Monday, January 1, 2018

Al Franken's #MeToo-ish Impending Resignation

We all have nothing but support for the push against sexual harassment. No one would suggest that things can go too far. Though, actually, some think things have with Al Franken, where even front-line accusers are admitting they were too harsh and quick to judgement. Some, but not all. Kirsten Gillibrand, for one, just can't let up, asserting that any accusation of sexual harassment is sufficient to pull the plug on anyone.

Based on the second thoughts in the aftermath of Franken, I think we can imagine things getting out of control. Even the New York Times has suggested the tide of sexual harassment accusations is taking on a partisan tinge, as well as first glimmers of profiteering from ambulance-chasers. What does it mean for things to go too far. What would that look like. Some people might compare it to McCarthyism, though that is such a common label for anything that smacks of an institutionally-sanctioned witch hunt mentality. For some, images might come to mind from Maple Street or the pod people.

We all applaud the efforts to eradicate sexual harassment by any means necessary. To have it brought into the sunlight. To see women finally have their voices heard and to assert power and take action. We all revel in these men being on the receiving end. Thoughtfulness and soberness is necessary in the process, however, lest there be a backlash that scuttles these efforts.

Friday, December 29, 2017

How to Burn Four Billion Dollars: The Tailspin of the UFC

Whenever I write about the UFC, I should add a standard apology to those who are reading my blog with an eye toward the area of my expertise: finance, and in particular financial risk management. But I have enjoyed mixed martial arts (MMA) since its inception in the mid-1990's, (I also love Brazilian Jiu Jitsu, which I have been active in over the same time period), and find the current missteps in UFC fascinating. Watching the UFC, by far the largest MMA organization, in its tail spin from the incredible height of its purchase by WME-IMG for $4 billion is becoming  more interesting than watching its fights.

The UFC was a failing enterprise in the 1990's, and was salvaged in 2000 by the Las Vegas Fertitta brothers for $2 million. They each cleared over half a billion from the sale. The president of the UFC, a former personal trainer, Dana White, pulled in a similar amount, plus or minus (actually, minus) a few hundred million.

Even at the time of the acquisition in 2016 the purchase price was met with skepticism.  But they did have some marquise talent, most notably Ronda Rousey. Her run is over. Not a surprise, because MMA demands many fighting skills, and there are thus many ways an up-and-coming athlete can find to break through an opponent's style, which in the case of Rousey was superb grappling without a base in stand-up fighting.

So, anyway, how is it going? Ronda is gone with no other women in a position to take on anything approaching her role. Dana and crew have latched onto Connor McGregor, a brash fighter who is both flamboyant and good in the octagon as the next big draw. They went all-in with McGregor by setting up a fight with Floyd Mayweather, the undefeated boxing champion. The fight pulled in $600 million, netting a hundred million plus for each fighter. This is the point that the UFC went full-stop into entertainment business, and as I wrote in a recent post, it is the point where it jumped the shark.

Now it is not clear that McGregor will fight again in the UFC. But with the hope he will come back and defend his title, and because now entertainment trumps sports, he continues to hold the title even though he has not defended it for over a year.

The number of viewers is languishing. FOX's recent title match was the second most-watched UFC event this year, but also was the fourth-lowest on FOX to date, with two million views (though it peaked above three million during the title bout). A UFC Christmas event drew 350,000 viewers, a tenth of the draw of last year's.

Meanwhile, it looks like the entertainment complex is doubling down after the McGregor-Mayweather spectacle by suggesting Mayweather will meet McGregor in a MMA fight.  If their boxing match was a joke -- Mayweather carried him for ten rounds to give the fans their money's worth before leveling him -- this would be a farce. It would be like arguing that a 41 year-old version of Lionel Messi should spend a few games as a linebacker in NFL football because in American football, among other things, they kick the ball. Mayweather is not stupid; we will never see him in the UFC, but that it would be put out there even for a second to tantalize the UFC fans is a measure of how entertainment value is dominating substance.

And, to top it all off, I hate to say that MMA is getting boring. Maybe the push toward entertainment at all costs is reducing the focus on athletic elegance. Or maybe the nature of MMA, which requires skills in a wide set of fighting styles, kickboxing while standing, jiu jitsu when on the ground, and wrestling and judo for the takedowns, leads to a jack-of-all-trades and master of none, and for those who are familiar with the best of each of these disciplines, a sport that is less than the best is inevitably going to come to seem crude.

Monday, December 25, 2017

Bitcoin Can't Win Against Fiat Currency

I'm not going to write anything here about the huge drop in bitcoin over the last few days, so what I am writing cannot be ignored should bitcoin get back up to the 20,000 range. And I'm not going to write about the stupid articles that espouse bitcoin. Though to get a sense of the level of thoughtfulness for the arguments for bitcoin, just to pull one recent one at random, check out this from Forbes.

I'm going to point out only one simple but devastating barrier to bitcoin becoming the standard, becoming even a second-tier means of payment:

If bitcoin doesn't find its way back into the shadows of the drug trade and underground economy on its own, it will be banished by the stroke of a pen, actually, of many pens. No sovereign will give up the power of issuing and controlling its currency. The central bank and monetary authority is one the most powerful economic tools of any government. If bitcoin or other extra-governmental currencies start to take hold, they can and will be made illegal to use for payment in one country after the other. 

The cryptocurrencies will still find a market in the underground economy, where people want to avoid taxes or need to remain anonymous and untracable because their activity is illegal or subversive. (It is true the ledger is public so all transactions can be seen. But the identity of the user behind the address can be kept anonymous.) But it will not be useable for the bulk of transactions, like your mortgage, credit card bill, tax payments. Or purchases on Amazon. It will be good for your recreational drugs, and your under-the-radar part-time t-shirt printing business.

A few other thoughts while I'm at it:

I can't take seriously a currency, crypto or otherwise, keeping in mind that currencies are supposed to be a store of value, when its exchange rate is determined by speculative activity, untethered to anything in the real world.  Where the volatility is greater than for any asset in the real world. And where the assessment by is that "it is truly difficult (and exciting) to imagine how it will play out."

To those who think there is credibility for bitcoin and other cryptocurrencies because Goldman now is considering a cryptocurrency trading operation, just remember this from Matt Taibbi: 

"The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money."

And right now, bitcoin smells like money.

Note: A fiat currency is the currency issued by a government that is declared its legal tender, accepted for payment of all debts, public and private. The word "fiat" means it is not backed by anything. No gold or silver; the government declares it as currency by fiat. 

Saturday, December 16, 2017

The Cry of the Pod People

Twitter was not available to the pod people in The Invasion of the Body Snatchers. They had to confront the humans directly, pointing and screeching to muster the mob to attack. But now that we have Twitter, a pod person in our day and age can efficiently and remotely signal a human to the pod-people mob with hashtag HumanToo. (This hashtag is already used in other contexts, but always by humans, so no problem.)

We don't have body snatchers right now, and, for what it is worth, we have put in legal protections should the event ever occur. Barring a dystopian state, (probably inevitable should the instance arise), no one can take someone's body without due process. No one can point and screech and have the mob take over from there.

At least that is true if body snatching is considered an assault on civil liberties that are protected by law. I suspect that is the case. Just as there are other actions that require due process. No one can be incarcerated without due process. No one's property can be seized without due process. However,  there are harmful actions that can occur outside the constraints of due process, like accusations that do not rise to a threat of harm or to libel. While immune from the requirement of due process, they can destroy one's character and reputation. (Thus the term character assassination.) It can leave the victim unemployable, and set them apart from society.

The pod people had bad intentions from the start, at least from the human's perspective. But sometimes there are things going on that justify some pointing and screeching. Unfortunately, what starts off with noble motives can move into body snatcher mode. And when pointing and screeching is given free rein, that is where things inevitably arrive. With the excesses, the social winds finally turn, and any value, any noble cause, is lost in the process, even met with a backlash.

In a recent post I discussed McCarthyism. This is a good example of how a legitimate concern -- there really were spies tied to the Soviet Union infiltrating the government, intent on subverting our government -- can turn into body snatching. Accusations could be made without support. People could be targeted mistakenly or even for ulterior motives. (And, getting back to the pod people, what if a timid pod person is not body snatching, but is only body touching. Do we pile him in with the full-throttle snatchers?) All with the result that, in so charge an environment, and based on the accusation alone, they were destroyed.

Monday, December 11, 2017

Stocks to Short for Your Grandkids

As I mentioned in an earlier post, working in a pension fund makes me think toward the long term. In that post I spoke about broader long-term risks; here I will give my view about long-term risks at the more specific level -- namely, industries to short if you are looking out a generation or more. That is, how various industries will decline over the next thirty or forty years. That is a long time, like the time since Whip Inflation Now of the mid-1970's, or the LBO craze of the late 1980s, but if you are under fifty there is a good chance you will live to see it, and your grandchildren will be in the thick of it.

General propositions
The key drivers of what to short are developments in the following areas:

  • ·       Increased reliability of products. Already, many of the things we consume are more reliable and last longer than any time in the past. Take computers and LED screens. And soon, it will be electric cars.
  • ·       Less consumption of goods. In the sense that most of our time is spent on fewer things – like those highly reliable computer items.
  • ·       More commodity items. Which means less demand for advertising. Compare advertisements today with those of a generation or two ago. Almost everything was driven by brands. Now we are not as focused on brands, and as far as brands go, there are so many brands that are hard to differentiate that they may as well be commodities. Meanwhile luxury goods are moving toward items that are inherently scarce, like art and real estate -- items that do not require production.
  • ·       More efficient production. And part of that efficiency is that what we produce requires less labor.
  • ·       Increased demand for personal space and privacy. We will circle the wagons around our personal space and privacy. We are going to draw the line when we find that companies know more about us than we know about ourselves.

Let's start with the easy ones, where there is a clear consensus, and work our way down from there:

Oil. We all know that fossil fuel is a goner. And the more obvious it becomes that oil remaining in the ground will be a stranded asset, the more oil will be pumped out in the shorter term. So between growing renewables, flowing oil, and more efficient technologies, energy will be abundant.

Will the oil jobs be replaced by renewables. Is it only a matter of retraining of those working in this sector to work with renewables? No, because even ignoring the higher economies in production, the capital plant of renewables lasts a lot longer and requires less maintenance per kilowatt-hour produced.

Saudi Arabia and the rest of the Middle East. There is a clear regional implication to this, of course. This is not good for the Middle East. And what is also bad for the Middle East is climate change.  Some predictions are that the Arabian Peninsula will become so hot as to be uninhabitable. So much for the Saudi's Vision 2030. And, I really can’t understand what the thinking is with Aramco. It is a long-term bet under the clouds of oil demand dropping with increasing speed and the political vulnerability of Saudi Arabia.

Trucking.  Trucking will also clearly be altered from an employment standpoint by self-driving vehicles. We got a taste of this a few weeks ago when Tesla unveiled its semi truck. Whether you like Tesla's odds or not, self-driving trucks are coming, especially for runs along the interstate.

Things will also change at the local level, for example for package delivery. A new household appliance, already in the works, will be a lockbox that can be opened for securely delivering packages, as ubiquitous as mailboxes. In the limit there will be one run per day of an autonomous vehicle to each residence and business. (How the packages get from the vehicle to the lockbox is the weak link in taking humans out of the loop in this scenario.)

Autos. Another no-brainer is that the automobile-related industries will be far smaller. Gas stations will disappear. And most mechanics. Cars will last far longer and require less maintenance, garages, which are already on the downswing, will largely disappear as well. (New tires from Costco.) Once production is scaled up with a few rounds of efficiency gains, electric cars are not complex, and are cheap to build. The cost of cars will be a fraction of what they are today. With low maintenance, low fuels costs, low purchase price, and autonomous driving, transportation will be far safer and less expensive.

People will be traveling less; fewer trips to the mall. People will have less need for a dedicated car because they will summon an autonomous car that can be running people one place or another nearly 24/7.  And most people won't care as much about style because they will be treating them as what they are, transportation services -- which gets to my point about more commodity-like products.

There will still be the vestigial car, just like there are still mechanical watches. Gas-powered cars will be admired and collected for their workmanship and intricacy, and not for their performance or function. Driving a car will be a hobby, like horseback riding. And maybe not in forty years, but at some point, people-driven cars will be seen on the street about as often as horses are. They will be enjoyed on closed tracks, just as horses are today.

Casualty Insurance
It is a mixed bag; some lines will dwindle, others will grow.
Auto. Autonomous vehicles are safer than people-driven vehicles, especially when all cars are autonomous. Fewer accidents means less need for casualty insurance.
Liability. Less high-risk labor.
Property. Things will be looking up here, due to the effects of climate change.

Real Estate
Commercial. Stores will become less prominent as the efficiencies of delivery improve. And as many items last longer. This leads to issues for commercial real estate. There will be construction for warehouses and "fulfillment centers." These are cheaper to build and maintain than commercial retail space. So less construction and maintenance. With the move toward renewables, there is a drop in construction of large-scale fossil fuel plants, and the plant for renewables will not require as much construction and maintenance demand.

Residential. Demographics and lifestyle will change the demand for housing. There will be less demand for large houses with living rooms and dining rooms that are not used, and for four and five bedrooms. This means a glut for some zip codes. And it also means fewer construction jobs. Houses will have solar cells and batteries to be increasingly self-sufficient, so less energy use.

So chalk up the construction industry -- one that is more immune to technology -- as another casualty.

Basic Materials and Mining
With less demand for new cars, less construction, and key goods that are replaced less often, there will be a drop in demand for many raw materials. Though others, like those that are needed for batteries and computers, will increase in demand. Or maybe not. Who knows what raw materials will be in demand, and how great that demand will be with the changes in technology that we might see over the course of the next generations. And because these products last longer, and finally meet the needs for various functions, they will not be the same engine of production.

Advertising (and Facebook and Google)
There is a feedback loop between advertising and the information and social network companies that depends on advertising. This feedback leads to a self-destructing business model, with the information companies and advertising going down together. The information companies depend on advertising, and yet they are information engines that reduce the need for advertising.

And advertising for non-luxury and non-status goods (luxury and status goods are not the fodder of Google or Facebook) will drop for the reasons I mentioned above: less advertising because we will demand fewer goods, and many of the goods will be commodity-like. Few of us care about which chargers we buy for our phones.

There are other pressures that might build for social networks such as Facebook. We will still need search engines, but Facebook is already tiresome to some of us, and we are getting the first whiffs of the toxicity at its root. With the world veering toward an impersonal dystopia, we will guard our privacy, we will circle around our real relationships. Here are recent articles from Wired that give a flavor of where things might be going, one a truly harrowing saga of overcoming malicious cyber attack, and another one of any number you can find, appearing with increasing frequency, on privatizing Facebook. From the perspective of forty years out, Facebook and social networking in general will have been a flash in the pan.

Saturday, December 9, 2017


I enjoy studying American history of the post-World War II period, and just remembered that earlier this week we passed the anniversary of a milestone for that period: On December 2, 1954, the United States Senate voted 65 to 22 to condemn McCarthy for "conduct that tends to bring the Senate into dishonor and disrepute", signaling the erosion of the crushing anti-communist excesses of the previous years. McCarthyism has been applied indiscriminately and almost invariably incorrectly to any number of perceived political and social excesses, but it is worth recalling it for what it was. 

First, to criticize McCarthyism is not to diminish the real threats. We must understand that at the time there was a real, broadly recognized threat to the U.S.  Through documents from Soviet archives and Soviet messages, we know that the Soviet Union engaged in substantial espionage activities in the United States during the 1940's, that the Communist Party in the U.S. was being funded by the Soviet Union, and that it was used as a base for recruiting spies. We should not have McCarthyism diminish the reality of the subversive elements of the time.

The threat was real, but the reaction to that threat was a frenzy, often described as a witch hunt, that was particularly focused on those in the entertainment industry and government. A simple accusation was sufficient for people to be attacked, lose their job and even their career, with no further prospects for employment at more than a menial level. President Truman remarked that, "A man is ruined everywhere and forever. No responsible employer would be likely to take a chance in giving him a job." Those who were accused had no recourse because the process took place through extra-judicial channels; no response could hold sway. Pleading the Fifth Amendment during the proceedings was taken as an indication of guilt.

What is more, although there were instances of serious attempts at subversion, there also were many who were attacked for activities from decades earlier that, though perhaps outside the social and political norm, had been benign. These were pulled up and judged with the now more stringent standard. It was as if a law had been enacted, and those who did not follow that law in the past were found guilty.

Yet at the time, these excessive and unlawful efforts which cast aside any notion of due process were supported by many thoughtful people. For example, William F. Buckley Jr., a prominent conservative intellectual, wrote that McCarthyism “is a movement around which men of good will and stern morality can close ranks." Certainly there were those who were opposed, but popular opinion – and no doubt the concern that those who opposed the juggernaut would be painted with the same brush – kept them silenced.

The political climate of McCarthyism declined through the 1950’s as public opinion shifted, and a number of court rulings pushed back against the processes that supported it. Most notable is one in 1956 that pushed back on using the invocation of the Fifth Amendment to infer guilt. The Court wrote that “we must condemn the practice of imputing a sinister meaning to the exercise of a person's constitutional right under the Fifth Amendment”, and in 1957, when the Court condemned cases where “Guilt or innocence may turn on what Marx or Engels or someone else wrote or advocated as much as a hundred years or more ago.”   

Monday, December 4, 2017

Assisted Dying for the Rest of Us

The baby boomers have changed our society as their demographic wave has washed over one institution and norm after another. Split sessions for public schools, a new level of competition for elite colleges, the free love generation and the rise of student protest, the housing bubble, the creation of the Millennials, (a.k.a. the echo boomers). They have the numbers and the political will to do things, and they have time and again pushed against the norm. To use the phrase of one baby boomer, they think different.

The final change will occur with the crashing of that wave: The availability of assisted dying for all. Assisted dying is already becoming the norm for those with terminal illnesses. Australia is the most recent to join the ranks of Sweden, the Netherlands, Belgium, Canada, Columbia, and Luxembourg, as well as California, Colorado, Washington, D.C., and Oregon in the U.S. (I use the term assisted dying broadly, to also involve giving the subject a lethal drug, and not literally being on hand as they take it and pass away. That is what is allowed in California.)

Currently there are restrictions, like having a terminal illness, especially one that is either painful or imminent. But once the mechanics are in place and the threshold has been passed, it is only a matter of degree to have assisted dying for those who decide that their debilitating state makes them no better off than one who is terminally ill. Once we have clear diagnosis tools for Alzheimers, for example, I can imagine voluntary assisted dying protocols along the lines of a more successful and less surreptitious Alice Howland in the film Still Alice.

The way is being paved to make this more acceptable. For example, consider the context provided by a recent full section in the New York Times devoted to the bleak world of old age and dying in Japan. We will see more articles depicting the emptiness of old age, the drain on society and our children, arguments that we should take charge of our death just as we do our lives -- this is the sort of thing that resonates with the baby boomers, also called the "me generation" -- and even arguing, as I have, that keeping someone alive can be akin to torture. I also have argued in a past post that we could help matters along by giving payments (obviously to a designated beneficiary) if someone elects to forgo expensive treatments that would only delay death by a short period.

Saturday, November 18, 2017

The Tesla Roadster Will Turn the Bugatti into a Wrist Watch

In three years Tesla will be rolling out the fastest production car in the world. And not a "production car" as in, we made ten or so of these so it can be called one. No, a production car that rolls off of an assembly line — though I hope the rate of production is controlled with DeBeers-like style — and that still outperforms any car you can buy at any price.

The Tesla Roadster that was unveiled this weekend and is slated for delivery in 2020 is not only better, it is in a different league in terms of its performance specs when compared to any car at any price. Including, for example, the 1500 hp Bugatti Chiron, which starts at $2,998,000.  The Roadster does zero to sixty in under two seconds (no other car is even built with the idea it can beat two seconds), a quarter mile in under nine seconds (no other car is even close to nine seconds). Top speed of over 250 mph. (It might be ten or twenty mph shy of the record here, we will have to see. Musk has said once it gets into production, the performance might exceed what we are seeing with the prototype. For now we just know it is "over 250 mph".) Plus, it seems to be user-friendly. Obviously it is quiet. And it seats four, at least if two of the four are small.

And, its best-in-the-world performance in terms of speed and acceleration will not even be the headline item when it gets its test-drive reviews. I predict that the Tesla Roadster will take corners unlike any car built today. First of all, it has a lower center of gravity because of its batteries. Second, it can have the distribution of that weight precisely tuned because the batteries can be placed most anywhere on the underbelly. And third, with a separate motor for each of the rear tires, the Tesla can have a computer assist that keeps the car from skidding out as you take a corner. Anyone who has tried to make a Tesla S skid on wet or icy roads already knows this. Imagine what happens when you are speeding around a turn and the computer can differentially send more torque to one tire versus the other.

And, this is only the beginning. As Musk has pointed out, by the time the car is in production there will doubtlessly be further improvements. And even then, it is only Version 1.0. The bigger point is that an electric car is a better technology than the gas-powered car. Over time the gas-powered car will have to yield.

Already, two days after the announcement, I have been reading the reaction from the aficionado of  high-end sports cars, supercars, and, as the Bugatti and its kin are called, hypercars. The basic argument is: "There is more to a sports car than how fast it goes. It is the workmanship. The feel of the car shifting gears. The sound of the engine growling.  The melding of man and machine." It is the laudable appreciation of these finer points that is behind the market for mechanical timepieces. They cannot be as accurate, but they embody the workmanship of great craftsmen; the feel of winding the spring; the sound of the mechanism ticking; the melding of man and machine (I guess).

So it will be for the exquisitely crafted cars of today, from the Ferrari to the Bugatti. If we take performance as the objective, the best car in the world will no longer be one that is one or two or three million dollars. It will, at least for a time, be the two hundred thousand dollar Tesla. And after that, it will be another electric car. Like fine timepieces, the supercars of today will be admired and owned not for superlative performance, but for an appreciation of their workmanship and their mechanical intricacy.

Tuesday, November 14, 2017

Pension Actuaries: The Joke is On Us

...An Actuary is someone who wanted to be an accountant but didn't have the personality for it....An introverted actuary stares at his own feet, and extroverted one stares at the other person's feet....What is the difference between God and an actuary?  God doesn't think he is an actuary...."Look at the white horses over there." Actuary: "They're white on this side, anyway."

Unfortunately, when it comes to the mess our pensions are in, actuaries are no joke. Pension funds labor under actuarial assumption for expected returns that are mainly pulled out of thin air without any regard for financial economics. Does anyone really think pensions will be able to grow at seven percent or more per annum? When they are constrained by their various constituents to hold 50% to 60% in bonds and cash? (See Figure 3 of this OECD publication.)

Those unrealistic assumptions lead to unsupportable levels of contributions, and thus pensions are underfunded as a matter of course. You know the assumption are wrong when virtually every pension is on the negative side of the ledger.  But the actuaries do not seem to have been trained in the concept of making course corrections. Nor do they educate themselves in financial economics to better evaluate the mess they are creating.

Why am I going into this? Over the weekend I attended an event honoring a former colleague of mine from my days at Morgan Stanley, Jeremy Gold.  He is an actuary who has spent his career trying to move the pension actuaries toward a firmer foundation in financial economics -- to have them at least avail themselves of what financial economists can provide. In the mid-1980's, Jeremy and I worked together in the Fixed Income Research Group at Morgan Stanley. He and I went on various trips to push fixed income products, and to market the fledging new strategy of portfolio insurance (flying out once to have dinner with the head of the Port Authority of Los Angeles, who we discovered, part way through the first course, had -- surprise -- thought we were selling port insurance). We co-authored a paper in 1988, In Search of the Liability Asset, that is still on various reading lists, maybe not for actuaries, but at least for those in finance.

Jeremy left Morgan Stanley in the late 1980's to get a Ph.D. from Wharton, and spent the next twenty years as a thorn in the side of the actuarial profession, pushing them to add financial and economic structure to their methods. One of the best and most widely read of his works for this is the paper Reinventing Pension Actuarial Science.

At the base of it, finance is not actuarial science.  It is not predicated on repeatable, or even known, probabilities. There is no appeal to the law of large numbers for the systematic risks of the financial system.The future does not look like the past. There are no mortality tables for asset returns.

...What do actuaries and Packer fans have in common? They both think that history will repeat itself...

So if you want to be the arbiter for over 20 trillion of U.S. pension assets, a good start is to do it based upon a foundation in finance.