Latest Stories

• Credit Default Swaps: Proudly the Tool of the Devil Again
• Protectionism and the Chinese Box of the Renminbi
• QOTD: John McCain’s 15% U.S. GDP Cut
• Who Files for Bankruptcies?
• Books of the Week

 

Weekend Reading

A few links from my weekly weekend reading column:

• There is no “new normal”: This time isn’t different (Forbes)
• Why world's post offices are ailing (The Globe and Mail)
• Changing distillate export patterns (EIA)
• BP chief Tony Hayward says oil industry mega mergers are dead (Times Online)
• Country Clubs: Stuck in the Rough (BusinessWeek)
• Fertility and living standards: Go forth and multiply a lot less (The Economist)

 

Interview with Jim Grant

Lengthy video interview with one of my favorite cantankerous contrarians, Jim Grant of Grant’s Interest Rate Observer.

 

Creativity and Compression

I spend a lot of time writing, and I'm constantly amazed -- even after decades of this stuff -- how much better things get when you say less. Take out words, and dull prose sits up. Take out sentences, and prose kicks up its heels. And take out paragraphs ... well, let's just say that's you often need to clear the room -- it can be that much more kinetic.

It is hard, of course. The expression "kill all your babies" is passed back and forth like contraband among writers for a reason: You have to learn to love killing the things in your writing (or coding/song-writing/etc.) you like best. Compression, compression, compression.

One of my favorite examples of this comes from Gene Wilder's great memoir KIss Me Like a Stranger: My Search for Love and Art. In this excerpt Wilder writes about being in the editing room with director Mel Brooks, and being distraught about a scene in his classic film Young Frankenstein that didn't work the way he hoped it would when writing it:

When we saw the ascension scene -- where I rise with the Creature on an elevated platform and cry, "LIFE, DO YOU HEAR ME? GIVE MY CREATION LIFE!," my heart sank. I thought this was going to be one of the highlights of the film, and instead it was a boring blob. I put my head down. Mel didn't vomit. Instead, he got up and started banging his head against the wall. He hit it three times, hard. Then turned his face to the rest of us and said, "Let not get excited! You have just witnessed a 14-minute disaster. In one week you're going to see a 12-minute fairly rotten scene. In two weeks you're going to see a 10-minute fairly good scene. And in three weeks, you're going to see an 8-minute masterpiece."

That's a cute speech, I thought, but you're kidding yourself, or just trying to make us feel better. How much can you change without reshooting? I saw the scene. I don't believe in miracles.

The next three weeks were my second lesson in directing: thousands of little pieces of film can be arranged in thousands of different ways. Almost three weeks to the day after Mel's speech, the lights went out in the screening room, and I witnessed an 8-minute miracle.

 

The White House Doesn't Represent America ('s Surname First Letters)

In idly scanning the data dump today of visitors to the White House, I got to thinking: How representative of America are these people? You know, are they just more ... whoever/whatever it is that people think are the kind of people who get invited to visit the White House when they don't get invited to visit the White House?

The thought of actually looking up who these people are, what they do, and why they might be visiting was excruciatingly boring, so I didn't do that. Instead, I looked at the distribution of first surname letters of the people who visited the White House, and then I compared that distribution to the actual frequency of the same first surname letters in the U.S. writ large.

Here is the result:

The red columns are the distribution of surname first letters according to census data for the 1,000 most popular surnames in America. The blue columns show the distribution, by surname first letter, of visitors to the White House. The x-axis letters are organized from left to right by decreasing Census frequency

As you can see, there are big differences between Census data and the 492 logged White House visits between January and now. For example, visitors with a surname beginning with the letter "s" are much more likely than you would expect based on the Census distribution of such names. Census data suggests that surnames beginning with "m" would have been the most likely, but they rank 5th among the first surname letter of White House visitors.

There are lots of other things in there too, like the White House dislike of people whose surname starts with "h". And there is also the Obama administration's outright letter-centric discrimination against people whose surnames start with "q" or "v", both of which had zero surname-sporting visitors to the White House. Where's the outrage on that, Glenn Beck?

 

No Credit Cards For You!

The latest Mintel data on credit card direct mail offers to consumers showing Q3 of this year against the preceding few years. The drop is ... precipitous, from 2.1-billion a quarter in 2006 to 391-million in the most recent quarter.

 

It's Alive, It's ALIVE, It's ALLLIIIIVVVE!

Turns out coursing a few gigavolts of financial stimulus current through even an economy the size of the U.S. will still get Frankenstein off the slab, however briefly.

 

Readings: Energy, Lego, Pig Farmers, etc.

• Can renewable energy save the world? Not without better batteries(voxeu)
• Breakthrough Inventions and Migrating Clusters of Innovation (NBER)
• Happy Anniversary Wall Street (Keen)
• Lego’s business comes to boom (CNBC) 
• Foodservice Traffic Declines for Fourth Consecutive Quarter (NPD)
• Chinese railways and speculating pig farmers (Pettis)
• The myth of uncorrelated returns (CFA Institute)

 

Back to the VC Future? Small as the New Big

The future of the venture capital industry? With ten-year returns tumbling toward negative numbers, lots of people rightly wonder where the venture business goes from here.

My argument has been that its future needs to look a like its decade-plus ago past. We will see more small funds, fewer large ones, and less capital committed in total. And those are all good things.

Josh Kopelman of First Round echoes that view, with a post up that (in addition to saying nice things about me) has some great nuggets about the venture industry’s early days. Among other things, Josh points out “… that in the 1980's there were just 12 venture funds above $250M.  Today there are over 408 - and 30 over $1B.  And most of this fund-size growth took place in the last 10 years.”

And one more nugget:

“the initial funds of Accel, Kleiner Perkins, CRV, Mayfield, Venrock, Greylock, NEA TA & Sequoia COMBINED were under $125M!“

Spot-on, Josh. Bringing the venture industry back to health doesn’t mean financial engineering, exotic funding options, or entrepreneur-unfriendly deal terms. It means, more than anything else, a return to its roots.

More here.

 

Regulation Didn’t Break Banks; Police Don’t Cause Crime

Good comment from John Kay in the FT:

Their activities underwritten by implicit and explicit government guarantee, it is increasingly business as usual for conglomerate banks. The politicians they lobby sound increasingly like their mouthpieces, espousing the revisionist view that the crisis was caused by bad regulation. It was not: the crisis was caused by greedy and inept bank executives who failed to control activities they did not understand. While regulators may be at fault in not having acted sufficiently vigorously, the claim that they caused the crisis is as ludicrous as the claim that crime is caused by the indolence of the police. [Emphasis added]

More here.

 

A Diary of the Great Depression

The excerpts from the Jim Ledbetter-edited Diary of the Great Depression continue to be riveting:

October 14, 1931. Last night’s paper reports the closing of eight banks in West Virginia and Philadelphia. Also that the 14 banks in Atlantic City have been combined into four banks. Also that the government bank aid plan is not going so good because the stronger banks do not want to guarantee the weaker. The proposed capital has been cut from $500 million to $100 million.

Stocks are on the way down again.

October 15, 1931. Great excitement in Youngstown. It finally happened here. The Dollar Savings & Trust Co, The City Trust, and the 1st National Banks all fail to open for business this morning. This leaves only the Mahoning Bank and The Commercial open for business. Both of them are besieged by depositors seeking to withdraw their deposits. I do not see how it can last. The town is panic-stricken and the streets are crowded with people excitedly discussing the situation. I was aroused this morning at 4 a.m. by newsboys shouting Xtras. It still seems like a bad dream.

October 15, 1931 2 p.m. Banks in the small towns around Youngstown are either closing their doors or refusing to permit withdrawals except for emergency use.

Several of the wealthiest families in Youngstown had all their funds invested in local bank stocks or in the local steel mills. With these investments almost worthless and with double liability attached to the bank stocks they are wiped out.

More here. And also read News from 1930, of course.

 

Bill Gross: One of Our U.S. GDPs Has Gone Missing

Some good stuff from Pimco’s Bill Gross in his latest monthly missive. A sample:

[The last fifty years] produced a persistent increase in asset prices vs. nominal GDP that led to an average overall 50-year appreciation advantage of 1.3% annually. That’s another way of saying you would have been far better off investing in paper than factories or machinery or the requisite components of an educated workforce. We, in effect, were hollowing out our productive future at the expense of worthless paper such as subprimes, dotcoms, or in part, blue chip stocks and investment grade/government bonds. Putting a compounding computer to this 1.3% annual outperformance for 50 years, produces a double, and leads to the conclusion that the return from all assets was 100% (or 15 trillion – one year’s GDP) higher than what it theoretically should have been. Financial leverage, in other words, drove the prices of stocks, bonds, homes, and shopping malls to extraordinary valuation levels – at least compared to 1956 – and there could be payback ahead as the leveraging turns into delevering and nominal GDP growth regains the winner’s platform.

…Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets – while still continuously supported by Fed and Treasury policymakers – is likely at its pinnacle. Out, out, brief candle.

Important reading. More here.

 

Readings: Galleon Wind-down, Solar, Biotech, etc.

• Bleeding Biotech (which argues for more money for biotech, an idea I disagree with) (American)
• Professional Money Management and Peak Oil (Gregor)
• The market is 25% overvalued; 15% correction coming (Grantham)
• We must overturn the status quo in derivatives (FT/Griffin)
• Solar Projects Are Going To Need Plenty Of Water (BI)
• Galleon Wind-Down of Funds Is 'Largely Complete' (WSJ)
• Detroit real estate auction flops (Reuters)

 

Soros on University Marxists, & Transforming Economics

Here is George Soros in the FT on his new economics institute on how it represents a threat to the economics establishment. Give him credit for chutzpah.

CF Do you think university faculties will accept the sort of outside influence?

GS There will be great resistance and people in the universities are rather despondent because they realise that papers that don’t conform to the prevailing dogma are not accepted by the periodicals which are used to give tenure. So there is a self-perpetuating quality about tenure and the people who are involved in it are pretty despondent about breaking in. I am much more optimistic because I think that this financial crisis has definitely proven that that is unrealistic, that they dogma has lost touch with reality. And I think reality will push its way in, in the form of the students who will not want to study a dogma whose time has passed. It’s like a little bit like Marxist dogma. The collapse of the Soviet Union did not bring an end to Marxism. There are still Marxists at universities, maybe more in Europe than in America, and eventually they’ll die out, but until then, they will be there. But they may not have any students listening to them.

 

Khosla on Failure: Take More Risk

Vinod Khosla has his critics, including me now and then, but give him credit for often and unapologetically making risky, early-stage investments with a very high chance of failure.

Khosla has been dabbling in [clean tech] deals since he started his outfit in 2004. With his fresh capital, he is on the hunt for the most ambitious startups. "Our specialty is risk," says Khosla. "Forget [hitting] singles. Lay it out there and take a swing. You may not get a very high percentage of hits, but you get a high slugging percentage."

Khosla's approach is to winnow losing ideas quickly before they consume too much cash, gambling that the surviving startups can score big. Whereas most venture capital firms budget for product-development milestones by the companies they invest in, Khosla Ventures uses metrics that forecast how much it will cost for startups to remove technical risks, tackling the toughest problems first. "We've developed a few tricks," says Khosla.

Take Calera, a startup launched by Stanford University. Its goal is to reduce emissions by making cement that traps CO2 gas during manufacture. Khosla figures there's a 10% chance his firm can make 100 times its eight-figure investment and a 90% chance the company will fail. That's precisely the kind of prospect that draws his attention. "Sometimes we tell an entrepreneur, 'Your project does not have enough risk for us,'" he says. "They look at you kind of funny."

I have no objection to the idea of taking more risk and aiming for things with massive returns. The challenge, however, with this model is that it has largely been highly capital-intensive – solving technical problems in technologies where there is no new tool is expensive – so even fast failures can be highly debilitating to an early-stage portfolio.

More here.

 

QOTD: “Other” is the Problem

Great comment from Mark Marinella of State Street on the important of risk limits in obvious places when investing in fixed income. He argues it all comes down to “other”:

The most important category with the tightest risk limits is “other”. Controlling risk there will save you every time.

[via CFA Institute]