that would mean FCF of $1.2 billion or a 12% FCF yield. It's a shareholder yield (dividends + repurchases) of 8.5%. 
  • Gold Fields Limited (GFI) - $9 billion market cap, plus about a billion of net debt. They made $745 million net in 2020. They generated $1.3 billion from operations, spent $584 million on capex.
We also like the business model of Royal Gold as mentioned in our original value post last fall. I think a basket of these gold miners is cheap and adds diversification to similarly cheap investments like tobacco companies, oil and gas royalties, and pipelines.

Thursday, April 22, 2021

Thursday Night Links

  • It was just over two years ago Diego Parrilla first joined me on the podcast to discuss his framework for analyzing financial bubbles and what he calls, “antibubbles.” You may have noticed that the topic of bubbles and antibubbles has come up in both of my recent interviews with James Davolos, on the topic of inflation, and Adam Rozencwaig, on the mania in green energy stocks. Considering how relevant Diego’s framework is to the current market environment and how dramatically the macro backdrop has changed since we last spoke, I thought it would be an opportune time to have him back for a follow up conversation. In this episode, Diego shares his views on the misconceptions underpinning all sorts of asset bubbles at present and how a paradigm shift in inflation threatens to play the role of pin to each of them. He also discusses why he believes cryptocurrencies are, in fact, a bubble and how they have created another opportunity in what he sees as one of the oldest and most enduring of antibubbles: gold. [Felder]
  • I believe we have a Big Problem with Fiat Currencies, Asset Bubbles, and Inflation. I also believe that Blockchain and Crypto are great technological innovations that have the potential to disrupt certain industries. I do however believe that Bitcoin and Crypto are quickly becoming a clear enemy of the Central Banks. The old adage warns us to “Never Fight the Fed” as we know they will do “whatever it takes” to keep their monopoly over fiat money and the privilege of Seigniorage, and thus why investors should be ready for additional regulation, taxation, or even outright prohibition as illegal tender. In addition, I believe the thesis and narrative have fundamentals flaws, including the Scarcity Fallacy or Value Creation Fallacy, and thus why, overall, my personal conclusion is “Bitcoin is 80% Bubble and 20% Anti-Bubble”. [Diego Parrilla]
  • Imagine a network of 100,000 members that we know brings in $1 million. We have to know this starting point in advance—none of the laws can help here, as they tell us only about growth. So if the network doubles its membership to 200 000, Metcalfe’s Law says its value grows by (200,000^2/100,000^2) times, quadrupling to $4 million, whereas the n log( n ) law says its value grows by 200,000 log(200,000)/100,000 log(100,000) times to only $2.1 million. In both cases, the network’s growth in value more than doubles, still outpacing the growth in members, but the one is a much more modest growth than the other. In our view, much of the difference between the artificial values of the dot-com era and the genuine value created by the Internet can be explained by the difference between the Metcalfe-fueled optimism of n2 and the more sober reality of n log(n). [IEEE]
  • Norway’s population rose by about 2 percent 2017-2020, but road traffic volumes also decreased by just over 1 percent 2018-19. There is a whole master’s degree in the data involved. From a high level though, one statistic seems worth focusing on: From 2017-2019, total sales of petroleum products decreased by only 3.3 percent, while EV market share more than doubled from 20 percent to 45. From 2015-2019, total sales of petroleum products decreased by about 6 percent, while EV market share nearly tripled. Norway makes it very, very attractive to buy an EV. Cities and bigger towns offer free parking. Tolls are reduced by at least half, and sometimes more. EVs are exempt from both road taxes and a 25 percent European VAT. Company EVs receive substantial tax breaks. Norway has 9 percent of the total charging stations in Europe, despite making up only 0.7 percent of the population. [BOE Report]
  • We leave Newport Beach (yes, yes, we know, we know) in the midst of the 49th monsoon to hit Southern California this year. Ugly nimbus clouds roll in off the sea. There are ten of us, high-type professionals all. There are eight automobiles: two American (a Pontiac 6000STE and a Dodge 600ES); two Japanese (a Datsun Maxima and a Toyota Cressida); and four from Europe, where this brand of machine was born (a new Audi 5000S, a Volkswagen Quantum, a Saab 900 Turbo, and a Volvo 760GLE). Euro-sedans. Four-doors. Priced between $10,000 and $20,000, bracketed by the likes of the Honda Ac­cord on the low side and the BMW 528e on the high. The mission: a two-day, 1150-mile, America-versus-the-world run to Cabo San Lucas at the tip of Baja, then a one-day layover in the sunshine and two days back. Our destination to­day is an oasis in the central Baja desert called San Ignacio. [Car and Driver]
  • Cycling in America is a competitive-wannabe hobby dominated by manufacturers trying to sell performance products to weekend warriors. Not unlike the hifi electronics industry, manufacturers would quickly put themselves out of business if they leveled with their customers and sold them just the products they need. [CBS]
  • Japan is a good example of IQOS’s continuing domination of the HNB category despite challenges from the likes of British American Tobacco (BTI), Imperial Brands (OTCQX:IMBBY) (OTCQX:IMBBF), and Japan Tobacco (OTCPK:JAPAF) (OTCPK:JAPAY). PM HTUs have now reached a 10%+ share in 12 markets, including Italy (11.3%), the Czech Republic (13.8%), Portugal (12.2%), and Hungary (17.0%). Italy (population 60m) is one of biggest tobacco markets in Europe while the other countries mentioned each has a population of approx. 10m. PM HTU's market share in key cities also shows the long-term potential for national market shares, especially outside IQOS's key current markets in Japan, Southern Europe, and Eastern Europe. IQOS has reached a high-single-digit share in Munich and Zurich, a 5.1% share in London, and a 12.3% in Kuala Lumpur in Malaysia. With respect to the mid-point of 2021 guidance, PM shares are trading at a 15.7x P/E and a 7.0% FCF Yield. Net Debt / EBITDA was at 1.92x, down another 0.1x sequentially, and Philip Morris “remain on track” to resume share buybacks in H2 2021. [Seeking Alpha]
  • The secret menu reveals a business model that goes beyond a right-to-repair issue, O’Sullivan argues. It represents, as he describes it, nothing short of a milkshake shakedown: Sell franchisees a complicated and fragile machine. Prevent them from figuring out why it constantly breaks. Take a cut of the distributors’ profit from the repairs. “It’s a huge money maker to have a customer that’s purposefully, intentionally blind and unable to make very fundamental changes to their own equipment,” O’Sullivan says. And McDonald’s presides over all of it, he says, insisting on loyalty to its longtime supplier. (Resist the McDonald’s monarchy on decisions like equipment, and the corporation can end a restaurant’s lease on the literal ground beneath it, which McDonald's owns under its franchise agreement.) So two years ago, after their own strange and painful travails with Taylor’s devices, 34-year-old O’Sullivan and his partner, 33-year-old Melissa Nelson, began selling a gadget about the size of a small paperback book, which they call Kytch. Install it inside your Taylor ice cream machine and connect it to your Wi-Fi, and it essentially hacks your hostile dairy extrusion appliance and offers access to its forbidden secrets. Kytch acts as a surveillance bug inside the machine, intercepting and eavesdropping on communications between its components and sending them to a far friendlier user interface than the one Taylor intended. The device not only displays all of the machine’s hidden internal data but logs it over time and even suggests troubleshooting solutions, all via the web or an app. [Wired]
  • The mission of a manufacturer is to overcome poverty by producing an abundant supply of goods. Even though water from a tap is a processed product with a price, no one objects if a passerby drinks from a roadside tap. That is because the supply of water is plentiful and its price is low. The mission of a manufacturer is to create material abundance by providing goods as plentiful and inexpensive as tap water. This is how we can banish poverty, bring happiness to people's lives and make this world into a paradise. [Panasonic]

Wednesday, April 21, 2021

Philip Morris Q1 2021 Earnings $PM

Yesterday, Philip Morris (PM) reported earnings for Q1 2021 and gave an investor presentation. Some highlights:

"Our business delivered a strong performance in the first quarter of 2021, well ahead of expectations, reaching a record high quarterly adjusted diluted EPS of $1.57, despite the continued challenges of the global pandemic.

Most impressive was the continued strong growth of IQOS, which made up 13% of our volumes and 28% of our net revenues, compared to 21.7% in the prior year quarter. We continued converting adult smokers at a very good pace and reached an estimated total of 19.1 million users, of which 14.0 million have switched to IQOS and stopped smoking. HTU shipment volumes grew 30% compared to the prior year quarter, with record market shares in key IQOS geographies, 12 markets with double-digit national share, and a share of 7.6% overall in IQOS markets excluding the U.S.

Our operating margins were also significantly above the prior year quarter, and while somewhat flattered by timing factors, the bulk of this improvement reflects strong underlying performance. The resulting combination of strong organic net revenue and adjusted diluted EPS growth leads us to raise our outlook for the year."


Another good summary of the quarter from Seeking Alpha:

Japan is a good example of IQOS’s continuing domination of the HNB category despite challenges from the likes of British American Tobacco (BTI), Imperial Brands (IMBBY), and Japan Tobacco (JAPAF). PM HTUs have now reached a 10%+ share in 12 markets, including Italy (11.3%), the Czech Republic (13.8%), Portugal (12.2%), and Hungary (17.0%). Italy (population 60m) is one of biggest tobacco markets in Europe while the other countries mentioned each has a population of approx. 10m. PM HTU's market share in key cities also shows the long-term potential for national market shares, especially outside IQOS's key current markets in Japan, Southern Europe, and Eastern Europe. IQOS has reached a high-single-digit share in Munich and Zurich, a 5.1% share in London, and a 12.3% in Kuala Lumpur in Malaysia. With respect to the mid-point of 2021 guidance, PM shares are trading at a 15.7x P/E and a 7.0% FCF Yield. Net Debt / EBITDA was at 1.92x, down another 0.1x sequentially, and Philip Morris “remain on track” to resume share buybacks in H2 2021. 

PM do not disclose their operating income segmented by cigarette vs heated tobacco (which would be nice to know), only segmented by geography. They do disclose net revenue for cigarette vs heated tobacco segments.

If IQOS is 13% of volume and 28% of net revenue, then IQOS is obviously higher priced per "heated tobacco unit". But the question is how the margins compare, since the business is shifting from cigarettes to IQOS. Here is what they said in the investor presentation about the drivers of their overall profitability:

"Our adjusted operating income margin increased by 590 basis points on an organic basis. This reflects the increasing weight and profitability of IQOS, the positive impact of pricing, productivity savings, including lower device costs; lower commercial spend due to the pandemic, a favorable comparison in Eastern Europe and certain other timing factors."

That makes me think that IQOS has higher profit margin than cigarettes. But for some reason, it seems like they are being quiet about it.

The degree of switching from cigarettes to IQOS is itself impressive. Heating the nicotine leaf might be more appealing than vaping pure nicotine, perhaps because this provides some of the MAOI benefits of cigarettes. They may have a big winner with IQOS. Note that Altria has the rights to it in the U.S. 

In our Value vs Growth bibliography, we linked to two important posts by Lyall Taylor, who has been doing some of the best recent writing on value vs growth.

Who knew that Lyall was writing brilliant theses about value vs growth while powered by nicotine? He is right on board with our Re-Nicotinization thesis. We will call him "Chainsmoker" LT3000 from now on.