Tuesday Night Links

• It is intriguing to recognize that bats, the natural reservoir of coronavirus, have exceptionally high levels of melatonin, which may protect these animals from developing symptomatic disease. The slow release (extended release) formulation of melatonin is preferred as it more closely replicates the normal circadian rhythm. There is marked inter-individual variation in the metabolism of melatonin (first pass metabolism) hence the dose must be individualized. High serum levels are associated with hyper-REM sleep and bad dreams. Rapid release melatonin (usual over the counter formulation) results in early high peaks that do not replicate the normal circadian pattern; hence it is important to take the slow release/extended-release formulation. [link]
• In U.S. states other than South Dakota and Florida, Americans actually started and lost a second war in 2020, this time against coronavirus. We poured all of our money and effort into the fight. Governors suspended what had been considered Constitutional rights, e.g., to assemble. After 1.5 years sitting at home growing (more) obese and less educated/skilled, Americans managed to rack up a COVID-19 death rate higher than in give-the-finger-to-the-virus Sweden. [Phil G]
• Focusing on the U.S. Federal Reserve System (the Fed), the Article outlines a series of structural reforms that would radically redefine the role of a central bank as the ultimate public platform for generating, modulating, and allocating financial resources in a democratic economy—the People’s Ledger. On the liability side of the ledger, the Article envisions the complete migration of demand deposit accounts to the Fed’s balance sheet and explores the full range of new, more direct and flexible, monetary policy tools enabled by this shift. On the asset side, it advocates a comprehensive qualitative restructuring of the Fed’s investment portfolio, which would maximize its capacity to channel credit to productive uses in the nation’s economy. [Saule T. Omarova]
• They are all uncannily similar in that 1) there was a parabolic rise in share price, 2) the rise was not justified by fundamentals, and 3) they have failed to sustain any momentum to the upside for longer than 6-months. In addition to the momentum stock charts that appear to be breaking, the Nasdaq versus Energy chart is also breaking lower (implying energy to materially outperform tech going forward). [HFI Research]
  
• I’ve talked to people who feel they know Bach very well, but they aren’t aware of the time he was imprisoned for a month. They never learned about Bach pulling a knife on a fellow musician during a street fight. They never heard about his drinking exploits—on one two-week trip he billed the church eighteen groschen for beer, enough to purchase eight gallons of it at retail prices—or that his contract with the Duke of Saxony included a provision for tax-free beer from the castle brewery; or that he was accused of consorting with an unknown, unmarried woman in the organ loft; or had a reputation for ignoring assigned duties without explanation or apology. They don’t know about Bach’s sex life: at best a matter of speculation, but what should we conclude from his twenty known children, more than any significant composer in history (a procreative career that has led some to joke with a knowing wink that “Bach’s organ had no stops”), or his second marriage to twenty-year-old singer Anna Magdalena Wilcke, when he was in his late thirties? They don’t know about the constant disciplinary problems Bach caused, or his insolence to students, or the many other ways he found to flout authority. This is the Bach branded as “incorrigible” by the councilors in Leipzig, who grimly documented offense after offense committed by their stubborn and irascible employee. But you hardly need to study these incidents in Bach’s life to gauge his subversive tendencies. Just listen to his music, which in its ostentatious display of technique and inventiveness must have disturbed many in the austere Lutheran community, and even fellow musicians. Not much music criticism of his performances has survived, but the few surviving reactions of his contemporaries leave no doubt about Bach’s disdain for the rules others played by. [Lapham's Quarterly]
  
• There were too many Oswalds in view, with too many smuggled rifles, retelling a familiar story to too many witnesses. At least one curtain rods story, and the disposable witness who heard it, had to go. The obvious person to be jettisoned was the hapless Ralph Yates. The stubborn insistence on what he knew he had seen and heard, from the man he had given a ride, had to be squelched. [CBS]
• The metal resource needed to make all cars and vans electric by 2050 and all sales to be purely battery electric by 2035. To replace all UK-based vehicles today with electric vehicles (not including the LGV and HGV fleets), assuming they use the most resource-frugal next-generation NMC 811 batteries, would take 207,900 tonnes cobalt, 264,600 tonnes of lithium carbonate (LCE), at least 7,200 tonnes of neodymium and dysprosium, in addition to 2,362,500 tonnes copper. This represents, just under two times the total annual world cobalt production, nearly the entire world production of neodymium, three quarters the world’s lithium production and 12% of the world’s copper production during 2018. Even ensuring the annual supply of electric vehicles only, from 2035 as pledged, will require the UK to annually import the equivalent of the entire annual cobalt needs of European industry. The worldwide impact: If this analysis is extrapolated to the currently projected estimate of two billion cars worldwide, based on 2018 figures, annual production would have to increase for neodymium and dysprosium by 70%, whilst cobalt output would need to increase at least three and a half times for the entire period from now until 2050 to satisfy the demand. Energy cost of metal production: This choice of vehicle comes with an energy cost too.  Energy costs for cobalt production are estimated at 7000-8000 kWh for every tonne of metal produced and for copper 9000 kWh/t.  The rare-earth energy costs are at least 3350 kWh/t, so for the target of all 31.5 million cars that requires 22.5 TWh of power to produce the new metals for the UK fleet, amounting to 6% of the UK’s current annual electrical usage.  Extrapolated to 2 billion cars worldwide, the energy demand for extracting and processing the metals is almost 4 times the total annual UK electrical output. Energy cost of charging electric cars: There are serious implications for the electrical power generation in the UK needed to recharge these vehicles. Using figures published for current EVs (Nissan Leaf, Renault Zoe), driving 252.5 billion miles uses at least 63 TWh of power. This will demand a 20% increase in UK generated electricity. Challenges of using ‘green energy’ to power electric cars: If wind farms are chosen to generate the power for the projected two billion cars at UK average usage, this requires the equivalent of a further years’ worth of total global copper supply and 10 years’ worth of global neodymium and dysprosium production to build the windfarms. Solar power is also problematic – it is also resource hungry; all the photovoltaic systems currently on the market are reliant on one or more raw materials classed as “critical” or “near critical” by the EU and/ or US Department of Energy (high purity silicon, indium, tellurium, gallium) because of their natural scarcity or their recovery as minor-by-products of other commodities. With a capacity factor of only ~10%, the UK would require ~72GW of photovoltaic input to fuel the EV fleet; over five times the current installed capacity. If CdTe-type photovoltaic power is used, that would consume over thirty years of current annual tellurium supply. Both these wind turbine and solar generation options for the added electrical power generation capacity have substantial demands for steel, aluminium, cement and glass. [Richard Herrington]
• That helps explain why the Biden administration has been pressing the Organization of the Petroleum Exporting Countries to produce more oil. “We continue to speak to international partners, including OPEC, on the importance of competitive markets and setting prices and doing more to support the recovery,” Jen Psaki, Mr. Biden’s press secretary, said last week. [NYT]
• If a subordinate tells you that an asset on your balance sheet does not exist, you either write it off or you are a fraud. But Jens Peter Clausen wrote, "We properly want to go deep this quarter?" And Adithya Vijayakumar wrote that Mike was "working with the finance team to get the buy off on scrapping the modules for the second quarter." That makes it sound like actual ground truth is not the final arbiter of what appears in Tesla financial statements. This is not the first time there have been Tesla cost accounting irregularities. Remember that the government indicted someone in Tesla's accounts payable department for impersonating employees of one Tesla vendor (Hota Industrial Manufacturing of Taiwan) in order to substitute their payment information with the payment information of a different vendor, Schwabische Huttenwerke Automotive GmbH (SHW). [CBS]
• The primary driver of quality returns is growth in assets. Profitability decreases, which makes sense as profits across the economy mean revert and high profits should get competed away. Valuation multiples improve, which is perhaps surprising, as they generally begin at elevated levels, but this improvement only just offsets the contraction in profitability. High quality companies mostly deliver returns by getting bigger. Contrast this with the drivers of top decile value returns shown below. The top decile of the value factor delivers returns through change in multiples. The companies have anemic asset growth, and profitability does not improve. But multiples do. This reflects our understanding of how value works. Low multiples often reflect poor earnings. But while earnings may continue to be poor, they are not as bad as was priced, so multiples improve. Value is the racecar, hard to beat, but prone to accidents around the curves. Quality loses to value much of the time but is much more consistent and performs better when growth slows. There is one final difference that matters to investors. Because value derives from market valuations, which are volatile, while quality derives from company profitability, which changes more slowly, companies in the quality portfolio tend stay in the quality portfolio with lower turnover than companies in the value portfolio. In our dataset, quality companies were likely to still be in the portfolio three years after being added, while value companies were likely to be out of the portfolio after two years. Value requires more frequent rebalancing than quality. [verdadcap]