Tuesday, November 24, 2015

"Debate: Does Longevity Put a Strain on the Economy?" (GE)

From GE Reports:
Nov 24, 2015 by Daniel Callahan, Co-Founder and President Emeritus of the Hastings Center
The question that’s often overlooked in the debate over longevity is not whether we can — but whether we should — radically extend life expectancies. The clear answer is, no.  
I have spent many of my 85 years thinking about old age, what it means and what we might do about it. There is always something disturbing about the debates I have with enthusiasts for radically extending life expectancy. The topic is typically introduced with three cheers for life extension beyond our present boundaries, followed by exciting — sometimes breathless — talk about all the scientific breakthroughs on the horizon that would get us there. I always try to stir up interest in the question, “But is that a good idea?” 
Few seem prepared to even discuss the question of not can we — but should we — extend life as far as possible. The answer seemed to be self-evident answer: No one likes to get old, do they? But I think the question is unavoidable, and the answer is clear: Life extension a glaringly bad idea. 
There are there two ways of thinking about significantly extending life expectancy, by which I will mean well over 100: what we as individuals might like, and what might be best for the human community. I have seen several public opinion surveys from different countries showing variable responses to the question of how long individual people would like to live. In Australia, a surveyfound that 80 would be long enough for most. In Germany, a study found 85 to be the ideal. And in America, two separate surveys found 90 to be the desired age. In none of them was there much desire to live beyond 100....MORE
Well there you go, I guess Mr. Keohane was right.

Should Pearson Decide to Sell Its Stake, Bertelsmann Seeks Partner to Buy Penguin Random House

From peHUB:
European media giant Bertelsmann (BTGGg.F) is looking for a private equity partner to help it buy the rest of publisher Penguin Random House should co-owner Pearson (PSON.L) want a swift exit from the business, three sources told Reuters.

Privately owned Bertelsmann controls 53 percent of the publisher of bestsellers such as the Fifty Shades series and Lee Child’s Jack Reacher thrillers.

Announced in 2012, the venture brought together two of the biggest names in book publishing, with the Penguin imprint and logo a familiar sight on bookshelves around the English-speaking world.

Pearson and Bertelsmann initially committed to holding their shares for at least three years and each partner has the right of first refusal thereafter should one want to sell.

They also agreed that from five years after completion of the deal either partner can require an initial public offering (IPO) of the publisher....MORE
In the words of former President Bush:
 “There's an old saying in Tennessee — I know it's in Texas, probably in Tennessee — that says, fool me once, shame on — shame on you. Fool me — you can't get fooled again.”

"DARPA seeking novel mathematical frameworks for understanding and representing complexity"

We are still at least a decade away from being able to model systems that are both complex and chaotic. Fortunately you can get a lot done by understanding nonlinear jerk systems.
Now, could I get all the jerks to line up on the outside of the butterfly wings...

From Next Big Future:
Complex interconnected systems are increasingly becoming part of everyday life in both military and civilian environments. In the military domain, air-dominance system-of-systems concepts, such as those being developed under DARPA’s SoSITE effort, envision manned and unmanned aircraft linked by networks that seamlessly share data and resources in real time. In civilian settings such as urban “smart cities”, critical infrastructure systems—water, power, transportation, communications and cyber—are similarly integrated within complex networks. 
Dynamic systems such as these promise capabilities that are greater than the mere sum of their parts, as well as enhanced resilience when challenged by adversaries or natural disasters. But they are difficult to model and cannot be systematically designed using today’s tools, which are simply not up to the task of assessing and predicting the complex interactions among system structures and behaviors that constantly change across time and space. 
To overcome this challenge, DARPA has announced the Complex Adaptive System Composition and Design Environment (CASCADE) program. The goal of CASCADE is to advance and exploit novel mathematical techniques able to provide a deeper understanding of system component interactions and a unified view of system behaviors.  
“CASCADE aims to fundamentally change how we design systems for real-time resilient response within dynamic, unexpected environments,” said John Paschkewitz, DARPA program manager. “Existing modeling and design tools invoke static ‘playbook’ concepts that don’t adequately represent the complexity of, say, an airborne system of systems with its constantly changing variables, such as enemy jamming, bad weather, or loss of one or more aircraft. As another example, this program could inform the design of future forward-deployed military surgical capabilities by making sure the functions, structures, behaviors and constraints of the medical system—such as surgeons, helicopters, communication networks, transportation, time, and blood supply—are accurately modeled and understood.”...MORE

Business Insider's Parent, Axel Springer, Is Suing An Adblocker

From harknesslabs:
Are Adblock companies legal?
Today brought the news that Axel Springer, the media giant that recently bought business insider for 343 million is suing a ad blocker. Many would balk at this action, claiming that ad blocking is inherently legal and that this is just a dinosaur grasping for any method they can to grab any dollars on the ground. 
The thing is though, ad blockers may very well be illegal in the USA. In fact, very similar cases have been tried in court before, but in a very different medium: Online game hacking. I wont blame you for not initially seeing the parallels, but they are in fact very similar businesses.

Lets compare Adblock Plus and MDY Industries. MDY made and sold a ‘bot’ (a program that played the game for you, to accumulate more in game gold) for Blizzards World of Warcraft. Blizzard was not happy with this as it felt it made the overall economy worse for players and that it was prohibited by their terms of service. Blizzard took MDY to court and won (more on this later).

Adblock Plus gives away software that lets end users block advertisements on all websites. Some websites may have language in their Terms of Service forbidding access with a adblocker enabled. 
The similarities if you did not catch them are this: The platform (websites, blizzard) have a contract with a user (gamer, website visitor) saying they cant do something. The user then decides they want to do that bad thing anyways. The offender (MDY, Adblock plus) provides software that lets the user do this bad thing.

There is a law on the books which deals with this very issue and its called Tortious Interference. Wikipedia says: “Tortious interference with contract rights can occur where the tortfeasor convinces a party to breach the contract against the plaintiff, or where the tortfeasor disrupts the ability of one party to perform his obligations under the contract, thereby preventing the plaintiff from receiving the performance promised. The classic example of this tort occurs when one party induces another party to breach a contract with a third party, in circumstances where the first party has no privilege to act as it does and acts with knowledge of the existence of the contract. Such conduct is termed tortious inducement of breach of contract.”...MORE

Monday, November 23, 2015

"Why and how do Munger and Buffett “discount the future cash flows” at the 30-year U.S. Treasury Rate?"

From 25iq:
Buffett and Munger use several methods which are at odds with traditional financial theory. Here is one of those nontraditional approaches:

Buffett: “We don’t discount the future cash flows at 9% or 10%; we use the U.S. treasury rate. We try to deal with things about which we are quite certain. You can’t compensate for risk by using a high discount rate.”

There is no law of nature requiring that a capital allocation process account for risk, uncertainty and ignorance by adjusting the interest rate. Buffett and Munger instead use the concept of margin of safety. Having a margin of safety and also adjusting the interest rate would be redundant in their view. They: 
1. Assemble options to invest that involve businesses which have a future that is “quite certain” and is within their circle of competence
2. Use the 30 year rate to do the DCF in their head on all these opportunities
3. Apply a margin of safety
4. Compare every option available to then anywhere on Earth and chose the best one.

This makes some people nuts since they were trained to adjust the interest rate to account for risk. I’m not taking a personal position here and am instead trying to better explain the Buffett/Munger approach.

The two methods are different ways of accomplishing the same thing, so why do Buffett and Munger use their own approach? I believe they prefer their method since it frames the ultimate question in a way that they prefer. They hate the idea of someone saying “invest in X since the return is above your hurdle rate” since that decisions can be made only by looking at every other alternative in the world. By using the same 30 year US Treasury rate for every DCF he has created a “system to compare things.” The things Buffett compares side-by-side must be “quite certain” and available to buy at a significant discount to intrinsic value reflecting a margin of safety.

My friend John Alberg a co-founder of http://www.euclidean.com/ puts it this way:

“Another way of saying it is that all investments share the same discount rate. You can’t apply a different discount rate to company A than company B because $1 in the future is worth the same amount of money regardless of whether it comes from company A or B. So instead an investor should focus on the cash that a business can generate within a margin of safety and compare them by that measure. With respect to DCF, the reason that it can be “done in the head” is because it simplifies to a simple ratio when you use margin of safety. That is, if most future cashflows from company A are going to be greater than some number c_A and the discount rates are going to be greater than some other value r then the quantity c_A / r is less than the result you would get from a DCF. Put another way, the quantity c_A / r is a lower bound on the DCF or it is an estimate of intrinsic value with a margin of safety. But notice that if you are comparing the intrinsic value of two companies with cashflows of at least c_A and c_B then the discount rate r is constant between the two and therefore not the important part of the equation.”

Buffett and Munger have a flow of deals that cross their desks. We don’t see them but Byron Trott recently said that many investors would cry over losing what they turn down. That flow established their opportunity cost. 30-year US treasury rates can be 3%, but if they have a flow of deals that return 10% that is “sort of” their hurdle rate.

Munger: “We’re guessing at our future opportunity cost. Warren is guessing that he’ll have the opportunity to put capital out at high rates of return, so he’s not willing to put it out at less than 10% now. But if we knew interest rates would stay at 1%, we’d change. Our hurdles reflect our estimate of future opportunity costs.”...

HT: Value Investing World

1,111 Carat Diamond Found In Botswana

From Motherboard:
The final resting place for a diamond the size of your fist is not where you’d expect. 
At a whopping 1,111 carats, the largest diamond discovered in over a century was found in Botswana this week. The rock measures 65mm x 56mm x 40mm, about the size of a tennis ball. 
The stone was found in Karowe mine, which is 300 miles north of the country’s capital, Gaborone. Two other large diamonds, 813 carats and 374 carats each, were found in the same mine. The findings added $150 million to the value of the company that owns the mine this week, Lucara Diamond. 
"The significance of the recovery of a gem quality stone larger than 1,000 carats, the largest for more than a century... cannot be overstated," William Lamb, the CEO of Lucara, said in a statement. 
Already, administrators are deciding on what to do next with the massive diamond. Lucara announced that the rock was too big to fit inside their in-house scanner, so first thing’s first: it’s being sent for analysis to Antwerp, Belgium, home of a world-famous diamond district and one of the most popular places for diamond trading. 
Normally when massive diamonds like this are found, they don’t stay whole for long. As diamonds are the hardest substance on Earth, only a diamond can cut another diamond. The rock will likely be cut using another rock, as well as a fine saw coated in diamond dust, and shaped into smaller (though relatively still enormous) diamonds, and those will be sold individually....MORE

Nomura and Morgan Stanley on Dollar/Euro Parity

From Barron's Asia Stocks to Watch, Nov. 18:

Can Euro Hit Parity With The U.S. Dollar?
The U.S. dollar pared back gains in Asian trading after reaching a 7-month high against the Euro as the latest minutes from the Federal Reserve showed a strong intent to raise U.S. rates next month.

The euro rose 0.4% to trade at 1.07 recently. Other currencies gained too. The New Zealand dollar jumped 0.9%, the Australian dollar gained 0.7%, the Korean won gained 0.8%, the new Taiwan dollars rose 0.7% and the Malaysian ringgit jumped 1.2%.

Can the U.S. dollar sustain its gains? Historically, the dollar tends to rally heading into the Fed’s tightening cycle, followed by mixed performance afterwards.

Morgan Stanley thinks so:

The more challenging global environment is likely to leave the USD supported even once the Fed hiking cycle is under way. The impact of a higher USD and rising US rates on a fragile global economy, especially EM and Asia in particular, is set to provide the USD with continued support, we believe. The latest TIC data show that official holders have been sellers of US Treasuries for September. The TIC data show that China and Japan have also been net selling US Treasuries. This would seem consistent with the previously reported reduction in FX reserves in Asia and China in particular. The TIC reporting that China’s holdings of US Treasuries are now at a 7-month low. We view these reduction in FX reserves as a sign of private investor demand for USD, and hence a USD positive factor.
For Morgan Stanley’s view on the euro, check out this Bloomberg video.

Meanwhile, Nomura Securities updated its euro/usd forecast, now seeing euro parity in 6-9 months:

In early 2015, we were reluctant to extrapolate a strong EUR depreciation trend too far, and we have never previously embedded parity in our forecast path for EURUSD. However, we now judge that the likelihood of EURUSD hitting parity is high on a 6-9 month horizon....MORE
1.0623 down 0.0025.

How Special Is The Financial Times? (FT @ NYT)

From the New York Times, Nov. 22:

Pearson’s Big Paydays Defy the Odds Against Print Media
It has been tough sledding for print media. More than 150 newspapers have closed or converted to digital-only offerings in the last two years. Recently the magazine giants Condé Nast and Time Inc. have both cut employees and closed magazines.

What, then, to make of the recent sales of The Financial Times and The Economist for sky-high prices?

In July, to sharpen its focus on textbook publishing and testing, the British media company Pearson agreed to sell The Financial Times to Nikkei, an employee-owned Japanese publisher, for about 855 million British pounds, or about $1.3 billion, in cash. Pearson had owned The Financial Times for 58 years. Then, in August, Pearson sold its 50 percent stake in the Economist Group, publisher of The Economist, for £469 million, or about $715 million, to the Economist Group itself and to Exor S.p.A., the investment arm of Italy’s powerful Agnelli family.

Nikkei paid $1.3 billion for The Financial Times newspaper, which has combined paid print and digital circulation of 690,000, according to the company.Nikkei to Buy Financial Times From Pearson for $1.3 BillionJULY 23, 2015

The transactions turned heads, not only in media circles, but also on Wall Street. Nikkei paid 44 times The Financial Times’s operating profit. Exor paid 15 times the Economist Group’s operating profit. By contrast, Gannett, owner of USA Today and the largest public newspaper publisher, trades at about five times trailing cash flow, as does McClatchy, another large newspaper group. 
Both buyers are exultant. In an interview, John Elkann, Exor’s 39-year-old chairman, said that he started reading The Economist as a teenager. Over the last five years, he said, Exor’s sliver of equity, which increased to 43.4 percent in the deal, has given him insight into the power of the brand and its annual operating profit of about £65 million.

“If you have a distinct journalistic offer, which is independent; if you have a readership, which is growing in the world because more people want to be informed and speak and read English; and if you have technology that can help you reach much more of them than you could in the past, the combination of that, if well executed, is pretty powerful,” Mr. Elkann said of The Economist.

For his part, Tsuneo Kita, the Nikkei chairman, said in an email that for three years, he had wanted a partnership with The Financial Times for access to an important English-language business publication. Buying The Financial Times also gave Nikkei a way to diversify its aging 2.7-million subscriber base. In an auction conducted by Gregory Lee, a media banker at Evercore, Nikkei not only bested the German media company Axel Springer, it also outbid buyers like Bloomberg L.P. and Thomson Reuters, as well as private equity firms and assorted billionaires.

Mr. Kita wants to build the world’s premier business media company. “It is precisely because there is a flood of information every day that there is demand for trustworthy, accurate and insightful reporting,” he explained. He says the news business is in a period of “momentous change” and thinks both Nikkei and The Financial Times can thrive by keeping their independence, while learning from each other. “English is the premier business language of today, and The FT has a 127-year history of excellent reporting in this language,” he wrote. Nikkei is 139 years old.

At these prices, though, there is no guarantee that either buyer will make money on its investment. The newspaper business could be in the process of either a long-awaited turnaround or simply another downtick. Nikkei is borrowing the money for The Financial Times from a consortium of Japanese banks, albeit at historically low interest rates.
Despite these risks, The Financial Times’s successful auction was fueled by the combination of its brand and its success in its digital business, Mr. Lee, of Evercore, said. In the last decade, The Financial Times’s digital subscribers have increased to about 535,000 from 76,000; a majority of its about £300 million in revenue comes from subscribers, not advertisers.

John Ridding, chief executive of The Financial Times, said in an interview that the newspaper’s gamble in charging a high price for premium content, both in print and online, had paid off. And neither he nor his colleagues wanted The Financial Times to become some billionaire’s toy — it had to continue to be a relevant media property. “Some people thought that this was a trophy buy,” he said. “I think the answer to that is firmly no.”

In the end, Nikkei wanted The Financial Times more than Axel did, offering about £90 million more, according to people briefed on the deal. “They would have been prepared to go even higher,” Lionel Barber, editor of The Financial Times, said in an interview....MORE

Saudi Statement Offers Another Opportunity To Short Oil

Today's action via FinViz:
$41.50, last.
And from ZeroHedge:

Oil Tumbles Back Into Red As Saudi "Whatever It Takes" Jawboning Is Not Enough
Just 2 hours after news broke of Saudi officials discussing the need to do "whatever it takes" to stabilize the oil market - sending crude soaring - half the gains are gone. With the algos tagging Friday's highs, WTI Crude has tumbled back into the red from Friday's close as traders want action not words to solve the massive global oil glut...

U.S. Farmland Price Decline Now At Two Years and Counting

From Agrimoney:
US farmland prices extend decline to two full years
Farmland prices in major US agricultural states extended their decline to two full years, undermined by weak crop values which have kept the farm equipment sector in the mire for even longer.
A farmland price index formulated by Creighton University, on states from North Dakota to Colorado, came in at 34.8 points for November – up from the figure of 31.0 for last month, but remaining well below the 50.0 level which indicates a neutral market.

The decline represented "the 24th straight month the index has moved below growth neutral", said Ernie Goss, the Creighton economics professor in charge of the survey, underlining the depressant effect to agriculture from weaker crop values. 
"The strengthening US dollar and global economic weakness have pushed farm commodity prices down by 14.1% over the past 12 months."

'Strongly positive'The comments come the week after data from the Federal Reserve, the US central bank, showed a stabilisation in land values in major Corn Belt and central Plains states over the summer, although lenders surveyed for the report forecast a further decline in values ahead.

And they follow too an unusually large land purchase in Illinois announced last week by Farmland Partners, which purchased 22,300 acres for a price of $197m, equivalent to some $8,800 per acre, saying that it believed the sluggish market would prove short-term....

Gold Miners: Here Comes Your Nineteenth Market Meltdown (GDX; GDXJ)

December gold $1071.60, down $4.70.
The ETF for the senior miners, the GDX closed at $13.40 on Friday, down 4% on the day and flirting with the multi-year low printed on September 11 at $12.62. The juniors, proxied by the GDXJ closed at $1.79 down a lower percentage but weak nonetheless.

From The Daily Gold:

Bracing for Another Breakdown in Gold Miners
The bear market in the gold miners has been one for the record books but it is not over yet. Last week we noted that precious metals were on the cusp of making new lows while the US$ index was very close to another key breakout. This scenario remains well in play and would certainly affect the gold mining sector, which over the past two weeks failed to rebound or build on any strength. 
Below is a daily candle chart that shows GDXJ (large juniors) and GDX (largest miners). Before Friday both markets had essentially traded nowhere or sideways over the past 10 days. That could be enough time to “work off” the oversold condition that developed after the miners declined 16% and 18% over the previous eight days. Friday’s sharp decline reduced the miners chances of testing the 50-day moving average and could be the start of the next leg lower. Any strength next week could be capped near $19.50 in GDXJ and $14.00 in GDX. A daily close below $18.00 in GDXJ and $13.00 in GDX could quickly lead to lower levels. 
GDX and GDXJ have formed small hammers on the weekly candle charts but volume and size (of the reversal) are lacking. The miners appear to be biding time before an inevitable break to new lows. Unless they can close above the highs of this week or form a huge reversal next week, the prognosis for the weeks ahead remains bearish. Finally, note that previous declines lasted nine to ten weeks. While this decline may not last as long, it could continue for several more weeks as miners are not yet extremely oversold on a weekly basis....MORE 

"Trends in oil production"

From Econbrowser:
World field production of crude oil increased 2.9 million barrels a day in the 12 months ended last July. That compares with a 3.6 mb/d increase over the entire nine years from Jan 2005 to Dec 2013.
World field production of crude oil in thousands of barrels per day, Jan 1973 to July 2015.  Data source: Monthly Energy Review, Table 11.1b.
The biggest single factor is Iraq, where production is up almost 1.1 mb/d over the last year. Although ISIS has managed to bring cruelty to much of the rest of the world, so far they have not disrupted Iraqi oil production.
Iraq field production of crude oil in thousands of barrels per day, Jan 1973 to July 2015.  Data source: Monthly Energy Review, Table 11.1a.
The second biggest factor in the 2.9 mb/d gain was the United States, where production increased 0.6 mb/d July 2014 to July 2015, thanks to the tremendous success of shale oil, or production based on horizontal fracturing of tight geologic formations.
U.S. field production of crude oil in thousands of barrels per day, Jan 1973 to July 2015.  Data source: Monthly Energy Review, Table 11.1b.
...MORE (looking for the turn)

Sunday, November 22, 2015

"Goldman eyes $20 oil as glut overwhelms storage sites"

In case you missed it.
This is actually a reiteration of a call Goldman made in September, which idea was shot down by a bunch of idiots demurrers .
Storage and the perception of storage are important, see link below.
December futures have dropped off the board, the new front-month January's were last at $41.46 down 26 cents. With October 2016 contracts at $48.02 there is more than enough room for a storage contango trade.

From Ambrose Evans Pritchard at the Telegraph:
“The world is floating in oil. The numbers we are facing now are dreadful," said David Hufton from PVM Group 

The world is running out of storage facilities for surging supplies of oil and may soon exhaust tanker space offshore, raising the chances of a violent plunge in crude prices over coming weeks, experts have warned.
Goldman Sachs told clients that the increasing glut of oil on the global market has combined with mild weather from a freak El Nino this winter. The twin-effect could send prices plummeting to $20 a barrel, the so-called ‘cash cost’ that forces drillers to abandon production. “Risks of a sharp leg lower remain elevated,” it said.
Oil has fallen from $110 a barrel early last year and is hovering near $40 for US crude, and $44 for Brent in Europe.
The US investment bank said the overall glut in the commodity markets may take another twelve months to clear. It cited ‘red flag’ signals on the Shanghai Future Exchange over recent days. Copper contracts point to “imminent weakening” in China’s ‘old economy’ of heavy industry and construction, it said.
The warnings came as OPEC producers and Russian companies fight a cut-throat battle for market share in Europe and Asia. Saudi Arabia is shipping crude to Poland and Sweden for the first time, poaching new customers in the Kremlin’s traditional backyard.

Iraq is selling its low grade ‘Basra heavy’ crude on global markets for as little as $30 a barrel as the country runs out of operating cash and is forced to cut funding for anti-ISIS militias. Iraq is seeking a large rescue loan from the International Monetary Fund. “The drop in oil prices is a difficult test for us,” said premier Haider al-Abadi.

It is estimated that at least 100m barrels are now being stored on tankers offshore, waiting for better prices. A queue of 39 vessels carrying 28m barrels is laid up outside the Texas port of Galveston, while the Iranians have a further 30m barrels offshore ready to sell as soon as sanctions are lifted.
“The world is floating in oil, and commercial stocks on land are at a record high,” said David Hufton, head of oil brokers PVM Group. “The numbers we are facing now are dreadful. Stocks have been building continuously for two years. This is unprecedented.”

“What has saved us so far is that China has been buying 200,000 to 300,000 barrels a day (b/d) for their strategic reserve,” he said.
It is unclear exactly how much more space China may have. The Chinese authorities certainly want to keep building stocks – and do so at bargain prices - since reserves cover just 50 days demand, far short of the 90-day minimum recommended by the International Energy Agency. But the new storage depots in Gansu and Xinjiang will not be ready until the end of the year, at the earliest.

Data from the US Energy Department shows that America’s storage sites are 70pc full, in theory leaving room for another 150m barrels. But this is already tight enough to create regional bottlenecks. It will not be sufficient if OPEC continues to flood the global market in a bid to drive out rivals. Excess supply is running near 2m b/d....MORE
Back on August 23 we posted "Oil Price Decline May Be Due For a (Brief) Pause".
We got lucky with the timing:
A twofer following Friday's $39.86 WTI print.
First though, some background. Back in January we and FT Alphaville's Izabella Kaminska posted on the opportunities presenting themselves in the cash-and-carry corner of the oil trade:

As We Search For A Bottom In Crude: Floating Oil Storage--Do the Math
That post pointed out that the six month contango was $6.50, more than enough to make the trade work.
We aren't there yet but at $4.00 from the October futures to the April vintage it definitely has some of the bigger houses and maybe even some of the national oil companies firing up their slide rules.
In late May with WTI at $56.74 down 77 cents we posted "The tanker market is sending a big warning to oil bulls". Early but not wrong. Here's how the action turned out:

We expect lower prices this autumn but for now $40.29 seems like a reasonable place to stop falling or maybe even bounce a bit....

"China’s Demographics at a Turning Point"

The one rule of demographics is: demographics rule.

From New Geography, November 18:
For decades, the decline in China’s birth rate was a big boost for the economy. What now?
This week, schadenfreude could have been a word invented for China experts if you judge by some of the commentary surrounding the country’s lifting of its one-child policy. Most got it right that the legacy of the one-child policy is now a problem for the Chinese economy because of a rapidly rising old-age dependency ratio (green line in the first chart below). This was tacitly acknowledged by the lifting of the policy.

But many got it wrong that the one-child policy has always been a problem for the Chinese economy since its inception. The cause of their error is the inclination in some quarters to merge a political and moral issue with an economic one, as if to press the point that unfree and coercive decisions are not only bad eventually for the economy, but bad always and from day one. Unfortunately, economic accountability does not come instantaneously after coercive policies are implemented. Politicians are lucky in that the ultimate consequences of their decisions can take years or even decades to finally be seen in full relief.

Before this occurs, the more immediate and proximate result of a bad policy may in fact be hugely positive for a long time. The reason is that a bad policy can borrow prosperity from the future, or in other words, front-load prosperity to the detriment of future generations. By enacting a policy that pulls prosperity forward, the present can look like a boom but the future then has to contend with the reversing undertow of that same policy.

At any rate, it is right that a free society focuses on the one-child policy’s encroachment on personal freedom and on the unintended consequence of a lopsided male-female ratio. But ignoring these very important issues for a moment, it must also be said that the one-child policy was in fact a significant contributor, arguably even a critical enabler, of the Chinese boom of the past few decades.

DR China
The chart shows China’s dependency ratios: Total DR in blue; Child DR in red; Old-age DR in green. 
Source: UN Population Division. See definitions in footnotes.
There is no mystery here because the chain reaction is well understood by demographers and economists, albeit perhaps forgotten or ignored by some this week. As the Chinese fertility ratio declined, so did the total and child dependency ratios (blue and red lines in the chart), opening a window of opportunity for a demographic dividend.
China’s policymakers managed to seize on this window to accelerate the economy. Here business dynamism, economic policy and the large expansion of trade with the US, Europe, Japan and other economies made a big difference and allowed the country to capitalize on the opportunity and to reap a large demographic dividend.

But there is no free lunch in economics or indeed in demographics. The long-term effect of the one-child policy was to pull prosperity forward by crashing the dependency ratio faster and generating a demographic dividend that was far larger than would have been if households had had more children.

Without the one-child policy, China’s dependency ratio would have fallen more slowly between 1980 and 2010 and may have looked more like India’s (chart below). The decline would have been less pronounced in 1980-2010 and therefore the demographic dividend less great, but the climb would be less steep now and therefore the future less challenging. See Demography Charts – 1 for dependency ratios of other countries.
BRIC Countries Total Dependency Ratios
BRIC Countries Total Dependency Ratios
With only one child to support aging parents, the dependency ratio has started a climb that will continue for several decades. Should the removal of the one-child policy result in more children, this would in the near term push the dependency ratio to rise even faster. As sure as demography was a tailwind in the years 1990-2010, it will be a headwind for decades to come.
This does not mean that the Chinese economy will be weak for decades. Demographics is only one component among many and economies can adapt to changing conditions. Should there be a surge in Chinese innovation and/or new reforms to raise productivity, China could very well skirt or mitigate the coming demographic challenge....MORE

The Hidden Message of the Fed Minutes (The Federal Reserve is looking for lower interest rates for a long time)

From Barron's 'Up and Down Wall Street' column:
Has nasty, brutish, and short become the real new normal of today’s world? To judge by stock markets around the globe last week, it might seem so.

Not missing a beat after the horrific terrorist attacks by Islamic State operatives that took the lives of 130 people in Paris a week ago Friday, equity markets rallied, with Wall Street actually putting in its best week of the year. 

Was this a manifestation of defiance or denial? The latter might have been the case previously, as when President Obama said the Islamic State had been “contained” in an interview with ABC News the day before the Friday the 13th Paris massacre. That description recalled the similarly unfortunate assessment by former Federal Reserve Chairman Ben Bernanke, who declared the spillover effects from subprime mortgages were “contained” in early 2007—only months before the crisis really began to unfold.

Equity markets do have a record of bouncing back from the initial blow imparted by acts of terror, as Liz Ann Sonders, Charles Schwab’s chief investment strategist, wrote last week in Barrons.com’s Wall Street’s Best Minds. Even after 9/11, the 12% hit when the U.S. stock market reopened was recouped a month later. And after the London underground bombings in July 2005, there was only a 1.4% drop, which was recovered the next day.

But even on Monday, in the very first trading session following the heinous Paris attacks, stock markets not only didn’t buckle but moved higher. To be sure, the U.S. market seemed oversold and due for a bounce. Still, the seeming indifference to the events of the previous Friday suggested that investors had grown a lot more callous in recent years. 

Recall that the Flash Crash on the afternoon of May 6, 2010, which sent the Dow Jones Industrial Average plunging nearly 1,000 points in a matter of minutes, seemingly was precipitated by videos of protests in Athens against austerity measures needed to stay in the euro. I’ve lost track at this point of the number of Grexit crises; they all blur together. And, at the risk of sounding like Spiro Agnew, Richard Nixon’s vice president who resigned in disgrace, when you’ve seen one street demonstration, you’ve seen them all. 

But by week’s end, bourses around the globe had put on sparkling showings in an extension of the advance that started last month—and as if nothing had happened in Paris. Asia, Tokyo, Shanghai, and Hong Kong were up by 1.4% to 1.6%. Closer to the attacks, Germany soared 3.8%, London by 3.5%, and even the Paris bourse was up over 2%. 

And back in the U.S.A, the Standard & Poor’s 500 index put in its best week of 2015, gaining 3.3%. To be sure, that followed one of the worst weeks of the year, in which the benchmark for big U.S. stocks shed 3.6%. Meanwhile, the Nasdaq Composite regained the 5000 mark and wound up 3.6% higher. And the Dow Jones Industrial Average was kicking it, adding 3.4%, with the help of Nike (ticker: NIKE), which jumped 5.5% Friday, on news of a stock split, a dividend hike, and an expanded share-repurchase plan. 

What was especially striking was that the markets seemed to gain steam after Wednesday’s release of minutes of the Federal Open Market Committee’s meeting last month, which gave further confirmation that the U.S. central bank would raise rates at the coming two-day confab on Dec. 15-16. As if much confirmation was needed, especially after the previous report of a bigger-than-expected 271,000 jump in nonfarm payrolls in October. 

So, the long-awaited, and endlessly discussed, initial liftoff in the Federal Reserve’s interest-rate target from the near-zero (0% to 0.25%, to be exact) that’s been in place since the dark days of the financial crisis in December 2008 might finally be at hand. That’s a reason to bid up stocks?

WHAT GOT LESS MEDIA ATTENTION—but didn’t escape that of the market—was that the FOMC minutes strongly implied that even if the initial rise in the federal-funds target rate is imminent, the ascent will be milder and will not reach nearly as high as most forecasts indicate.

Specifically, the minutes discuss the notion of a real—that is, after adjusting for inflation—equilibrium interest rate. That rate would be associated with stable prices, a construct theorized by Swedish economist Knut Wicksell a century ago. Divining that golden mean isn’t obvious, but Thomas Laubach, a staff economist at the Fed’s Board of Governors, and John C. Williams, the president of the San Francisco Fed, have been studying the matter since early last decade.

In a recent paper, they reckon that this equilibrium real rate—which they dub r* from their equations—is about 0%. This is a moving target, but this rate had averaged about 2%—again, over the inflation rate—during the past half-century. Following the financial crisis and the Great Recession, they found, it was about a negative 1.5%. By implication, the 0% to 0.25% fed-funds target was about right....MORE

Saturday, November 21, 2015

Art: War Between the 'Freeport King' and the Oligarch and How Dmitry Rybolovlev Made a Quick $300 Million

From the Financial Times:

The Art Market: Feathers fly in Monaco
Bouvier/Rybolovlev lawsuits; Geneva tightens up on freeports; Paris Tableau folded into Biennale; lay-offs at Sotheby’s 
‘Tete’ by Amedeo Modigliani, which Dmitry Rybolovlev bought from ‘freeport king’ Yves Bouvier
‘Tete’ by Amedeo Modigliani, which Dmitry Rybolovlev bought from ‘freeport king’ Yves Bouvier
The increasingly vicious dispute between “freeport king” Yves Bouvier and his former client, the Russian billionaire Dmitry Rybolovlev, has taken two new twists.

Rybolovlev and his lawyer Tetiana Bersheda were detained and questioned by Monaco police after Bouvier ally Tania Rappo accused them of tampering with police evidence and invasion of privacy. They were released without charge but Rappo’s lawyer Frank Michel believes that an inculpation will follow shortly.

Rappo was an intermediary for the numerous art sales Bouvier made to the Russian before the two men fell out almost a year ago. She accuses Rybolovlev and Bersheda of secretly recording a conversation during a dinner party at which she was present and then turning the recording over to the police. Bersheda said that she and Rybolovlev “refute [the] futile accusations of Mrs Rappo who continuously attempts to distract attention from charges of money laundering”.

Meanwhile the Monaco appeals court has denied Bouvier’s request to throw out the case brought by Accent Delight and Xitrans — companies connected to the Rybolovlev family trust. They have accused him of fraud, money laundering and complicity in money laundering in Monaco.

Bouvier’s spokesman maintains that the case should have been vacated because the accusation “violated impartiality . . . had particularly scandalous irregularities . . . and some of the witnesses were accompanied by an interpreter who is none other than the plaintiff’s lawyer”. However, Monaco’s court of appeal recently rejected an application to quash the proceedings.

Buying from Bouvier, Rybolovlev spent some $2bn on art over eight years. His lawyers said that the alleged fraud “caused losses to the plaintiff companies of close to €1bn”. He has also brought a civil lawsuit in Singapore, seeking damages for alleged fraud.

Bouvier’s side was quick to point out that, in the light of last week’s Modigliani record sale of $170.4m, “Thanks to Yves Bouvier, Dmitry Rybolovlev possesses a set of four nudes [acquired for about $200m] . . . today the most conservative estimate for the nudes would be $500m.”
. . .
LAFA (Luxembourg Art Law and Art Finance Association) was launched a month ago in Le Freeport in the Grand Duchy. The private initiative is the brainchild of seven people involved in the art and finance sector, which include Le Freeport managing director David Arendt and Deloitte’s Adriano Picinati di Torcello, and aims to be a “centre of competence in the fields of finance and art” with debates and conferences on the subject....MUCH MORE
See also (if interested): 

"Critical Slowing Down" As A Warning Signal In Complex Systems

From the Simons Foundation's Quanta Magazine:

Complex Systems
Nature’s Critical Warning System
Scientists are homing in on a warning signal that arises in complex systems like ecological food webs, the brain and the Earth’s climate. Could it help prevent future catastrophes?
 [No Caption]
Nestled in the northern Wisconsin woods, Peter Lake once brimmed with golden shiners, fatheads and other minnows, which plucked algae-eating fleas from the murky water. Then, seven years ago, a crew of ecologists began stepping up the lake’s population of predatory largemouth bass. To the 39 bass already present, they added 12, then 15 more a year later, and another 15 a month after that. The bass hunted down the minnows and drove survivors to the rocky shoreline, which gave fleas free rein to multiply and pick the water clean. Meanwhile, bass hatchlings — formerly gobbled up by the minnows — flourished, and in 2010, the bass population exploded to more than 1,000. The original algae-laced, minnow-dominated ecosystem was gone, and the reign of bass in clear water began.
Today, largemouth bass still swim rampant. “Once that top predator is dominant, it’s very hard to dislodge,” said Stephen Carpenter, an ecologist at the University of Wisconsin, Madison, who led the experiment. “You could do it, but it’s gonna cost you.”

The Peter Lake experiment demonstrated a well-known problem with complex systems: They are sensitive beasts. Just as when the Earth periodically plunges into an ice age, or when grasslands turn to desert, fisheries suddenly collapse, or a person slumps into a deep depression, systems can drift toward an invisible edge, where only a small change is needed to touch off a dramatic and often disastrous transformation. But systems that exhibit such “critical transitions” tend to be so complicated and riddled with feedback loops that experts cannot hope to calculate in advance where their tipping points lie — or how much additional tampering they can withstand before snapping irrevocably into a new state.

At Peter Lake, though, Carpenter and his team saw the critical transition coming. Rowing from trap to trap counting wriggling minnows and harvesting other data every day for three summers, the researchers captured the first field evidence of an early-warning signal that is theorized to arise in many complex systems as they drift toward their unknown points of no return.
The signal, a phenomenon called “critical slowing down,” is a lengthening of the time that a system takes to recover from small disturbances, such as a disease that reduces the minnow population, in the vicinity of a critical transition. It occurs because a system’s internal stabilizing forces — whatever they might be — become weaker near the point at which they suddenly propel the system toward a different state.

Since the Peter Lake study, interest in critical slowing down has spread across disciplines, bringing with it the hope of foreseeing and preventing a plethora of catastrophic failures. As theoreticians refine their understanding of the phenomenon, experimentalists are gathering further evidence of it in a mix of real-world systems.

“We have all these complex systems like the brain, the climate, ecosystems, the financial market, that are really difficult to understand, and we will probably never fully understand them,” said Marten Scheffer, a complex systems theorist at Wageningen University in the Netherlands. “So it’s really kind of a small miracle that across these very different systems, we could find these universal indicators of how close they are to a threshold.”

Experts stress that the study of critical slowing down is in its early stages, and not yet ready to serve as a call to action in the management of real systems. In some cases, responding to the signal might save an endangered species, a patient’s mental health, or an industry. But in other types of complex systems that have been studied mathematically — such as food webs that, unlike Peter Lake’s, are so chaotic that they do not exhibit critical transitions at all — the same signal might be a false alarm. Carpenter, who has returned to Peter Lake for a new experiment, says much more research is needed to sort out these different cases. In the meantime, he said, “don’t try this at home.”...

Friday, November 20, 2015

ZeroHedge Reminds Us Of The Best Trading Video, Ever

We've used this a couple times and it never gets old.
From ZeroHedge:

Stocks Soar Most In 13 Months After Worst European Terrorist Attack In Over A Decade

"LivingSocial Offers a Cautionary Tale to Today’s Unicorns"

I had forgotten about this one.
But the one we are most interested in is WeWork, a couple links after the jump.

From the New York Times:
The first thing you see when walking into the headquarters of LivingSocial is row upon row of mostly empty desks, broken up by small street signs that employees once needed to find one another when the office teemed with people.

One row, “BYFAD Lane,” was named after a start-up, BuyYourFriendADrink, which LivingSocial acquired to get into the daily deals business. Other signs, such as “Sky Diving Street,” were named for some of the hottest discount coupons that the company once provided. On a recent visit, some desks were piled high with boxes of employee belongings, the detritus left behind after a round of layoffs that eliminated one-fifth of the work force. In one refrigerator, the milk was six months old.
The street signs are “anecdotes from our past,” said Mike Santore, who was director of content strategy at LivingSocial, referring to a time when it was nearly impossible to find a quiet desk to work. Now, he said, the signs “don’t mean anything, really.” Mr. Santore left the company this month.

The technology industry’s boom over the last few years has been defined by the rise of “unicorns,” the private companies that investors have valued at $1 billion or more. Before the term came into vogue, LivingSocial was among the biggest unicorns of its day. It now offers a glimpse of what some of today’s unicorns might look like several years down the road if things go awry.

Just four years ago, LivingSocial and its larger rival Groupon grew rapidly on a simple pitch: The companies would match customers to local businesses with a daily deal in users’ inboxes, like half off at a local deli or a two-for-one massage promotion. LivingSocial and Groupon would take a cut of each transaction.

Venture capitalists anointed daily deals as the way that the Internet would invade local business, and by late 2011 LivingSocial had raised more than $800 million and reached a valuation of $4.5 billion, according to data from the research firm VC Experts. The company counted Amazon and the mutual fund giant T. Rowe Price among its investors. LivingSocial spent heavily, blanketing the airwaves with TV ad campaigns. Riding a wave of momentum, the company explored going public.

Today, LivingSocial is more unicorpse than unicorn. The company never filed for an initial public offering and consumer fervor for daily deals has cooled. T. Rowe Price has written down its stake in LivingSocial to nearly zero, data from Morningstar shows. The company’s work force has shrunk to around 800 employees from 4,500 at its peak in 2011. (Groupon, which did go public, is trading at more than 85 percent below its I.P.O. price.)

LivingSocial is now struggling to evolve its business by focusing on “new experiences,” such as a coupon-free program that puts cash back on customers’ credit cards when they dine at certain restaurants. The company is grappling with employee retention. It has also been selling nearly all of the foreign companies it bought and closing offices it opened during its boom days....MUCH MORE
On WeWork:

Oct. 10, 2015
How To Convince Investors Your Startup Is Worth $10 Billion
Dec. 16, 2014 
WeWork Worth $5Bil., Weally

The Man Who Saw The Future of Terrorism

Don't get hung up on al-Qaida in the headline below, they are ISIS. The name you want is Jama'at al-Tawhid wal-Jihad which was the Zarqawi group that morphed into Al-Qaeda in Iraq (AQI).
(Wikipedia does a good job on the twists and turns of the history)

Contra a silly little Vox video on the roots of ISIS that has been making the rounds, the organizational history actually goes back to 1999 rather than 2003. See "The War between ISIS and al-Qaeda for Supremacy of the Global Jihadist Movement".

Zarqawi sawed off Nick Berg's head in early May 2004 and swore loyalty to Bin Laden in October of that year.
The U.S. killed him in 2006 and by 2008 the group was on the ropes.
Or so it appeared.

From Der Spiegel, August 12, 2005:

The Future of Terrorism: What al-Qaida Really Wants

If there is anyone who might possibly have an inkling as to what al-Qaida are up to, it is the Jordanian journalist Fouad Hussein. He has not only spent time in prison with al-Zarqawi, but has also managed make contact with many of the network's leaders. Based on correspondence with these sources, he has now brought out a book detailing the organization's master plan.  
There must be something particularly trustworthy about the Jordanian journalist Fouad Hussein. After all, he has managed to get some of the the most sought after terrorists to open up to him. Maybe it helped that they spent time together in prison many years ago -- when Hussein was a political prisoner he successfully negotiated for Abu Musab al-Zarqawi to be released from solitary confinement. Or is it because of the honest and direct way in which he puts his ideas onto paper? Whatever the reason, the result is that a film which Hussein made about al-Zarqawi has even been shown on al-Qaida affiliated Web sites. "That showed me that they at least felt understood," the journalist says.  

Even for an Arab journalist it is no easy matter getting in touch with al-Qaida's inner circle. Nevertheless, Hussein, who is based in Amman, Jordan, has succeeded in turning his correspondence with the terrorists into a remarkable book: "al-Zarqawi - al-Qaida's Second Generation." 

If you meet Hussein, as you might when he is relaxing in Amman's Café Vienna, you see he is calm and laid-back, without any of the glamour of a secret service spy. But what this small, slim man has to report is nothing less than the world's most dangerous terrorist network's plan of action: al-Qaida's strategy for the next two decades. It is both frightening and absurd, a lunatic plan conceived by fanatics who live in their own world, but who continually manage to break into the real world with their brutal acts of violence.

One of Hussein's most sensational sources for the book, according to what he told SPIEGEL Online, was Seif al-Adl. The Egyptian terrorist, who is suspected of taking part in the attacks on the American Embassies in Dar es Salaam and Nairobi in 1998, has a ransom of US$5 million on his head from the FBI. Secret services suspect that al-Adl is now in Iran.

To prove that he really has had contact to al-Adl, Hussein includes in the first two pages of the book a copy of a hand-written letter the wanted man sent to the author. In the original document, which is 15 pages long, al-Adl describes the disagreements between al-Zarqawi and Osama bin Laden during the Afghanistan war. "Statements from Seif al-Adl have also crept into the chapter on al-Qaida's strategy," explains Fouad Hussein.

An Islamic Caliphate in Seven Easy Steps
In the introduction, the Jordanian journalist writes, "I interviewed a whole range of al-Qaida members with different ideologies to get an idea of how the war between the terrorists and Washington would develop in the future." What he then describes between pages 202 and 213 is a scenario, proof both of the terrorists' blindness as well as their brutal single-mindedness. In seven phases the terror network hopes to establish an Islamic caliphate which the West will then be too weak to fight.
  • The First Phase Known as "the awakening" -- this has already been carried out and was supposed to have lasted from 2000 to 2003, or more precisely from the terrorist attacks of September 11, 2001 in New York and Washington to the fall of Baghdad in 2003. The aim of the attacks of 9/11 was to provoke the US into declaring war on the Islamic world and thereby "awakening" Muslims. "The first phase was judged by the strategists and masterminds behind al-Qaida as very successful," writes Hussein. "The battle field was opened up and the Americans and their allies became a closer and easier target." The terrorist network is also reported as being satisfied that its message can now be heard "everywhere."

  • The Second Phase "Opening Eyes" is, according to Hussein's definition, the period we are now in and should last until 2006. Hussein says the terrorists hope to make the western conspiracy aware of the "Islamic community." Hussein believes this is a phase in which al-Qaida wants an organization to develop into a movement. The network is banking on recruiting young men during this period. Iraq should become the center for all global operations, with an "army" set up there and bases established in other Arabic states.

  • The Third Phase This is described as "Arising and Standing Up" and should last from 2007 to 2010. "There will be a focus on Syria," prophesies Hussein, based on what his sources told him. The fighting cadres are supposedly already prepared and some are in Iraq. Attacks on Turkey and -- even more explosive -- in Israel are predicted. Al-Qaida's masterminds hope that attacks on Israel will help the terrorist group become a recognized organization. The author also believes that countries neighboring Iraq, such as Jordan, are also in danger.

  • The Fourth Phase Between 2010 and 2013, Hussein writes that al-Qaida will aim to bring about the collapse of the hated Arabic governments. The estimate is that "the creeping loss of the regimes' power will lead to a steady growth in strength within al-Qaida." At the same time attacks will be carried out against oil suppliers and the US economy will be targeted using cyber terrorism.

  • The Fifth Phase This will be the point at which an Islamic state, or caliphate, can be declared. The plan is that by this time, between 2013 and 2016, Western influence in the Islamic world will be so reduced and Israel weakened so much, that resistance will not be feared. Al-Qaida hopes that by then the Islamic state will be able to bring about a new world order.

  • The Sixth Phase Hussein believes that from 2016 onwards there will a period of "total confrontation." As soon as the caliphate has been declared the "Islamic army" it will instigate the "fight between the believers and the non-believers" which has so often been predicted by Osama bin Laden.

  • The Seventh Phase This final stage is described as "definitive victory." Hussein writes that in the terrorists' eyes, because the rest of the world will be so beaten down by the "one-and-a-half billion Muslims," the caliphate will undoubtedly succeed. This phase should be completed by 2020, although the war shouldn't last longer than two years.
A Serious Plan?
But just how serious is this scenario? "Al-Qaida makes no compromises," says the book's author Fouad Hussein. He obviously believes that this seven-point plan could well become the guiding principle for a whole range of al-Qaida fighters. Hussein is far from an hysterical alarmist -- in fact he is seen as a serious journalist and his Zarqawi book is better than most of the reports in Arabic on the subject. Only last year, the journalist made a film which was received with great interest and was shown on the German-French TV channel arte. In it he provided deep insights into al-Qaida's internet propaganda machine....

 HT: Victor Niederhoffer's Daily Speculations