Friday, March 5, 2021

Friday Night Links

  • The rules are simple. And they are ripped right out of Dr. Cate Shanahan’s Deep Nutrition. I can’t recommend the book enough.  1. No Vegetable Oils. Ever. Never Again. Last time you had them was before reading this article. Non-negotiable. Even if gaining muscle isn’t your goal, purely from a health stand point you should adopt this. [The American Sun]
  • You should be serving your content yourself. That's what this blog does. I have a server and I serve you my writing in the form of HTML/CSS/JS code; your browsers are clients which receive the code I serve. But that's not how Twitter works. On Twitter you're just some pansy who has to register, give them your email (!) and cellphone number (!!!). Then you upload your content through a client (a Twitter mobile app or their web app) and then Twitter, at their leisure and discretion i.e. hiding your content if you like a Trump tweet, or outright banning you for undermining confidence in the stability NATO alliance, serves your content on the internet. Twitter also keeps your list of followers, your own reading feed and your DMs and they can dispose of them at their complete leisure. [Spandrell]
  • In summary, the relative attractiveness of the commodity sector has changed since November 2020. At that time, we were finding considerable value in energy stocks and had minimal exposure to precious metal miners. Based on meaningful changes in valuations, we’ve recently shifted our research focus from energy stocks to precious metal miners. Our search for miners will be similar to how we screened through beaten-down energy stocks. We’re focusing on precious metal miners with strong balance sheets that will allow the companies to survive a prolonged industry downturn. As was the case with energy, we do not want to own miners that are dependent on bankers or the credit market for capital, and as always, we want to avoid combining operating and financial risk. We are also searching for miners that sell at discounts to the replacement value of their long-lived assets. And finally, we prefer miners with proven developed mines that are in favorable geographies. Owning precious metal miners is not for the faint of heart. They are extremely volatile and will do their best to shake out the most disciplined investors. And while we do not believe precious metal miners are as inexpensive as they were in their devastating bear market of 2015, we think the industry’s cash flows, balance sheets, and investment rationale have improved. In our opinion, it’s time to revisit the precious metals miners. We believe the sector is ideally positioned for a future of rising inflation, debt monetization, and a Federal Reserve with limited options. [Eric C
  • Even if someone has been able to find a large effect of non-pharmaceutical interventions on transmission with a more sophisticated statistical analysis, the fact it doesn’t jump at you when you look at this kind of simple graphs should make you skeptical of that finding and, the larger the effect, the more skeptical you should be, because if non-pharmaceutical interventions really had a very large effect it should be easy to see it without fancy statistics. I think that, in general, one should be very suspicious of any claim based on sophisticated statistical analysis that can’t already be made plausible just by visualizing the data in a straightforward way. (To be clear, this doesn’t mean that you should be very confident the effect is real if you can, which in many cases you shouldn’t.) That’s because sophisticated statistical techniques always rest on pretty strong assumptions that were not derived from the data and you should usually be more confident in what you can see in the data without any complicated statistical analysis than in the truth of those assumptions. So visualizing the data provides a good reality check against fancy statistical analysis. By following this principle, you will sometimes reject true results, but in my opinion you will far more often avoid accepting false ones. As we shall see later, not only is the literature on the effect of non-pharmaceutical interventions no exception, but it’s actually a great illustration of the wisdom of that principle. [Philippe Lemoine]
  • It is concluded that life-long weekly-repeated transient inhibition of insulin secretion by antilipolytic drugs may have an anti-aging effect, additive to the anti-aging effect of a milder caloric restriction. Speculation is that transiently lower plasma insulin levels might stimulate the anti-aging cell-repair mechanism autophagy, which has longer lasting effects on cell housekeeping. [link]
  • I want a stock to be so obviously cheap that I can determinate almost instantaneously that it is a buy, in Malcolm-Gladwell-style ‘blink’ fashion. Many of the world’s greatest investors, such as Buffett and Greenblatt, are similarly minded in this regard. Buffett is famous for making decisions within 10 minutes. He bought a US$500m position in PetroChina in 2002-03 after doing little more than reading company’s the annual report. He sold his position in 2007-08 for US$4bn (the hour or so it took him to read the annual report was a fairly productive hour). [LT 3000]
  • In addition, while most investors believe the BoJ's policies are a reason to sell the Yen, I'm inclined to view these policies as a reason to buy (the same is true of the ECB and the Euro). Why? Most investors believe the correct approach to investing is to figure out what you think is going to happen in the future, and then position yourself accordingly. I don't. I think you should figure out what other people think is going to happen, and then look for ways in which they may be wrong. This is because it is changes of opinion that drive financial market asset prices, not the future as it is currently envisaged. All the big money in markets is made and lost in the tails - things that people generally do not expect to occur that nevertheless end up occurring. You make money by being positioned to benefit from major changes in aggregate opinion. That is why (intelligently implemented) contrarianism pays. Markets already expect continuing efforts by the BoJ to debase the currency, and that is already reflected in the Yen's current trading level. That is why the currency is cheap. However, this is also what makes a Yen short so risky. Indeed, short Yen is such a crowded trade that if there is even a whiff that the BoJ is wavering in its debasement commitment, the Yen will surge. Japanese equities will also tank if this happens, which is why I think the consensus long Japan equities/short Yen combo is a poorly considered one. For me, the Yen tail risk is skewed to the upside over the medium term for this reason, even if the bears end up being right long term. [LT 3000]
  • One of the best measures of something's value is its replacement cost, and if a 21 year old can create a digital currency in his basement, it can't be all that hard. It is therefore reasonable to expect thousands and thousands of new coin offerings to emerge until the supply overwhelms demand and the prices of all of them crash. This is the same dynamic that eventually contributed to the crash in 2000-02. The booming share prices of worthless dot-com start-ups incentivised investment bankers to bring as many new IPOs to market as possible as fast as possible. As they did, the supply of worthless scrip continued to grow and grow until it eventually overwhelmed what previously appeared to have been an insatiable degree of speculative demand. At that point prices started to fall, and then the psychology rapidly changed, with everyone simultaneously rushing for the exits. Prices crashed and most market participants were wiped out. [LT 3000]
  • Lots of value investors like to bottom-fish and buy stocks that are or have recently fallen sharply. I do that too sometimes, but I prefer to buy something that has not only already dropped a long way, but which has also already 'bounced along the bottom' for an extended period of time on low volume. This process tends to steadily sift-out all the weak/impatient holders, while stock is slowly accumulated by strong hands - usually hard-core contrarian, longer-term holders like myself. Particularly bullish is when such stocks fail to elicit much reaction to bad news, and a very strong buy signal comes when such companies exhibit early signs of positive fundamental change. [LT 3000]
  • LTV/CAC metrics provide deceptive comfort to companies/investors about the wisdom of incurring hundreds of millions of dollars of losses in order to grow, because they assume that the LTV is locked in rather than merely a hypothetical based on a static analysis of how things look today, rather than a dynamic analysis of how LTV could look in the future, and evolve in an environment of increasingly saturated markets and more and more competitors desperately trying to ramp up volumes to recoup fixed costs. It is exactly analogous to shale O&G companies assuming that their efforts at rapid volume growth would have no impact on the end commodity price. After all, the LTV of their wells were very high relative to their WAC (well acquisition costs). So what could go wrong? Why shouldn't investors value them based on LTV/WAC metrics? As I have argued for some time now, I think a fairly epic bust in the technology sector is coming, that could well rival the scale of the bust, although with the worst effects being seen in the VC/private space rather than the listed space (although the latter will also likely be badly affected). In many cases, valuations have reached utterly absurd levels for loss making companies with unproven business models, which rely on static analyses that are highly questionable in a dynamic world. As I have argued in the past, consensus expectations for these companies are that they continue to enjoy rapid revenue growth and rising profitability, whereas I think in reality what we will see is decelerating top line growth and falling profitability/widening losses. [LT 3000]
  • How much of FB's ad revenue is driven by wastefully-unsustainable marketing dollars being thrown around by VC-backed startups desperate for growth without any regard for profitability is unknown, but it could well be substantial. Caspers alone is spending more than $100m a year on online marketing. Facebook's revenues are the other side of the unsustainable marketing and CAC expense line items of the said loss-making VC-backed Unicorns. What this means is that in a severe retrenchment in VC start-up land, a very considerable amount of online advertising spend could suddenly disappear, as many of Facebook's key customers suddenly substantially reduce their online ad spend. Furthermore, when end markets eventually consolidate (e.g. if Caspers ends up the winner by raising IPO capital and buying out all of its competitors for close to zero), there will also be less bidding competition for key words (relevant also for Google) and key ad slots, which could reduce prices as well as bidding volume. How much of FB's US ARPU is being driven by unsustainable CAC spending is unknown, but there is a notable gap between FB's monetisation in Europe and the US & Canada ($13.21/quarter vs. US$41.41/quarter, respectively, in 4Q19), despite Europe also being a relatively high-income region. The bulls have argued this is due to FB being under-monetised in Europe and the RoW (FB's global average was US$8.52/quarter in 4Q19), but the gap could also reflect FB being heavily over-monetised in the US, reflecting rampant Valley financing of worthless tech start-ups willing to spend billions of dollars on Facebook and Google ads to acquire customers and sustain rapid top-line growth at any cost. When you think about it, US$41.41 per user in the US & Canada - a user base that includes kids with limited financial resources - is a staggering amount of money. It would have to influence several thousand dollars of incremental annual product and services spend a year, for every single user (including kids, and the many very light users of FB), for that to be sustainable and economically justified. That's a tall order to sustain, let alone grow at rapid rates, and it is entirely possible inflated Unicorn CAC spend is a key reason the metric is so high. If in a major tech bust, FB's US ARPU was to fall to European levels, the company's revenues and pre-tax earnings earnings could fall catastrophically, by as much as US$20bn, reducing pre-tax income from US$30bn to US$10bn. [LT 3000]
  • I discussed in my Uber article why the ride-sharing business may very well be consuming more resources than the value of the output delivered, given the inherent economic inefficiency of the average punter being chauffeured around town when they could drive themselves or use alternative forms of transportation. The loss making nature of the business is providing false price signals to the economy about the resources required to provide the service, making it appear to be a more efficient choice, when in fact the cost of the service is not being reflected in the price paid. Market share and resources are therefore being misallocated. The taxi business has long existed (ride-sharing without the online interface), but has been consigned to niche applications because of the inherent economic inefficiency/cost of two people sitting in a car instead of one. It is a waste of society's scarce labour resources, unless there are good reasons why someone can't drive themselves (intoxicated; short trips in built-up areas like NYC with a scarcity of parking; travelling or heading to/from the airport, etc). While the bulls argue Uber's losses reflect a 'lack of scale' - an argument made despite the fact that the company has been in business nearly a decade, and has already has acquired tremendous scale - the truth is probably more that the lack of profits reflects the fact that the business model is actually consuming more resources than the value of the economic output it is producing. That reality has required that they price their service below the cost of its provision in order to grow, which is why they have lost more and more money as they have scaled. If the above were not true, they would be able to provide the service profitably and grow. Even if there was vigorous competition, the industry ought to be able to operate at at least break even levels. The same can be said of Tesla. They have built many great cars. I've been in a Model S - it's very cool. But the company keeps burning cash because the cost of the inputs continues to exceed the value of the output. [LT 3000]
  • One might argue the dissident right is a Pacific phenomenon, consisting of people who have experienced and contemplated the fall of middle-class California and the rise of East Asia. Coming back to America after visiting Tokyo and Singapore was depressing. Like going from the 21st century to the 20th. How could anyone possibly believe we're a superior civilization? Another useful exercise would be a trip in the late 90s comparing Santiago (Chile), Buenos Aires & Sao Paulo.  The legacy of Pinochet never looked so exemplary. Middle-class California checking in. I’d definitely think a disproportionate amount of us have experienced the decline of the Bay Area in particular. A lot of Bay Area folks who saw what was happening around them and were also influenced by Michael Savage. [Blair Nathan]
  • The United States still spends more on national security than the next six or seven countries combined, and there’s little doubt that all that money has produced an impressive amount of military power. But the United States doesn’t have the world’s best primary and secondary schools; the best health care; best WiFi; best railways, roads, or bridges; or best power grids, and it lacks well-funded public institutions that can serve U.S. citizens’ needs in a pandemic or enable the country to maintain the technological edge it will need to compete with other countries for the rest of this century. Looking back, the over $6 trillion spent on what Bush dubbed the “war on terror”—including the money spent on unwinnable wars in Afghanistan and Iraq—could surely have been spent helping Americans live more comfortable and secure lives at home. [Stephen M Walt]
  • Fixing the level of Treasury yields endogenized the size of the System Open Market Account: the Fed had to buy whatever private investors did not want to hold at the fixed rates. As a result, the size of the Account increased from $2.25 billion at the end of 1941 to $24.26 billion at the end of 1945. Fixing the pattern of Treasury yields endogenized the maturity distribution of publicly held debt. In each market sector, the Fed had to buy whatever private investors did not want to hold and, up to the limits of its holdings, had to sell whatever private investors wanted to buy beyond what the Treasury was issuing. Investors quickly came to appreciate that they faced a positively sloped yield curve in a market where yields were at or near their ceiling levels. An investor could move out the curve to pick up coupon income without taking on more risk and then ride the position down the curve, adding to total return. This strategy of “playing the pattern of rates” led investors to prefer bonds to bills. Their preferences, coupled with the Treasury’s decision to issue in all maturity sectors, forced the Open Market Account to buy unwanted bills and to sell the more attractive bonds. By late 1945 the Account held 75 percent of outstanding bills, but—in spite of heavy bond issuance by the Treasury—fewer bonds than it had held in late 1941. [link]


Stagflationary Mark said...

It is therefore reasonable to expect thousands and thousands of new coin offerings to emerge until the supply overwhelms demand and the prices of all of them crash.


What you really should have done in 1905 or so, when you saw what was going to happen with the auto is you should have gone short horses. There were 20 million horses in 1900 and there's about 4 million now. So it's easy to figure out the losers, the loser is the horse. But the winner is the auto overall. 2000 companies (carmakers) just about failed. - Warren Buffett, speaking to University of Georgia students in 2001

The only difference is that, unlike the auto, it isn’t even certain that there will ultimately be a winner. I’m trying to imagine a world in which I would willingly purchase privately created digital currency. Even if I believed hyperinflation was imminent (which I don’t), I’d much rather purchase physical coins made of gold and silver.

CP said...

Mark - penny for your thoughts on utilities, interest rates, value versus growth.

Stagflationary Mark said...

Taking some damage on utilities since we last spoke (currently down 2.4% since the purchase). Headline risk and rising interest rates aren’t causing me to lose sleep though.

Bracing for more short-term damage. TINA is becoming TISAN (there is some alternative now). It would not surprise me much to see the 30-year Treasury reach 3.2% soon, but I am definitely not expecting much higher than that. Should we reach that level, I think it will be temporary. Still positioning myself for more waves of long-term ZIRP to replace the current rising interest rate fears and TLT crashing hysteria. What exactly has been done to increase real GDP over the long-term lately? I’m drawing a blank. It certainly can’t be the pandemic’s baby bust or temporary stimulus.

You’re preaching to the choir on value vs. growth, but maybe that’s just me being older and more cynical. Sometimes, what is value and what is growth is not at all obvious. Take the investment that retired me. At the time, I saw great value there. I poured money into it. One coworker thought about investing in it too, but ultimately saw more value in new expensive tires for his truck. Those tires ultimately cost him $200k+ in missed opportunity costs. I cringe just thinking about it. The difference between success and failure can sometimes come down to just one bad assumption/decision. (In hindsight, continuing to drive a crappy car and investing instead was the best decision of my life.)

My opinions on interest rates may ultimately lead to a bad investment decision on interest-rate sensitive utilities. I definitely feel like I’m in the minority again now, but it’s not such a bad place to be. There’s often madness in the crowds, especially when they think the obvious must be true. Rising real interest rates are not compatible with my long-term theory that it will continue to get harder and harder to make money off of money though. And for what it is worth, I’m fairly confident in the theory.

CP said...

Sometimes it seems like growth versus value is clear - Tesla versus VPU:


Russell 1K Growth vs Value

Tesla vs Toyota

Zoom vs Exxon

Carvana vs Penske

CP said...

What would happen if in addition to the utilities, you owned some

Enterprise Products Partners
Dorchester Minerals

Might that reduce your overall risk?

CP said...

Classic Stagflationary Mark!

Declaring that the long-term bull market in long-term Treasuries is over while the natural log of the yield is well below the red trend line seems more than a bit premature to me. Where's the evidence of the bull market's demise?

CP said...

Regarding this -

Velocity is slow to pick up at the beginning of a big inflation. I'm not counting on it remaining low.

CP said...

Landlord bubble - this is fascinating

Stagflationary Mark said...

Might that reduce your overall risk?

It most likely would. Hubris could very well be my downfall but fewer moving parts for me to track (KISS principle) does mean I sleep better, even if it means heading down into the abyss. At least the minor pain I experience as VPU declines is somewhat offset by the rising dividend yield as the price falls. Of course, sleep would be more difficult if the dividend yield declines as well. If I am wrong on interest rates, I’ll ultimately be wrong on future dividends.

Velocity is slow to pick up at the beginning of a big inflation. I'm not counting on it remaining low.

At some point, I think it is nearly guaranteed that inflation will not remain low. However, I’m counting on it remaining low far longer than most.

Consider that we’re in a pandemic. Many people opted to hoard extra canned goods to ride it out. There were actual shortages. And yet, even today, I can order petite diced canned tomatoes from Target at 49 cents per can. If I spend $35, they’ll ship them to me for free.

The original Stagflationary Mark would be shocked. I’m not that shocked though. I switched to the Japan scenario quite a few years ago and I’m still embracing it.

The game will end someday. With this much debt, the Fed can’t afford deflation. The Fed claims that it has the tools to fight inflation if it needs to do so. For now, I believe them. All they’d need to do is take the punchbowl away. It’s barely inflating as it is.

Housing prices are certainly inflating again though. Inventories are down. Not making any more land. I would point out that they weren’t making any more land in Japan either, and we know how that ultimately worked out. I was working in Seattle at a software division of a Japanese landscape company in 1990. That job sure didn’t last long.

Landlord bubble - this is fascinating

Might expect to see low housing inventories if everyone wanted to be a landlord. Is this a hidden bubble? Where does it end? Will a bell ring once there are too many landlords? Not rhetorical questions. I would really like to know.

Being a landlord is not without its risks. A potential landlord bubble doesn’t seem to be on anyone’s radar though. Most still seem to think being a landlord is any easy way to riches. Just keep acquiring more units until you can quit your day job. Continue to tell others on message boards how great it is working out. Maybe even convince others to do it too. Seems like a recipe for a bubble to me, eventually.

Or maybe it just follows the harder to make money off of money theory. As more landlords appear, they just make less due to the increased competition. And eventually they stop saying how great it is working out. Doesn’t have to pop. Could just sort of grind to a halt as the lowest lying renter fruit disappears, I suppose.

Stagflationary Mark said...

The small farming community I grew up in currently has 5 listings.

2 are single-family homes. Both pending. Should be off the market shortly. That make sense. There’s a city of 200k just 33 miles away. Not a horrible commute.

2 are multi-family homes. One is $550k. 5k square feet. Price reduced. “Great investment find!” The other is $185k. 10k square feet. “Sellers WILL NOT make any repairs.” “This is a fantastic opportunity to run your own business in part of the building and still have amazing cash flow from the other tenants.” Both were listed just over 100 days ago.

1 is land.

That’s what recently got me interested in landlord economics. Seems like an odd mix of properties for sale. Not sure I believe that these will be great investments. The cheaper property is in the center of town, on the main street.

“Opportunities are endless... cafe, brewery, bookstore, yoga studio, office space, airbnb options, etc.”

Bookstore? Yoga studio? Really? I’m just not picturing either of those being profitable. At all. Town has been struggling ever since the main highway bypassed it shortly before I moved away nearly 40 years ago. The opportunity to lose money seems nearly endless, especially if you are an outsider moving into a small farming community with the intent to earn a living.

There was one established grocery store when I lived there. It was pretty big, given the size of the town. Outsiders would move to town and open a second smaller grocery store. They never lasted long. It was hard to watch. And that was before the town was bypassed.

Allan Folz said...

+1. I really liked the Lords of the Land post.

True story: early last week I was writing a guest post on the "Central Bank Circle of Life" (back-burnered due to a life intrusion, hope to restart it shortly) and came to a point where it was time to make the old stand-by joke "It's Stag Mark's world and we're all just living in it."

So I bounce over to your blog to grab the URL to link and what did I see but... Soap Bubble, Lords of the Land, and Sarcasm Report v.282. LOL!

They should do a Ground Hog Day reboot with J Powell as the protagonist... He has to break the back of disinflation so a senile octogenarian can win re-election by appealing to swing Millennial voters, while not crushing Boomers' asset portfolios and driving them to a Populist Billionaire running on a third party ticket. I have it fully cast in my head. Just need someone to play the Ross Perot character. ;)

Stagflationary Mark said...

Just need someone to play the Ross Perot character. ;)

Dana Carvey! From SNL (1992):


Ross Perot: Well, there you go! Now, that was vintage! That was one of the finest moments in any debate I’ve ever seen. I mean, talk about Pin the Tail on the Donkey — that’s just what you did! You were A-1 in that debate! You had an H-Bomb, them other fellers had a slingshot!

Hahaha! :)

CP said...

Tesla vs Vanguard Utility ETF:

Stagflationary Mark said...

I’m enjoying your Tesla to VPU ratio charts. How low will it go? I might be more than a bit biased, but I don’t think the bottom is even remotely in yet. Based on a wuick glance of sn S&P 500 heat map, Tesla’s market cap is still roughly comparable to the total combined market caps of every regulated electric utility in the S&P 500.


Packard (1899-1958)

Packard was conceived as a luxury model – it cost over 4 times as much as a comparative Oldsmobile. This luxury image would prove vital to sustaining the brand, even through the Great Depression. Only when they began introducing mid-priced vehicles did they run into problems – they simply were unable to compete with the “Big Three” in a mid-priced market. Price wars among the big auto corporations and a dangerous merger with Studebaker drove the independent manufacturer into the ground.

Emphasis added.

One winner of the combustion engine auto market was the fuel that goes into them (oil). If history were to repeat, one winner of the electric auto market might be the fuel that goes into them (electricity).

We take electricity for granted in this country, unless it suddenly vanishes during a power outage. And then it’s one of the most important things in the world. If Tesla were to suddenly vanish, life would go on. For most of us, we might not even notice the difference.

Stagflationary Mark said...

I would like to point out that the Tesla to VPU ratio is extremely unfair to VPU investors.

Tesla focuses 100% on stock price appreciation whereas VPU sacrifices part of its price each time it pays a hefty dividend.

Tesla being completely unhindered from paying hefty dividends allowed its stock price to appreciate negative 5.84% today, while VPU only appreciated positive 1.55%.

As you can see... never mind. I withdraw my complaint. ;)