Posts tagged ‘game’

On Losing the Thread -- Update on What Actually Remains of the Russia Collusion Tale

I want to thank everyone for all the comments on my thread asking for someone to give me the current, most damning case for Russia collusion.  I am going to try to pull together a best-of version to post here.

However, I wanted to post a few excerpts from TA Frank at Vanity Fair, in an article titled "IS THIS IT?: A TRUMP-HATER’S GUIDE TO MUELLER SKEPTICISM" that seems to almost perfectly capture my current take on the whole affair:

Certainly, Trump’s ethical standards are low, but if sleaziness were a crime then many more people from our ruling class would be in jail. It is sleazy, but not criminal, to try to find out in advance what WikiLeaks has on Hillary Clinton. It is sleazy, but not criminal, to take a meeting in Trump Tower with a Russian lawyer promising a dossier of dirt on Clinton. (Just as, it should be mentioned, it is sleazy, but not criminal, to pay a guy to go to Russia to put together a dossier of dirt on Trump. This is one reason why the Clinton campaign lied about its connection to the Steele dossier, albeit without the disadvantage of being under oath.) It is sleazy, but not criminal, to pursue a business deal while you’re running for president. Mueller has nailed people for trying to prevaricate about their sleaze, so we already have a couple of guilty pleas over perjury, with more believed to be on the way. But the purpose of the investigation was to address suspicions of underlying conspiracy—that is, a plan by Trump staffers to get Russian help on a criminal effort. Despite countless man-hours of digging, this conspiracy theory, the one that’s been paying the bills at Maddow for a couple of years now, has come no closer to being borne out. (Or, as the true believers would say, at least not yet.)...

Let’s take a moment to consider Mueller himself. The cut of his jib is likable, and the trad Brooks Brothers vibe of his wardrobe is a perfect complement to his job title. But it’s hard to avoid the suspicion that he’s playing a political game at this point. To be fair, I’m vulnerable to confirmation bias of my own in this assessment, since about a year ago I suggested that Mueller was going to drag out his investigation until 2019, when Democrats were likely to be back in charge of the House, and seeing a prediction play out can lead to unwarranted certitude. But the reports we’re starting to see suggest a man who’s fallen prey to the same state of mind that warped Ken Starr—namely disgust over the people you’re investigating and a desire to justify the sunk capital.

He includes this warning, which oddly enough is nearly identical to what I used to tell my Republican friends as they were giddy about a Ken Starr investigation into investment wrongdoing resulting in ... charges of perjury about lying about an extra-marital affair

Partisanship is hostile to introspection, but at some point maybe we’ll look back and think again about what was unleashed in the panic over Russian influence. Trump’s White House has pursued what is arguably the harshest set of policies toward Russia since the fall of Communism—hardly something to celebrate—yet nearly all the pressure, from the center-left as much as the right, is toward making it even tougher. As for those tapping along to S.N.L. songs in praise of Mueller and his indictments, they might want to remember that Trump won’t always be in office. The weapons you create for your side today will be used by the other side against you tomorrow. Do we really want the special-counsel investigation to become a staple of presidential life? It’s a creation with few boundaries on scope and a setup that encourages the selection of a suspect followed by a search for the crime, rather than the other way around. This caused calamities in the era of Bill Clinton, and it doesn’t get any better just because the partisan dynamics are reversed.

Relocation Subsidies, Short-Term Thinking, And Why Bezos is Smarter than Musk

I will begin by saying that few things in government aggravate me more than corporate relocation subsidies.  They are an entirely negative sum game.  I believe that subsidies are misguided and lead to a misallocation of capital, but at least things like EV subsidies create an EV industry, even if it is uneconomic.  But relocation subsidies are payments to create nothing -- their entire purpose is to move economic activity that would happen anyway across some imaginary line on a map.  Locally, we had a $100 million subsidy to a developer to move a mall approximately 1 mile.  Pure insanity.

However, it is hard for me to blame the managers of public companies who seek these subsidies.  I own my own company and can easily eschew such pork (if it were ever offered to me) but the CEO of a public company would be failing in their fiduciary duty to their shareholders to not accept government money that the drunken sailors in government are so gleefully trying to stuff in corporate g-strings.

With this money so available, it is important that corporate management make location decisions considering these subsidies but not solely focused on them.  The contrast between Amazon and Tesla (including the former SolarCity) helps explain my point.

In finding new headquarters locations, Amazon's most important considerations were likely

  • Ability to attract great management and developer talent who seem to be more attracted to hipster areas with lots of Starbucks and sushi more than to areas with low cost housing.
  • As they incur regulatory scrutiny, closeness to national government
  • Access to domestic and international partners
  • Access to capital

Note these criteria do not include access to low cost labor and real estate.  These do not really matter much for its headquarters offices.  These DO matter for distribution centers and warehouses, which is why these are located not in the center of high cost cities but in low cost suburban or rural areas.  In this context, then, splitting its headquarters between New York and Washington DC make a ton of sense.

Now let's think about Tesla.  Tesla was looking for manufacturing locations for solar panels and cars.  This is in an era when few even consider anywhere in the US a viable long-term option, but Tesla selected New York state and southern California.  I can tell you from sad personal experience that both these places are among the most expensive and hardest places to do business in the country.  Seriously, in SoCal Tesla took over a facility that Toyota couldn't make work.  These make absolutely no sense as long-term locations for manufacturing, but Tesla came here none-the-less in part for big fat subsidies and in part to ingratiate two powerful sets of state governments (in addition to subsidies, California reciprocated by giving Tesla a special sweetheart deal upping its zero emission vehicle credits).

I am reminded of this because Bloomberg has the whole, sad tale of Tesla in New York here.

I am not much on memes but I thought I would try my hand just this once...

 

Looking At Causes of Recent Wildfires and Resultant Property Damage, It's Hard To Point The Finger Solely or Even Mostly at CO2

Today I want to talk a bit about trends in wildfires in the US.  And as regular readers know, I have a real pet peeve about declaring a trend without actual, you know, trend data.  The media may be willing to jump from "most devastating fire in California history" to a trend just based on this one data point, but I am not going to play.

It turns out, though, that we don't have to play the one data point extrapolation game because there actually does seem to be a trend in wildfire.  Here is the national chart:

You might be saying:  Hey Coyote, you are cherry picking -- I have seen this same data but with a huge hump in the early part of the century.  Here is the chart you saw:

(source for both)  The problem with this chart is a huge definitional change in the data between the first and second half of the century.  In short, the early half of the century included controlled burns and other purposeful manmade actions (mostly in the southeast) and the latter half does not.  I described this here -- skeptics who use this chart are in serious danger of committing the same sloppy data errors we accuse warmists of (confession:  I made this mistake for a number of years).

To complete our proof there is indeed a trend in wildfire and not just in wildfire news stories, here is the chart for California, though I cannot vet the source.  I will say its not a slam dunk trend but I will take it on faith, at least for now, that the recent years would be high and make the trend more obvious

OK, so there seems to be a wildfire trend in the West.  I will focus on California because that has been the area in the news.  Let's consider 4 possible causes:

  1. Temperature.  The state of California has seen a 0.02C per decade, or 0.2C per century increase in temperatures.  This is a very tiny increase and well below the increase thought to have occurred in other parts of the world.  The rise has been faster over the last 10 years or so but it is unclear if this is a long-term trend or a near-term weather effect (e.g. tied to the PDO)
  2. Precipitation.   Total precipitation has decreased by ever so slightly over the last 100 years.  A half inch per century is about a 2% reduction
  3. Forest management.  The amount of wood harvested, and thus fuel removed, from forests has dropped by 80% since the 1950s
  4. Urbanization.  This does not necessarily increase fire acreage but it does substantially increase the probability a given fire will impinge on man-made structures.  Also, given the enormous almost exponential increase in total CA real estate value, the likely cost of fires of the same size and intensity has risen dramatically.  Much of the developed area affected by fires the last several years have been in the red and purple parts of the map that were developed most recently.  Fifty years ago they would have just burned trees (source).  More CA urbanization trends here.

So, what is causing the large fires?  Well, probably a lot of things.  I am a big believer that changes in outputs from complex systems can have complex causes (which is why I think the whole meme that "CO2 is the Earth's thermostat" is an embarrassing joke).  But given that over the last 50 years temperatures have risen by a fraction of a degree, precipitation has dropped by a fraction of an inch, but fuel removal has dropped by 80% and urbanization has skyrocketed, it is really hard for me to pin all or even most of the blame on manmade CO2.

Postscript:  One other point -- California is less than 0.1% of the total land area of the Earth.  I have a hard time extrapolating global climate trends from a few big events in 1/1000th of the world.

Postscript #2:  I missed this, that hotbed of climate denial called Mother Jones had an article a year ago blaming California fires on forest management policy, specifically preventing lots of little fires leading to one big fire.

Does the Zero-Sum Nature of Academic Success Contribute to the Left-wards Bias of Academia?

For a while now, I have  had a theory that the zero-sum nature of academic success (competition for a fixed and perhaps shrinking number of tenured positions) affects the larger world-view of academia. (This article that compares academia to a harmful cult demonstrates this zero-sum thinking pretty well.)

It is pretty well-established that the American academic community is disproportionately of the Left, and in fact tilts pretty strongly in many cases to the far Left / progressive side.  People debate a lot about why this should be, but I think one contributing factor (but certainly not the only one) that I have never heard anyone discuss is the zer0-sum game these academics must play in their own careers.  I think that many of them incorrectly assume that all professions, and all of the economy and capitalism, is dominated by this same dog-eat-dog zero sum game -- remember, for most, academia is the only industry they have ever experienced from the inside.  And once you assume that the whole economy is zero-sum, it is small step from there to overly-narrow focus on distribution of wealth and income.

One of the mistakes folks on the Left make about capitalism is to describe capitalism as mostly about competition.  In fact, capitalism is mostly about cooperation, its a self-organizing process where people who don't even know each other cooperate to deliver products and services, facilitated by markets and the magic of prices.  Sure, competition exists but it is not the fundamental feature, but an enabler that makes sure the cooperation occurs as efficiently as possible.  Capitalism in fact is about zillions of voluntary trades and transactions every day that each make both parties better off -- or else both sides would not have agreed to it.  Capitalism in fact is a giant positive sum game, a fact that many on the Left simply do not grasp.

Never in my business life have I thought any company I worked for was playing in a zero-sum game.  Sure, individual sales to an individual customer might be zero sum -- UPS is going to order its bearings from Rockwell or Emerson and winning and losing that one order is zero sum.  But as a whole no business I have been in has ever felt zero sum.  In my business running campgrounds, I want our campgrounds to be the best but our growth is generally not at the expense of some other campground -- it is about attracting more people for more days to camping and offering those who do camp more value-added services.

Postscript on Metrics:  As an aside, it struck me that one improvement to the dysfunctional academic experience described in the Washington Post article linked above might be to an a measurement of the professoriate that went beyond just counting published articles and their citations.  Start counting the number of advisees each professor has that lands teaching and tenured positions and you could change some behavior.

Media Selection Bias is One Reason Many People Have a False Impression of Increasing Extreme Weather

The media will breathlessly promote stories about any weather event in tail of the distribution curve.  I have written many times that this creates a false impression that these events are becoming more common.  Another element of this selection bias is what gets left out.  Does anyone doubt that if we were having a record-heavy tornado season, this would be leading every newscast?  If but if a record-heavy year is newsworthy, shouldn't a record-light year be newsworthy as well?  Apparently not:

source

Which reminds me of this chart Kevin Drum had the other day as "proof" of man-made climate change

I am not going to bother to go to their data source and pick it apart, though my guess is that I could.  But without even looking at the data sources I know this is garbage.  Think about places where there are large natural disasters in the US -- two places that come to mind are California fires and coastal hurricanes.  Do you really think that the total property value in California or on the US coastline has grown only at inflation?  You not only have real estate price increases, but you have the value of new construction.  The combination of these two is WAY over the 2-3% inflation rate.  This effect is magnified by the nature of the metric, which is not total losses but losses over some threshold.  This sort of threshold metric is easy to game, and says nothing for the total losses which would be a better measurement.

By the way, I am wondering how he automatically blames all of these natural disasters on manmade climate change.  Take the most recent, disastrous fires that hit the Redding, California area this year.  That fire started on BLM (federal) land.  When it was small, California State Fire (CalFire) personnel showed up to put it out.  The BLM told them to go away.  The chance to put the fire out when it was small was lost.  How do you blame a fire that was really due to moronic intergovernmental rivalry and bad forest management policy on climate change?

I won't repeat the charts but this post has charts on many extreme weather events and shows that, with the exception of large rainfall events, there is no trend in any of them.

My Guesses About $TSLA, and Why @TSLA Shareholder May Be Presented with a Bad Deal

@Elonmusk is facing real blowback for his management buyout by tweet the other day, in particular for two words:  "funding secured."  Many, including myself, doubt he really had tens of billions of dollars of funding secured at the time, particularly since all bankers and likely sources of funding as well as most large Tesla shareholders had never heard of any such transaction when contacted by the media.  The SEC is now looking into this and other Musk corporate communication practices.  If he lied in the tweet, perhaps to get revenge on the short-sellers he hates with an irrational passion, he could be in deep, deep legal poop, up to and including jail.

Let's play a game.  Let's assume he did NOT have funding secured at the time he tweeted this, and now is running scared.  What can he do?  One ace he has is that the board is in his pocket and (I hate to be so cynical about this) will likely lie their asses off to cover Musk.  We already saw the dubious letter the other day, from "members of the board" rather than officially from the board, attempting to provide cover for Musk's tweets.  This is not just a crony thing -- it is entirely rational for the company to defend Musk.  He is, in my opinion, a terrible executive but he is the avatar that drives the fan boys and the stock price.  The day that Musk leaves is the day that the company can really get its operational house in order but it is also the day the stock trades under $75.

So what can Musk do?  Well, the first defense might be to release a statement like "when I said funding secured, I was referring to recent conversations with ______ [fill in blank, maybe with Saudis or the Chinese, call them X] and they told me that if we ever were looking for funds they would have my back."  This is probably the best he could do, and Tesla would try to chalk it up to naivete of Mr. Musk to accept barroom conversation as a firm commitment.  Naivite, but not fraud.   I don't have any experience with the Feds on this kind of thing but my guess is that the SEC would expect that the CEO of a $50 billion public company should know the rules and legally wasn't allowed to be naive, but who knows, the defense worked for Hillary Clinton with her email servers.

But this defense is MUCH MUCH better if, in the next day or so, Tesla can announce a deal with X on paper with signatures.  Then Musk can use the same defense as above but it has much more weight because he can say, see, they promised funding and I believed them when they said they had my back and here they have delivered.

The problem with this is it would be really a deal being crafted for tens of billions of dollars on a very short timeframe and with limited negotiating leverage (X will know that Musk NEEDS this deal).  As a result, the deal is not likely to be a very good one.  X will demand all sorts of extraordinary provisions, perhaps, for example, a first lien on all Tesla IP and a high breakup fee.  I picture this more like the negotiation for bankruptcy financing, and in fact the IP lien was part of the financing deal Theranos made when it was going down the drain.  But put yourself in Musk's shoes -- jail or bad deal?

And likely his conscience would be clear because this deal would be killed quickly by shareholders.  That would be fine, because the purpose of the exercise would be to keep Musk out of jail, not to actually buy the company.  Tesla shareholders will still get hosed, probably having to pay some kind of break-up fee which any sane investor X would insert as the price for participating in this farce.  And we will go back to the starting point of all this, which is Tesla being public and focusing on operational improvement in what may be the most important operational quarter in its history.

Disclosure:  I have in the past been short Tesla but have no position in it now (I did short when trading reopened the other day after Musk's announcement but covered this afternoon).  I am not in any way, shape, or form giving any financial advice you should spend actual money backing.

My End Game Prediction for @Tesla ($TSLA) if They Really Do Go Private at $420

Readers know I am in the campground business.   Years ago there was a trend towards building super-luxury campgrounds for as much as $30,000 a camp site.  I never understood how anyone could get a return from this.  Finally I had a guy from a large campground and RV park REIT tell me, "You know how you make money on a $30,000 a site campground?  You wait for it to go bankrupt and buy it for $5,000 a site."

This is what I think the end game for Tesla may be.  I just don't think there is enough available capital in the world, and enough operational focus in Elon Musk, to see their way through to bootstrapping an entirely new worldwide automotive firm, including new dealerships, manufacturing plants, charging networks, etc.  Remember, Tesla does not just need capital for R&D and manufacturing, they also need it for the whole sales / service / fueling network.  Kia, for example, can grow with less capital because it can get independent business people to invest in the service and dealer networks and rely on existing gas stations for the fueling network.  Tesla must build all of this from scratch because of choices they made early in their development.

Even without an LBO, I think they were going to fail at this (despite having some good products) and others disagree with me.  But given the amount of debt that an LBO at $420 might take, and the subsequent rejection of the largest public capital markets, I don't think there is any way Tesla could head off a failure.  People who want to lionize Elon Musk forget that SolarCity was headed for exactly this same kind of cash crunch, only to be bailed out by a crony insider transaction with Tesla (much to the detriment of Tesla shareholders).

Right now, GM, Ford, Daimler .. pretty much any of the auto majors, would do well by buying Tesla.  It would help them with an instant presence in the BEV market and it would help Tesla by solving some of the sales and service investment and manufacturing operations problems they have.  But Tesla is just too damn expensive.  Right now the company is worth more than either GM or Ford.

I see the future after at $420 LBO as a failure in 24 months followed by a purchase by an auto major thereafter.

Why Trump's Higher Tariffs Now are Unlikely to Result in Lower Tariffs Later

On Friday I was browsing the AM dial looking for a sports talk radio station discussing Game 1 of the NBA Finals when I ran into Rush Limbaugh.  Now, I am not one of those who will say that I never listen to X -- I will listen (at least for a while) to both the Limbaughs and Olbermans to understand what is going on in Tribe Blue and Tribe Red.  And I am glad I did on Friday because I heard something that really shocked me.

No, this is not faux public shock at some Conservative taking a position one would fully expect him to take, but just the opposite -- Limbaugh was at least partially defending Trump's tariffs despite the fact that I am absolutely positive he knows better.

In fact I am sure he knows better because he made a very good 60-second case for exactly why tariff's were bad.  Couldn't have done a better job in that short time myself.  But then he did what many Conservatives have been doing of late -- he tried to justify the tariffs as part of some hypothetical long game of Trump's to negotiate a better deal in the future.

Personally, I think it is absurd to assume that Trump's real intention is to get us to a new equilibrium with lower tariffs all around the world.  He does not understand the value of free trade and his closest adviser on this issue is an ardent protectionist.  Trump's negotiation experience is all in zero-sum games where he is trying to extract the most of a fixed pie for himself, not in trying to craft win-win solutions across multiple parties.

But here is the real reason this won't work:  The current relatively-free trade regime that exists today was built almost totally on America's moral leadership on the issue.  Let me take a quick aside to discuss a parallel case.  In 2012 the US compound in Benghazi was attacked.  The Obama Administration publicly blamed this attack on an obscure anti-Muslim video posted on YouTube, and continued to insist for weeks on the video being to blame despite the fact that new evidence shows the Administration knew from the beginning the video had nothing to do with the attack.  This was a terrible action for the Administration to take, because from China to Russia to Iran to Saudi Arabia to Britain to Berkeley, there is growing skepticism, even hostility, towards free speech.  If the US President is not staking out a moral position on the world stage in favor of free speech, then it is not at all clear who in the world is going to oppose what seems to be a natural authoritarian tide to shut inconvenient people up.  Obama did not have to defend the video itself (I have not seen it but I understand it to be confused and absurd and fairly indefensible) but he should have said something like "I don't like the video myself but in a free society we do not meet speech with violence, no matter how confused or misguided that speech is."

I have the same problem for many of the same reasons with Donald Trump's tariffs.  Pro-tariff folks pretend like there is some powerful free-trade globalist conspiracy they are fighting, but in fact the real headwinds all around the world are in favor of protectionism.  Few countries outside of the US have our historic dedication to free trade.  In addition, many of our partners have their own anti-trade populist parties on the rise (e.g. Britain, Italy).  And many of the most powerful political actors in our trading partners actually represent large corporations (some state owned and some just highly-aligned with the state) and powerful labor unions who would be perfectly happy to pursue additional crony protectionism of their industry even at the expense of the majority of their country's consumers and businesses.  All these forces for protectionism have always been kept at bay in large part by America's leadership on the issue.   How better to demonstrate to the Luddites that trade deficits are not bad than by accepting large trade deficits and having the strongest economy in the world?

Rush Limbaugh and other Trump Conservatives want to argue that these Trump tariffs are the opening move in an extended negotiation that will likely result in a better end state.  I have an alternate way of portraying them.  This is the United States walking into a group of barely-recovering alcoholics -- a group in which the US has historically been the powerful moral voice who has kept all these countries on the wagon -- and slamming a bottle of Jack Daniels on the table.  The results are not going to be pretty.

Greatest Bar TV Ever

Was at a bar in the new Andaz Hotel in Scottsdale, at a restaurant called Warp and Woof.  I like the contemporary vibe of a lot of Andaz hotels, including this one in particular.

Anyway, over the bar, rather than some random college basketball game, they had Bob Ross painting shows on a loop.  Excellent.

Updated:  I am thinking of an Anchorman - Bob Ross mashup here:  "See the happy, happy scotch.  Scotchie Scotchie Scotch.  Oh, look, I didn't realize I ordered a double.  We don’t make mistakes. We just have happy accidents."

On the Short-Sightedness of Politicians

The Republicans are running around counting coup, crowing that the Democrats totally caved on the continuing resolution and talking about how much bigger their political cojones are than the Democrats', or something.

My question is -- given that this entire negotiation has to happen again in 3 weeks -- how does this make even a small bit of sense?  All they are doing is firing up the Democrats to fight harder the next time this happens which is ... in 3 freaking weeks.  This is like the Cleveland Browns publicly calling out Tom Brady for being overrated just before their next game.  Are politicians so desperate to win one 12-hour news cycle that they are willing to bollix up the playing field for the next battle?

Dolphin Intelligence -- Simply Amazing

This has been shared around a lot but I was very impressed with dolphins following strategies of deferred gratification that some humans I know would be challenged by.

At the Institute for Marine Mammal Studies in Mississippi, Kelly the dolphin has built up quite a reputation. All the dolphins at the institute are trained to hold onto any litter that falls into their pools until they see a trainer, when they can trade the litter for fish. In this way, the dolphins help to keep their pools clean.

Kelly has taken this task one step further. When people drop paper into the water she hides it under a rock at the bottom of the pool. The next time a trainer passes, she goes down to the rock and tears off a piece of paper to give to the trainer. After a fish reward, she goes back down, tears off another piece of paper, gets another fish, and so on. This behaviour is interesting because it shows that Kelly has a sense of the future and delays gratification. She has realised that a big piece of paper gets the same reward as a small piece and so delivers only small pieces to keep the extra food coming. She has, in effect, trained the humans.

Her cunning has not stopped there. One day, when a gull flew into her pool, she grabbed it, waited for the trainers and then gave it to them. It was a large bird and so the trainers gave her lots of fish. This seemed to give Kelly a new idea. The next time she was fed, instead of eating the last fish, she took it to the bottom of the pool and hid it under the rock where she had been hiding the paper. When no trainers were present, she brought the fish to the surface and used it to lure the gulls, which she would catch to get even more fish. After mastering this lucrative strategy, she taught her calf, who taught other calves, and so gull-baiting has become a hot game among the dolphins.

The Irony and Internal Contradiction of Passive Investment Management

My relatively snarky post on hedge fund fees and passive management got a lot of response, including a few of challenging emails from friends and acquaintances.  So I wanted to cover a few followups here.

One of the interesting features of passive investment management is that it doesn't work if everyone does it.  I vaguely remember there is some name for this in the game theory world but I can't for the life of me remember.  Anyway, passive investment is based on the theory that the market for financial products is relatively transparent and efficient.  While one stock will certainly perform better than another, it is almost impossible (or at least really expensive) in a mostly-efficient market for a regular investor, or even an average fund manager, to parse this out.  As a  result, high fees or expenses one might incur to find these opportunities generally don't pay for themselves, and it is better to just invest in a broad basket of securities and accept the average market return.

But note that this is predicated on the assumption that someone, somewhere is actively managing.  Someone must be looking for good stocks and bad stocks and buying the former and selling the latter.  Without these folks actively managing, it would not be an efficient market.  [I am reminded at this point of the old joke about a man walking down the street with an economist.  The economist steps right over a $100 bill on the sidewalk without stopping.  The man asks the economist, "why didn't you stop and pick up that money?" and the economist answers, "in an efficient market it can't really be there."]

I remember a while back reading economic research about shopping.  What percentage of customers have to be active price-shoppers to make a market efficient?  I personally don't price shop for the small stuff.  If I need a bunch of cheap bulk stuff, I just run to Wal-Mart or Costco and buy it with confidence I am getting a pretty good price.  But why can I do that?  Because I trust these large corporations to honor their promise for low prices?  Hah!  No way.  What I trust is that there are people who clip coupons and price every dang item to the penny, and it is these folks who keep Costco and Walmart honest.  Government interventionists like to talk about the free rider problem all the time, but most all of us are free riders on these hard core shoppers.

The same is true with us passive investors.   I like to get snarky about the fees certain active investors charge, but I am still dependent on their work.  And I don't particularly doubt that there are hedge funds and private equity firms that make consistently above market returns, but I do think they are a minority.  I would equate it to max-contract players in the NBA.  No one doubts Lebron James merits a max contract -- any of the teams in the NBA would sign that deal in five seconds.  But a max deal for, say, Chandler Parsons?  Joakim Noah?  The problem with hedge funds is that the few of these folks who merit the two and twenty max contract have very likely been closed to new investors for years, in the same way it is impossible to get LeBron James to play for Memphis.  It is frustrating for me to see public and private institutions chasing yield and continuing to pay 2 and 20 to folks with an unproven algorithm and a marketing plan.  If I am going to pay 2 and 20, its more likely to be to someone in private equity or an LBO fund who is doing more than stock picking.  That's because I do think that stocks are generally well-valued on the market based on their current management, investment plans, culture, etc.  But they may contain opportunities for smart people who can come in and, for example, apply different management and culture and strategy to the people and assets.  A box that is half Kale and half candy corns might not sell for a good price because no one wants the combination, so value can be created splitting it up.

A couple of other thoughts that came up in discussions since yesterday:

  • I am willing to believe that passive investing looks so good vis a vis active investing because central banks have inflated assets and compressed volatility.  If all the boats are rising with the tide of state actions that are raising the tide, then one is less likely to be fussy about which boat he is on.  What's the point of value investing when the market treats stocks as commodities?  But I can certainly see that in markets like the late 70's or pre-market-boom early 80's that stock pickers might have had more room to differentiate themselves.
  • I am also willing to concede that passive investing may turn out to be a terrible trend for corporate governance.  If all your shareholders are just holding your stock as part of a basket of 500 stocks, who is going to hold you accountable?  It is very awkward for a Vanguard agitate for changes in a company, even when they might be the largest single shareholder.  Also, ironically, passive investing may be opening the door for single lone wolf activist investors to impose their will on companies, sometimes to the other shareholders' detriment.  If one person with 5% cares a lot and the other 95% are passive, that one person might be able to raise a lot of hell.

As a final note, I am a screaming hypocrite on the whole passive investing thing, since with most of my net worth I am the ultimate in active investors.  I have most of my savings in one company, the one I run.

Movie Game: Spot the Rifle

My kids and I drive my wife crazy when we are watching a movie at home.  We have all kinds of conversations going, conversations we would never even consider in a theater (another reason, beyond screen size and sound systems, why I consider the home movie watching experience distinct and not entirely competitive with the theater experience).   No movie can be watched without a dozen IMDB lookups of what else so and so actor was in.

One game we play is spot the rifle.  This probably does not mean what you think it means.  It refers to Checkov's rule (the writer, not the astrogator) never to put a rifle on stage in Act 1 if someone is not going to use it in Act 3.  Our game assumes that movies are following this rule, so we look for elements sometimes awkwardly thrown into Act 1 so they can be used later.  Note this is distinct from a macguffin, and is really not the same as foreshadowing either.  The "save the clock tower" fund raiser early in Back to the Future is an example.  Calling your shot in this game, like on Jeopardy, requires the answer to be in a specific form, ie "Never put a lightening strike on a clock tower on stage in Act 1 if you are not going to use it in Act 3".  It goes without saying that winning answers must be shouted out in Act 1, not Act 3.

My daughter, who is quite an aficionado of romantic comedies, texted me an updated corollary:  Don't put a pregnant woman on stage in act 1 of a comedy unless she is going to go into labor at the most inconvenient moment in act 3.

Postscript:  The "Q" armorer dynamic in James Bond is a version of this on steroids.  The rules of Q were:  1.  Every tool he gives Bond gets used and 2.  No matter how odd or arcane the tool (e.g. high powered electromagnet built into a condom) it turns out to be exactly the niche tool Bond needs to escape at some point.   For example, one and only one time is Bond issued with a CPR device but that one time he needs it to save his life (Daniel Craig version of Casino Royale).

My New Rules

Well, I guess it should be obvious that I have not totally given up blogging.  I thank everyone for the nice emails and the nice comments.

However, I am going to try some new rules for the next month, less on my blogging and more on how I engage with the news.

  1. No more Twitter.  For those of you who use Twitter as a news aggregator, my posts will still appear on twitter and from time to time I will post things there that fit on twitter better than in a full blog post.  But I am not going to read my feed, and I am really not going to engage with things in my feed.  Everyone is trying to piss me off, and worse, a few times they have been successful and I have posted juvenile retorts that I later regretted.  I am going to keep a Civ 6 game on my computer and every time I am even tempted to open twitter I will play a couple of turns of Civ 6, worrying instead how to keep Gandhi from nuking me again.  Ironically, I just today ticked over 1000 followers on Twitter, so thanks very much for the support, but if you tweet at me over the next month I won't see it.
  2. Paring down my RSS feed.  I have read partisan political blogs on both sides of the aisle for years.  In fact it has been a point of pride that I read from both sides.  But these folks are all crazy, all the more so because they waste so many electrons arguing their side is sane and the other is crazy.  Everyone on these blogs is trying to just make me angry or afraid.  I am not going to play.  I can get angry and afraid all by myself.  All the political blogs are going out the window for the next month.  The more polemical climate blogs are going out.  Anyone who uses the words "Comey" or "Russia" or "Impeach" or "Benghazi"  in two out of three posts is gone.  Unfortunately, this means, at least for this month, that I cast off Instapundit as well, which is hard for me because Professor Reynolds really gave me my first traffic and helped promote my book.
  3. I have been reading the same stuff for years.  Over time I need to find some like-minded folks interested in discussing policy while still capable of assuming that folks who disagree with them may actually be people of good will.  But I don't want to spend my time in full wonk mode either.  I will call Megan McArdle my benchmark of what I am looking for, and I am accepting recommendations for folks Left and Right of her to read.  Kevin Drum for example on the Left was pretty good on this dimension when his guys were in office but he is much more in team politics mode now (Mother Jones banning me didn't help, particularly since they banned me for referring to the "NRA" in a comment -- particularly funny since I was referring to FDR's National Industrial Recovery Act and not to the much-hated-by-progressives National Rifle Association).

My wife never reads my blog and probably is not too in touch with my existential blogging angst of late, but out of the blue the other day she suggested it would be fun to set up a salon where we could bring together folks across the political spectrum to have discussions of issues of the day.  I thought this was a great idea and have been thinking about how to pull this off.  Unlike what seems to be fashionable today, we actually have friends across the political spectrum -- something that has been easy considering one of our families consists of Massachusetts Progressives (from Antioch, no less!) one is of Texas Conservatives (with oil company executives, no less!).  Our families always got along great but I worry that a few of my friends my be at each others' throats if we have them talking politics in the same room.  So we have to figure out how to discuss policy, not politics.

Thinking About Checking Out of Blogging

I am not sure I am able to continue blogging in the current environment.  When I began blogging over 12 years ago, it was to report on my various adventures in trying to run a small business.  It soon morphed into a platform for me to think out loud about various policy issues.  For example, while I didn't really understand this when I started, it became a platform for me to think through mistakes I made in my initial enthusiasm for the Iraq War.  You can see me in the early years evolve from a kind of knee-jerk global warming absolute denier to a lukewarmer with much more understanding of the underlying science.  I think of myself as an intellectual (though one who cannot spell or proof-read) who likes to discuss policy.

But I am not sure this is the time for that.  The world seems to be moving away from intellectualism.  I say this not because Trump voters were somehow rejecting intellectualism, but because intellectuals themselves seem to be rejecting it.  They act like children, they are turning universities into totalitarian monoculters, and they compete with each other to craft mindless 140-character "gotchas" on Twitter.  I challenge you to even find a forum today for intellectual exchange between people who disagree with one another.  In politics, Trump clearly rejects intellectualism but for whatever reasons, the Democratic opposition has as well.

We have a tribal war going on in this country that has officially gone beyond any real policy issues.  While the US and the Soviet Union had real differences in philosophy and approach, most of their confrontations were in proxy wars which bore little resemblance to these values.  That is what politics are now -- a series of proxy wars.  We spend several days focusing attention on Jeff Sessions, but spend pretty much zero time talking about real issues like approaches to the drug war, and police accountability, and sentencing reform.  Instead all we can focus on is the political proxy war of this stupid Russia hacking story.   Obama's birth certificate and Hillary's servers and Russian hacking and Trump's real estate sales -- all we fight are proxy wars.

And like most tribal warfare, the two tribes are incredibly similar.  I have called them the Coke and Pepsi party for years.  Go talk to the the rank and file and sure, one group may like Nascar and barbecue while the other likes Phish concerts and kale, but you will see them asking for the same sorts of things out of government.   Take the minimum wage, a traditional blue tribe issue.  In Arizona, a heavily red state (we have a super-majority in the legislature of the red team), a $10 minimum wage referendum passed by nearly 60% of the vote last year.  The members of the two tribes absolutely hate each other, but they support the same laws.  I guess I should be happy they don't get together, since as a libertarian I think many of these things they want are bad ideas.

People tell me I need to just deal with the adversity.  But I don't mind opposition per se.  I love when I get a chance to respond to real criticism.  Hell, I wrote 5000 words or so here in response to such criticism.  It's fun.  But more likely nowadays I will write a couple thousand words on school choice and the response will be, in total, "Your a Trump cuckservative."  Several years ago I wrote a long article on rail in response to a Joel Epstein piece.  Epstein had argued the US rail rail system was inferior to those in Europe and Asia because we don't have enough passenger rail.  I argued with a series of charts and analysis that the US rail system was superior because it focused on freight over passengers, and that shifting freight to rail had far more environmental benefits than shifting passengers to rail.  Epstein's entire response to my article was, "You should get out of the country more often."  This is the classic intellectual argument of our day.  It was smug.  It implied my article was based on being part of the wrong tribe, the narrow-minded denizens of flyover country rather than the coastal set that have been to Gstaad but not Tulsa.  At it did not even bother addressing the issues raised.

Or look at Black Lives Matter.  BLM actually had what looked to me to be the outlines of a pretty good plan.  To really achieve their goals, though, was going to take a lot of work jurisdiction by jurisdiction, establishing some model legislation and best practices and bringing it to various municipalities.  It didn't even try.  It abandoned this plan in favor of just disrupting sh*t and shaming the unwoke for saying that "all lives matter."  Today, invocations of BLM consist pretty much 100% of virtue signalling for one's own tribe or shaming of the other tribe.  Its the equivalent of dueling fans at a game yelling "Yankees suck!" "No, Red Sox suck!"

People also tell me to just deal with it, that if I love the policy stuff I should ignore these problems.  But let me give you an analogy.  Let's say you absolutely love English Premier League football, but every time you try to go to a game, you miss most of what happens on the field because hooligans are fighting around you in the stands.  Do you keep going for your love of football or at some point is the mess that surrounds it just too much?

Anyway, I am highly tempted just to say "screw it" for a while and focus on something else entirely.  I am trying a different approach as a change of pace, trying to write a more formal policy piece for a think tank, but I am having a surprising amount of trouble doing it well.  Writing such pieces was not really my forte at McKinsey when I was a consultant and I am not sure it is now.  Not disciplined enough in my writing, I think.

Anyway, on a positive front, I now have a dedicated (though very small) room for my model railroad and I installed the first bit of benchwork.  This is sort of like laying the keel for a new ship.  Coyoteblog readers, I know, will be hanging on the edges of their seats for further updates.

From Parks and Recreation:

Jean-Ralphio: Why don’t you use that time to go after one of your passions? Like model trains, or toy Gandalfs or something.

Ben: I don’t know why you jumped straight to model trains. I mean, it’s accurate…

Creating the Government Monster Truck

A reader sends me this (I never can remember which folks say its OK to use names -- if you want me to credit you, please say its OK in your email).

"The politician creates a powerful, huge, heavy, and unstoppable Monster Truck of a government," P.J. O'Rourke writes in his new book, How the Hell Did This Happen? (Atlantic Monthly Press). "Then supporters of that politician become shocked and weepy when another politician, whom they detest, gets behind the wheel, turns the truck around, and runs them over."

Which sounds like what I have written for years, eg here

Technocratic idealists ALWAYS lose control of the game.  It may feel good at first when the trains start running on time, but the technocrats are soon swept away by the thugs, and the patina of idealism is swept away, and only fascism is left.  Interestingly, the technocrats always cry "our only mistake was letting those other guys take control".  No, the mistake was accepting the right to use force on another man.  Everything after that was inevitable.

Arizona and the Case For School Choice

From the Arizona Republic:

Five of the nation's top 10 high schools are in Arizona — and they're all branches of the same charter school.

According to U.S. News and World Report, Basis Scottsdale is the nation's top-performing high school, followed by Basis Tucson North and Basis Oro Valley. Basis Peoria and Basis Chandler were ranked fifth and seventh, respectively.

The rankings consider students who exceeded state standards, graduation rates and college preparedness, according to U.S. News.

Two additional Arizona charter schools, along with two "special function" public schools, made the top 100.

Arizona was one of the earliest adopters of charter schools in 1994, and it continues to be at the forefront of school choice. However, the state has some of the lowest school funding and teacher pay in the U.S.

I love that last line.  Makes one question if the obsession on teacher pay and funding for bloated school administrations really is the key to education improvement.  I wonder if when the Arizona Republic writes their inevitable next article on Arizona having lower teacher pay they will add a clause that says "However, the state has five of the nation's 10 top charter schools".

This is a fascinating article and I encourage you to read the whole thing.  The article gives plenty of space to opponents of school choice and charter schools:

[Arizona Education Association President Joe] Thomas said any public school district in Arizona could replicate the Basis model if they were also allowed to work only with a small number of high-achieving students and "force the rest out of your school."

This inference that Basis gets its results by carefully cherry-picking students is undermined by facts from the same article:

There are no entry requirements or exams to get into a Basis school — just a game of luck. An annual lottery determines which new students are accepted.

Already, Basis schools have received 15,000 applications for 1,000 open spots for next school year, Bezanson said.

To be fair, since Basis does not participate in the free school lunch program and the city school bus program won't deliver kids to Basis, there are kids that probably are not able to apply, but again, this is far from a case of cherry-picking.  It is a case of setting very high expectations and expecting kids to achieve that.  Thomas's comment on this reflects the different philosophy of teachers unions vs. school choice folks:

Thomas said Basis schools are great for the small minority of kids who can succeed in the high-pressure environment. But most students don't — and public schools have the expectation to teach all students.

This is partially true, the Basis approach is not right for all kids, but given they have 15 applications for every 1 open lottery spot, it is right for a lot apparently.  But the difference in philosophy is that public school advocates want to force the Basis kids that are able to achieve at a high level into dumbed-down, plodding schools, moving no faster than the lowest common denominator.  School choice advocates, on the other hand, also acknowledge this difference, but rather than enforcing a one-size-fits-all public solution, advocate for a thousand flowers to bloom with many different school solutions.

There are many other charter schools in town that do a great job with kids of different needs.  My wife and I support a Teach for America teacher at a charter school in South Phoenix.  The kids in her class are mostly all Hispanic, many have parents that do not speak English and a high percentage are on the school lunch program.  These kids may not be quite at the Basis level, but they out-achieve most of the Phoenix public school system and are well beyond what kids from similar demographics are doing in local government schools.

Losing the Prisoner's Dilemma Game: Economic "Development" Incentives are a Total Waste of Money

From today's WSJ:

The race to woo companies has intensified as state and local governments struggle with a slow economic recovery, sluggish new business formation and job losses resulting from automation. Many older industrial cities see tax incentives as one of the few levers they can pull.

The fight to attract and retain companies “is probably as competitive as it has ever been in the 30 years I have been doing this type of work,” said Lawrence Kramer, managing partner with Incentis Group, the consulting firm that helped Riddell with incentive negotiations.

Economic-development tax incentives more than tripled over the past 25 years, offsetting about 30% of the taxes the companies receiving incentives would have otherwise paid in 2015, compared with about 9% offset in 1990, according to an analysis of incentives covering more than 90% of the U.S. economy.

By 2015, the total annual cost of these incentives was $45 billion, according to the analysis, by Timothy Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich. The study looked at 47 cities in 32 states plus the District of Columbia.

Total incentives are likely higher because the analysis didn’t include some used by cities, including Elyria, such as city income tax rebates for companies.

Seriously, how absolutely pointless is this:

When Elyria Mayor Holly Brinda learned that Riddell Inc. was looking to leave this small city in northeast Ohio, she came up with a $14 million package of tax incentives and offered to lease land to the company for $1 a year.

It wasn’t enough. Riddell, which makes the football helmets used by many NFL and college players, decided to move its roughly 320 employees just over 2 miles down the road to a neighboring town, which offered its own bundle of incentives and lower corporate and individual income-tax rates.

You can't even argue you are trying to save jobs for local people, because the same people are working, just with a 2 mile delta in their commute.

One of the very earliest posts on this blog, waaaay back in 2005, was to compare local economic development spending to a prisoner's dilemma game:

politicians who are approached by a company looking for a handout for business relocation face what is called the prisoner's dilemma.  Many of you may know what that is, but for those who don't, here is a quick explanation, via the Stanford Encyclopedia of Philosophy:

Tanya and Cinque have been arrested for robbing the Hibernia Savings Bank and placed in separate isolation cells. Both care much more about their personal freedom than about the welfare of their accomplice. A clever prosecutor makes the following offer to each. "You may choose to confess or remain silent. If you confess and your accomplice remains silent I will drop all charges against you and use your testimony to ensure that your accomplice does serious time. Likewise, if your accomplice confesses while you remain silent, they will go free while you do the time. If you both confess I get two convictions, but I'll see to it that you both get early parole.  If you both remain silent, I'll have to settle for token sentences on firearms possession charges. If you wish to confess, you must leave a note with the jailer before my return tomorrow morning."

The "dilemma" faced by the prisoners here is that, whatever the other does, each is better off confessing than remaining silent. But the outcome obtained when both confess is worse for each than the outcome they would have obtained had both remained silent.

I hope you can see the parallel to subsidizing business relocations (replace prisoner with "governor" and confess with "subsidize").  In a libertarian world where politicians all just say no to subsidizing businesses, then businesses would end up reasonably evenly distributed across the country (due to labor markets, distribution requirements, etc.) and taxpayers would not be paying any subsidies.  However, because politicians fear that their community will lose if they don't play the subsidy game like everyone else (the equivalent of staying silent while your partner is ratting you out in prison) what we end up with is still having businesses reasonably evenly distributed across the country, but with massive subsidies in place.

Of course, garnering positive press releases for politicians' re-election campaigns is part of the equation as well.  Actually, the game is worse than a prisoner's dilemma game because politicians playing it enjoy all the positive benefits while the price is paid by others (taxpayers).

It would be great to ban this stuff entirely.  But you know what, Arizona already did!  In its Constitution no less.  And we still can't stop this BS.  Our Constitution reads that neither the state nor any municipality in it may “give or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation.”  This seems pretty definitive, but as I wrote here

This has been interpreted by the courts as meaning that if a state or municipal government gives money to a private company, it must get something of value back - ie it pays money to GM and gets a work truck back.  But politicians will be politicians and have stretched this rule in the past out of all meaning, by saying that they are getting "soft" benefits back.  In other words, they could subsidize the rent of a bookstore because reading is important to the community.

The Goldwater Institute in AZ keeps filing suit and has been pretty successful in blocking some of the most egregious subsidies, but it takes constant vigilance, and at the end of the day, if politicians want to throw money at private companies in order to help their re-election chances, they are going to do it.

 

The Politicization of Everything -- Is Escapism Even Possible Any More?

Tired of politics?  Want to escape for a while?  Maybe talk sports, take in a movie, play a computer game, or go to a show.  Well good luck.

Over the last year, I have turned off ESPN Radio, which I used to listen to all the time, because I got bored with all the discussion of politics and social justice.  It wasn't even that I necessarily disagreed with the content, it is just that I was tuning in to listen to discussion about the merits of various NFL defenses and not some ex-jock's views on politics.  If I want politics and social justice, I have other sources for those (I actually think there are some fascinating race and gender issues in sports, I just don't need to hear about them in every damn show).  The same thing is happening in almost all entertainment fields.  Over the last month at least a third of Engadget.com's blog posts have been purely about politics with no technology hook at all.  If you go to a Broadway show, there is a chance you will get lectured on social justice by the actors.  And God forbid one tunes into a music or movie awards show and expects to, naively, see non-political content about music and movies.  You can't pay me enough to watch the Oscars any more.

Computer Gaming Update

Well, I have now spent scores of hours playing Factorio and have almost completely ignored, so far, the excellent new Civ 6.  I was about done with Factorio when I discovered Bob's Mods, a set of game mods that about triple the number of resources and chemical intermediaries and make the game one or two orders of magnitude even more complex.

This is going to have incredibly niche appeal, so be forewarned.  If you spent most of your time in SimCity or City: Skylines trying to optimize road flow rather than making a pretty city, or if you like Space Engineers, this may be your game.

Computer Gaming Updates

I have played through a half a game on Civ 6 and am thrilled.  Like original-cast Star Trek movies, every other episode is really good.  This one feels excellent.

I have a new geek obsession called Factorio.  Basically, you have to create an ever more complex production base with zillions of different intermediate products zipping this way and that on conveyors, all while fighting off aliens.

I played Stellaris for quite a while but got bogged down in the end game.  Tons of potential, maybe Stellaris 2 will crack the code.

Speaking of that, I did enjoy Endless Space, judging it good but not great (ie not totally addictive).  The pre-release version of Endless Space 2 has dropped and I am just starting to try it out.  Endless Legend was a really good alternate take on the Civ model and I am hoping that Endless Space 2 will do the same for space 4x.

"How Do I Explain This Election to My Kids" Is Much Easier for a Constitutionalist

Last night, Van Jones (among likely many others on the Progressive Left) lamented, "How am I going to explain the election [Trump's victory] to my kids?"

Well, as someone who has always respected the Constitution, I would tell my kids that the folks who wrote the Constitution spent a lot of time thinking about how to make the system robust against tyrants.  Their solution was a system of checks and balances that prevented a single person in the Presidency acting against the general wishes of the country.  The President is bound both by Congress and the judiciary, but also by law (particularly restrictions in the Bill of Rights).

The last couple of Presidents, with the aid of a sometimes supine Congress and judiciary, have pushed the boundaries of these limitations, expanding Presidential power, and in certain spheres attempted to rule by decree.  Folks like Van Jones were way up in the forefront of folks cheering on this power grab, at least under President Obama, as long as it was their guy grabbing for power.  What should Jones tell his kids?  Perhaps he could say that for well-intentioned reasons, he helped increase the power of the President, but in doing so forgot that folks he disagrees with would likely someday inherit that power.

As I wrote years and years ago:

  • Technocratic idealists ALWAYS lose control of the game.  It may feel good at first when the trains start running on time, but the technocrats are soon swept away by the thugs, and the patina of idealism is swept away, and only fascism is left.  Interestingly, the technocrats always cry "our only mistake was letting those other guys take control".  No, the mistake was accepting the right to use force on another man.  Everything after that was inevitable.

Sarah Baker has some nice thoughts along these lines at the Liberty Papers, but I will leave you with her first one:

This is how libertarians feel after every election. We learn to live with it. So will you.

My Apologies to Colin Kaepernick

A while back, I implied that Colin Kaepernick's refusing to stand for the National Anthem may have been in part a strategy to avoid being cut from the 49ers.

I apologize.  Even if that were true -- and it was pure speculation on my part -- he has done everyone in this country a favor.  Until a month ago, there was no ceremony much more empty than the pro forma singing of the National Anthem at sporting events.  As I wrote before,

I am not a big fan of enforced loyalty oaths and patriotic rituals, finding these to historically be markers of unfree societies.  For these sorts of rituals to have any meaning at all, they have to be voluntary, which means that Kaepernick has every right to not participate, and everyone else has every right to criticize him for doing so, and I have the right to ignore it all as tedious virtue-signalling.

In the past, people stood for the national anthem because that is what you do.  Mindlessly.  It was, for many, a brief ritual before you got to the good stuff.  It was singing happy birthday before you got the cake. (I am speaking for the majority of us, I know there are folks who have always approached the anthem as a deep and solemn rite).

But this weekend, suddenly, and perhaps for the first time at a ball game, everybody who stood up for the National Anthem at an NFL game likely thought about it for a second.  They were not standing just because that was what everyone else was doing, they were standing (or sitting) to make some sort of statement, and what exactly that statement was took a bit of thought.  Standing for a ceremony that has 100% dutiful participation means zero.  Standing for a ceremony with even a small number of folks who refuse has a lot more meaning.

So thanks, Colin.

Tesla and SolarCity: Two Drunks Propping Each Other Up

This is honestly one of the weirdest acquisition proposals I have seen in a long time:  Elon Musk's Tesla offers to buy Elon Musk's Solar City.

This makes zero business sense to me.    This is from the press release:

We would be the world’s only vertically integrated energy company offering end-to-end clean energy products to our customers. This would start with the car that you drive and the energy that you use to charge it, and would extend to how everything else in your home or business is powered. With your Model S, Model X, or Model 3, your solar panel system, and your Powerwall all in place, you would be able to deploy and consume energy in the most efficient and sustainable way possible, lowering your costs and minimizing your dependence on fossil fuels and the grid.

I am sure there are probably some hippy-dippy green types that nod their head and say that this is an amazing idea, but any business person is going to say this is madness.  It makes no more sense than to say GM should buy an oil production company.  These companies reach customers through different channels, they have completely different sales models, and people buy their products at completely different times and have no need to integrate these two purchases.  It is possible there may be some overlap in customers (virtue-signalling rich people) but you could get at this by having some joint marketing agreements, you don't need an acquisition.  Besides, probably the last thing that people's solar panels will ever be used for is charging cars, since cars tend to charge in the garage at night when solar isn't producing.

One might argue that some of the technologies are the same, and I suppose some of the battery and electricity management tech overlaps.  But again, a simple sourcing agreement or a battery JV would likely be sufficient.

So what do these companies share?  I can think of three things.

The first is Elon Musk.   When one sees a deal like this, one is immediately suspicious that there is some kind of game going on where the owner combines holding A with holding B and somehow in the combination ends up with more wealth.  This is a game conglomerates played in the 1960's -- you could create a lot of (paper) value if you had a high PE (stock price to earnings ratio) company and went around buying low PE companies, instantly creating paper wealth if you could buy their earnings cheap and then have them suddenly valued at your higher PE.   Its hard to guess if this sort of game is going on here, as neither company has earnings (or rather both lose a lot of money).   Further, I have no read on Mr. Musk's personal ethics.  If this were Donald Trump, we would all immediately be suspicious such a game was at play.

The second thing these two companies share is that they have business models based on consuming massive amounts of government subsidies.  They get subsidies directly (each by selling various sorts of tax credits or fuel economy credits to power companies and auto makers), they have both gotten sweetheart deals from governments for production facilities, and their customers get subsidized as well in the purchase.  However, while there certainly are economies of scale for cronyism (large companies have the pull to get the loot), I shudder to think that there might be even more for these two companies to grab if they were larger.

The third thing these two companies share is that they both have huge financing needs, are losing lots of money, and are burning through tons of cash.   And here I think is the real heart of this deal, and if I am right, we may be able to answer the question on Elon Musk's ethics.  While both companies are burning through cash and are constantly going out to the market for more money, Tesla still has a (not totally justified in my mind) fabulous reputation with investors** and people seem to be falling over themselves to throw money at it.  With Apple languishing and Google old news, there is no hipper, trendier company out there.   On the other hand, SolarCity is starting to suck wind.  A few months back JP Morgan downgraded the stock:

SolarCity is having trouble attracting new investors, as the company has launched and canceled programs and altered its accounting methods, JPMorgan wrote in a note, according to MarketWatch.

Additionally, some of SolarCity's lower-income customers could be at risk of "slow-pay or default in the event of an economic downturn," the firm continued.

...SolarCity's weaknesses include its generally high debt management risk, weak operating cash flow, generally disappointing historical performance in the stock itself and poor profit margins.

They are also seeing more competition from local contractors and, perhaps most worrisome for their business model, various government subsidies are being scaled back and many states are changing their power metering rules to pay customers only the wholesale rate, rather than the retail rate, for power they put back in the grid.  They have said in most of their annual reports as a risk that their business model likely would not be viable (if it could be called that even today) without current or higher levels of government subsidies.

I have no inside information here, but this is the best hypothesis I can put together for this deal.  SolarCity has huge cash needs to continue to grow at the same time its operating margins are shrinking (or getting more negative).  They are having trouble finding investors to provide the cash.  But hey!  Our Chairman Elon Musk is also Chairman of this other company called Tesla whom investors line up to invest in.  Maybe Tesla can be our investor!

The reason I call this two drunks propping each other up is that Tesla also is also burning cash like crazy.  It is OK for now as long as it has access to the capital markets, but if it suddenly lost that, Tesla would survive less than 6 months on what it has on hand.  Remember, SolarCity was a golden child just 3 years ago, just like Tesla is today.  Or if you really don't believe that high-flying companies that depend on access to the capital markets can go belly up in the snap of a finger when they lose their luster with investors, I have one word for you:  Enron.

There is a substantial minority of the investment community that thinks that Tesla's headed for chapter 11, even before taking on the SolarCity albatross.  Here is one academic paper.  Here is another such opinion.  Non-GAAP reporting has proliferated like a cancer among public companies, with so many creative non-GAAP numbers that I am not sure the Enron folks would go to jail nowadays.  Tesla is a master of this game.    Even if Tesla is not headed for chapter 11, the absolute last thing Tesla needs to be doing is taking on a new acquisition that burns a lot of cash, while simultaneously diluting their management focus.

When I watch SpaceX launches, I so want to love Elon Musk.  But I am increasingly convinced that this is a terrible deal, an insider game he is playing to try to keep one of his investments alive.  I am seldom a fan of most minority shareholder lawsuits, but if I were a minority shareholder of Tesla I would be suing to block this acquisition.

By the way, many investors must be reading this the same way, because SolarCity stock prices are up and Tesla stock prices are down (at lot) today.

Disclosure:  I have been short Tesla for a while.  I shorted SolarCity this morning when the acquisition was announced, after its price popped up.  I consider this merger announcement as the moral equivalent of announcing that SolarCity is in financial distress.  These investments are tiny, the equivalent of a bar bet rather than any substantial investment on my part.

**Footnote:  I have to say this every time -- The Model S is a great car.  I would love to have one, if Santa put it under the tree for me.  But just because they have one great product does not mean that the company will be a success or is a great investment or that it is worth massive amounts of my tax money in subsidies.

The Downside of Web/Cloud Enabled Devices (Including My Oddest Analogy of the Week)

Google's parent Alphabet is abandoning support for Revlov's Smart Home Hub (which they bought a while back).  In and of itself this part of an irritating strategy (pursued enthusiastically both by Alphabet and Apple) of identifying edgy new devices with enthusiastic user bases, buying them, and then shutting them down.   I was a SageTV fan and user back in the day until Google bought it and shut it down (as a potential competitor to GoogleTV and its other streaming products).  The bright side is that this pushed me to XBMC/KODI, which is better.  The dark side is that I am sure Google could easily write those guys a check and then they will be gone too.

Anyway, after SageTV was shut down by Google, I could still use the hardware and software, it just did not get improved or updated or supported any more.  But increasingly new electronic products are requiring some sort of cloud integration or online account activation.  To work, the product actually has to check in with the manufacturer's servers.  So what happens when those servers are shut down?

Alphabet-owned company Nest is going to pull the plug on the Revolv smart home hub and app on May 15, rendering the hardware unusable next month.

Just to be clear on how much of a big deal this is, the company isn't only out to stop support but to really disable the device and turn the hub into a $300 teardrop-shaped brick. How much does a pitchfork go for nowadays?

...Needless to say, existing users are outraged by the development, and they have very good reason to be so."When software and hardware are intertwined, does a warranty mean you stop supporting the hardware or does it mean that the manufacturer can intentionally disable it without consequence? Tony Fadell seems to believe the latter. Tony believes he has the right to reach into your home and pull the plug on your Nest products," Arlo Gilbert, CEO of Televero and formerly proud owner of a Revolv hub, says, emphasizing that "Google is intentionally bricking hardware that he owns."

Video game enthusiasts have worried about this for years, and have started to encounter this problem, as the new most-favored copyright protection scheme is to require an online account and an account-check each time the game is run.  They try to say the online component is adding value, and they do a few things like leader boards and achievements, but the primary rational is copy protection.    Personally I find this generally easier to work with than other types of copy protection that have been tried (I really like Steam, for example) but what happens when the login servers are shut down?

This sort of reminds me, oddly enough, of cemeteries.  There used to be a problem where private cemetery owners would sell out the cemetery, fill it up, and move on.  But then the cemetery itself would fall apart.  It's not like the owners are still around to pay association dues like condo owners do.  Once people figured out that problem, they quickly began demanding that cemeteries have a plan for long-term maintenance, with assets in trust or some such thing.  Perhaps the hardware and software industry will do the same thing.  I could see a non-profit trust getting set up by the major players to which manufacturers pay dues in exchange for having the trust take over their servers after a product is abandoned.