Monday, August 31, 2015

M is for Millenial?

Interesting piece on Facebook's new Messenger AI, "M":
When you ask M a question, the AI works to understand what you’re asking and formulates a response. But rather than sending it to you, the system sends this response to human “trainers”—customer-service types who work alongside the team inside Facebook’s new building in Menlo Park, California. These trainers then decide what else must be done to provide what you’re looking for

So it sounds like M gets the input, and then essentially send it to a Millenial, who Googles etc., to get the task done. I guess that works, and I think there are some startups taking this approach ("don't scale!") Fun to see it filter to FB, and a great cultural fit for them too. And now we know what "M" stands for.
In doing that heavy-lifting, the humans generate a roadmap for how particular questions should be answered. “Everything the trainers do, we record every step,” Lebrun says. This includes what websites they visit, what they say when calling the DMV, what they type in response to M users, and so on. In the future, this data can help drive a more advanced system based on deep learning, a form of AI that masters tasks by analyzing enormous quantities of information across a vast network of machines.

The long term plan is to gather inputs and automate the more common queries. Sounds great if it works. Siri has been a big disappointment as Apple's ability to deliver great experiences suffers post-Jobs.

Tuesday, August 25, 2015

Krugman out of paradigm

Although it's a terrible word, and an unhelpful communication technique, out of "paradigm" is still the best way I can characterize the continuing struggle academic economics has with understanding how finance, and particularly the monetary system, actually work.

Mosler highlights this when reviewing a recent Paul Krugman column:
Krugman: I know that may sound crazy. After all, we’ve spent much of the past five or six years in a state of fiscal panic, with all the Very Serious People declaring that we must slash deficits and reduce debt now now now or we’ll turn into Greece, Greece I tell you.

But the power of the deficit scolds was always a triumph of ideology over evidence, and a growing number of genuinely serious people — most recently Narayana Kocherlakota, the departing president of the Minneapolis Fed — are making the case that we need more, not less, government debt.


Mosler: This is the right answer- because the US public debt, for example, is nothing more than the dollars spent by the govt that haven’t yet been used to pay taxes. Those dollars constitute the net financial dollar assets of the global economy (net nominal savings), as actual cash, or dollar balances in bank accounts at the Federal Reserve Bank called reserve accounts and securities accounts. Functionally, it is not wrong to call these dollars the ‘monetary base’. And a growing economy that generates increasing quantities of unspent income likewise needs an increasing quantity of spending that exceeds income- private or public- for a growing output to get sold. 
Krugman: One answer is that issuing debt is a way to pay for useful things, and we should do more of that when the price is right.  
Mosler: Wrong answer. It’s never about ‘when the price is right’. It is always a political question regarding resource allocation between the public sector and private sector.
A lifetime ago, Krugman wrote that mathematical models were useful because they took implicit, inconsistent assumptions and make them both explicit and consistent. This was an aid to clear thinking.

His current thinking on monetary operations has a number of implicit assumptions, which is why he believes a fiat state has the same constraints and responsibilities as a household, and why his thinking fundamentally comes from the "sound finance" school of thought and not the "functional finance" school of thought proposed by Abba Lerner back in 1951.

Monday, August 24, 2015

Gell-man's law and Kuran

Gell-man's Amnesia Effect goes:
You open the newspaper to an article on some subject you know well. In Murray's case, physics. In mine, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backward—reversing cause and effect. I call these the "wet streets cause rain" stories. Paper's full of them.
From Michael Chrichton.

Kuran argues:
One mechanism [for authoritarian regimes in the Islamic world] is kinship ties. Because organizations could not form, people relied on their blood ties. This was part of the reason that commercial transaction were and still are (relatively) personal rather than the impersonal model generally followed in developed states. 
From a mugwump (via Andreeson)

Alternatively, it could be exactly the opposite.

Friday, August 14, 2015

China and the Yuan

If China's devaluing the Yuan, it suggests that the economy there is slowing down too much. China remains export driven, and a cheaper currency makes exports more competitive.
Sources told Reuters that the move to devalue the yuan reflects a growing clamor within Chinese government circles for a devaluation of perhaps up to 10 percent to help struggling exporters.
Fundamentally however, exports mean that a country generates real goods, and then exchanges them for numbers in a spreadsheet, overall it's a better deal for the importer than the exporter. Life in an export-driven economy means you work hard, but don't end up with much for it because most of your output has been traded away for digital beads. Mosler (and MMT) argues:
In a weakening global economy from a lack of demand (sales) and ‘western educated, monetarist, export led growth’ kids now in charge globally, the path of least resistance is a global race to the bottom to be ‘competitive’. And the alternative to currency depreciation, domestic wage cuts, tends to be less politically attractive, as the EU continues to demonstrate. 
The tool for currency depreciation is intervention in the FX markets, as China just did, after they tried ‘monetary easing’ which failed, of course. Japan did it via giving the nod to their pension funds and insurance companies to buy unswapped FX denominated securities, after they tried ‘monetary easing’ as well. 
The Euro zone did it by frightening China and other CB’s and global and domestic portfolio managers into selling their Euro reserves, by playing on their inflationary fears of ‘monetary easing’-negative rates and QE- they learned in school
No country is pursuing a fiscal strategy for increase demand and reduce unemployment. Ultimately, fiscal is all that will work, so we have our mix of deflationary low interest rates, increased risk of credit problems, and export-driven devaluation.

Wednesday, August 12, 2015

Is Alphanet like Berkshire Hathaway?

Google has rebranded itself as Alphabet. People are suggesting that Alphabet is like Berkshire Hathaway. I don't think that is an apt analogy, I think GE is a better analogy, but even that falls short.

Berkshire Hathaway is essentially a financial investing vehicle for Warren Buffet. He uses it to buy companies that are cheap. Alphabet is not fundamentally a financial investing vehicle, and it will not be used to buy companies that are cheap. While Buffet is folksy and charming and well loved, Alphabet will be making venture style investments not private equity style investments. Being the Berkshire Hathaway of the Internet sounds great, just like being the Google of the Beverage Industry, but I don't see how it goes further than that.

GE is a better analogy because it is a conglomerate, like Alphabet, with independently operating units, which share broad market information to work a little better. This is very Google, and it should be very Alphabet since Google has a strong competitive advantage in knowing almost everything that happens on the Internet and where the money is (via AdWords, Search, and Analytics).

GE also has world famous management discipline because running conglomerates is hard, and I'm not sure if Google has that discipline now but hopefully it may develop it in the future.

Wednesday, July 29, 2015

What is AirBnB's competitive advantage?

Cyrus Sanati, of Fortune, wonders what AirBnB's competitive advantage is, and if it will be able to ever earn the loft valuation is currently enjoys:
 I am not a fan of any business model where the person purchasing the service is expected to pay a  "fee" to a middleman, especially when that middleman (Airbnb), has no real competitive advantage whatsoever. Simply put, the barriers to entry online are way too low and Airbnb's sole revenue stream, the fees it charges its hosts AND guests, are very vulnerable to attack. I fear Airbnb will eventually be subject to vicious competition, forcing the company to lower those fees until its profit margins go to zero.

Is this true?
Real two-sided markets, like eBay (at least in the collectibles sector) have a very defensible middle man position, collecting fees both from buyers and sellers. I would add Uber in the same category, as I think the friction on the consumer side (multiple ride-sharing apps) and driver side (multiple ride-sharing apps), plus the positive externalities from network density, secure a strong middle man position.
AirBnB rentals would naturally cross-list on, or, and I'm willing to invest more time, at a website on a PC, to find something that's well priced. So I don't think I agree with Sanati that fee-for-service middle men businesses are destined to have low margins, I think it may be true for AirBnB in it's market.

Friday, July 24, 2015

The vector for financial contagion is hedge funds

This article sums up exactly my experiences at DE Shaw during the ruble default/LTCM melt down in 1998:
My Brazilian rate started trading. It blinked 17.40%, 1.50% wider than the prior day. I was out 3 million dollars, and I had no chance to trade. No chance to get out at 15.50% or 16.00%. The market had gapped.
The days following Lehman were notable not only because of the large moves, but because I, and many others, could never have traded at any price. Fists punched screens all across the globe.
It was a self-reinforcing problem. A feedback loop developed. I couldn’t sell my Brazilian rates so instead I sold another investment, Argentinian bonds. Others were doing the same, selling whatever they could, whatever was trading, moving the money into cash. The process devolved down the ladder of securities, from the least liquid to the most liquid. By the end, some of the largest stocks in the world, blue-chip stocks in the S&P 500 were also gapping.
The months following Lehman’s collapse saw the entire financial system start to fail, in a cascade of interconnected plummeting securities, and with them, the world economy.
Emphasis mine. The contagion has everything to do with the homogeneity of the financial investors, and nothing to do with actual market correlations between the assets.

Friday, July 17, 2015

Greece is a victim of Framing

SRW says that Greece, and the European crises, is a victim of framing:
The European crisis is a crisis of bad framing. Characterizing Europe-wide credit problems in terms of national actors, then fixing that characterization into place via intersovereign lending, were deeply pernicious, deeply destructive, errors. I don’t doubt these errors arose more from increments than ill intentions. There were pressures and interests and paths of less resistance — no need for any vast conspiracy. [2] The international framing was convenient to domestic constituencies throughout Europe. In every country, elites find it convenient to deflect passions to an external bad actor rather than take responsibility for mistakes at home. Sometimes on the merits they have a case, sometimes not. Regardless, inflaming passions against another nation is always a terrible choice. Even when a dispute really is a zero-sum conflict of interest between two nations, great diplomacy is called for. That may be a lot to ask for, but it is what civilized countries do.
I agree, but I don't think the problematic frames are "Greeks are lazy and corrupt" or "Germans are cruel and stingy". The problematic frame is "money is like gold" and "nations are like households".

The MMT crowd calls responsible management of fiat currency "functional finance" because it looks at the function fiat money plays in an economy -- as a general ledger entry to track obligations -- and rids it of the inherent value it holds as a store of value, implicit in the "sound finance" frame. In "sound finance", the nation, as a family, needs to have a rainy day fund of savings in case of bad times. In practice, this is disastrous as functionally, the nation needs to run deficits so it's people can net save and be employed, thus maximizing real value.

If you want a find a villain, look at the economics profession which continues to model money and finance as if it was a lump of gold instead of a spreadsheet entry. They are like the doctor's at Vienna General.

Thursday, July 16, 2015

Comments on Greece

Many comments on Greece have been morality plays of one sort or another but the most solid technical analysis comes from Warren Mosler:
[context: Greek debt reduction] 

As suspected, he’s was in it over his head.
My response would be to let the banks remain open with circumstances limiting withdrawals to available liquidity. Liquidity might come from earnings on assets, asset sales, and new deposits. The banks would be free, by mutual agreement, to issue IOU’s to depositors who didn’t want to wait for actual euro. The govt might issue IOU’s if it ran out of cash for operating expenses. To ‘seize control of the Bank of Greece from the ECB’ is nonsensical, as there’s nothing there but a computer with a spreadsheet. It would not give Greece the ability to clear funds outside of Greek member banks that are on that spreadsheet. Haircuts to bonds issued to the ECB and reducing Greek debt would also be meaningless in this context.
Mosler's point is that Greek needs to run larger deficits so it can address it's aggregate demand shortage. Debt reduction does not help this as it fundamentally still has Greece in a position to need surpluses, or too small deficits. So even if Greece had gotten it's haircut, it really would not have helped.

This aggregate demand manage is the prerogative (and responsibility) of any currency issuer, but Greece may not have anyone who knows how to set up a currency, and it certainly does not have anyone who knows how to run a fiat currency correctly. This is why Greece was talking about "seizing banks" when all it needed to do was issue IOUs (like California did briefly during it's budget crises).

Tuesday, June 16, 2015

Germans, Cash, and Debt

This article tries to explain why Germans strongly prefer to keep cash and avoid debt. Oddly, the explanation they offer suggests the opposite behavior:
But, of course, their attitudes toward currency must owe something to Germany’s tumultuous monetary history. During the Weimar-era hyperinflation that peaked in 1923, prices rose roughly a trillion-fold, as Germany attempted to pay its onerous war reparations with devalued marks.
Wouldn't hyperinflation mean you would not want any cash at all, and would want to take on debt (as it's real burden would just be inflated away?)

This reminds me of stories I heard about US mortgages in the late 70s, with interest rates topping 15%. While it might sound like a great time to take on a mortgage (high interest rates mean low house prices, and when rates fall you can refinance down) in practice people tell me that no one took out mortgages so no one bought houses unless the owner offered financing.

If anyone knows the real reason for German preference for cash, and/or US mortgages in the 70s, please let me know in the comments.

Grexit and the potential consequence

Mosler is unimpressed with Varoufakis asking that the ECB lower's Greece's debt burden:
Varoufakis completely misses the point.

First, the only way public debt, for all practical purposes, need be ‘paid back’ is via refinance.
Second, with the implied guarantee of the ECB’s ‘do what it takes’ policy, rates are down and market forces not applicable for those members ‘in good standing’ and not at risk of losing that ECB support.
Third, Greece, and the entire euro zone, is in desperate need of larger deficits/more public debt, either through tax reductions or spending increases (that choice is political). So even if Greece ‘wins’ on all points currently being negotiated the economy still deteriorates, just at a slower pace.
Fourth, if Greece attempts to go to drachma or any kind of ‘parallel currency’, based on discussion I’ve heard and read, it will most likely be a case of out of the frying pan and into the fire. The expertise required to do it right is not evident at any level.
Some of Mosler's points would make more sense in the context of a currency sovereign, which Greece is not once it joined the EU. However, he is correct that fundamentally, Greece needs more deficit spending to put the real economic resources there to work, and Varoufakis is not asking for that. He just wants less deficit reduction.

Suppose Greece defaults, what will be the impact on broader markets?

In 1998, Russia defaulted on its rouble debt (it did not have to, it did) and the US stock market cratered. The US economy is actually not that exposed to Russia, but some hedge funds are, and they had to make margin calls when they wrote down capital in their Russia bond portfolio, and sold equities to do so. This drove down the price of equities, which in turn forced even more forced selling to cover margin calls. If a similar dynamic happens this time, it's a buyers market so be brave, step in, and load up.

However, if banks have built up positions in Greek debt, and they need to write down capital to cover the loss at any scale, then they will have less ability to lend. I don't know how debt constrained the US economy currently is, but less bank lending is deflationary by definition so this could have real economic consequences in the US.

Wednesday, May 13, 2015

Unicorn valuations and the internet bubble

An interesting analysis of unicorn valuations and the term sheets behind them from Fenwick & West. Their conclusions:
  • Investors received terms that provided a fair amount of downside protection for their investment, especially in the event of an acquisition, but relatively few upside benefits.
  • These terms could result in a divergence in interest between early and late stage investors at the time of a liquidity event.
  • A significant percentage of the highest valuation unicorns had dual class common stock which provided founders/management and in some cases other shareholders with super voting rights.
  • Attaining a unicorn valuation appears to be a goal of promising companies raising money, as 35% of the companies we analyzed had valuations in the $1-1.1 billion dollar range, indicating that the companies may have negotiated specifically to attain the unicorn level.
The emphasis on downside protection over upside opportunity suggests that investors, most of whom are not traditional VC btw., are concerned about overvaluation. One wonders why they did the deal at all -- maybe just to add window dressing in their marketing materials?

Also interesting that the bulk of the downside protection is in the event of a white-knight/acquire. If Google buys Unicorn X, they are going to need to pay KKR.

Thursday, April 30, 2015

Should you be able to short internet Unicorns?

This article wonders if you should be able to short private internet stocks with (seemingly) excessive valuations:
Private tech companies could benefit from relaxing restrictions on stock transfers and allowing short-selling, bringing more investors into the market for their stock.
OK, so the summary is a little disingenuous, but more seriously, if someone thinks that a stock, public or private, is too high, then isn't the ability to short it both a good way for the market to capture that information and hopefully come up with a better valuation, and also getting naysayers to put-up or shut up? Also, aren't better valuations important for the economy as a whole, and the sector in particular?

I disagree with both assertions. Firstly, I don't believe that shorting is captured particularly well as market information. It didn't help with the Internet bubble of the 1990s, which is primarily a public market phenomenon, and it contributed to the real estate debt bubble that followed in the 2000s (by banks selling the securities with one hand specifically so they could short them with the other).

Secondly, I don't believe that asset bubbles in general, and this asset bubble in particular, are harmful to the broader economy. Unlike debt bubbles, which wipe out bank capital and so generate a systemic contagion effect, equity bubbles wipe out assets within individual entities, limiting their spread. We bounced back quickly from the crash of '98, but are still struggling with the crash of '08. Japan has yet to emerge from their crash of '91.

When/if this bubble pops, it will knock out some venture capital and private equity firms, will be a damper in a couple of overcooked real estate markets, but the broader economy will continue just fine. If you see stocks tumble, rush in to buy them.

Monday, April 27, 2015

Why does active asset management still exist?

At U Chicago, I was confronted with the paradox of 1) being at the intellectual ground zero for the efficient market hypothesis while 2) being at the vocational launching bad active investment managers. And yes, it was the same people in both classes.

Robin Hanson talks (briefly) about why index funds have not taken over the world:
Even employees who invest for themselves tend to pick at least one high fee intermediary: an active-management investment firm. Few take the low cost option of just directly investing in a low-overhead index fund, as recommended by academics for a half-century.
Whatever the reason, this is why the recent spate of Roboadvisors have come to the fore (that, and their very slick websites).

Looking at my own portfolio, I see lots of index funds, and the effort to patch together international index funds back when that was hard to create, plus strange situation specific hedges (REIT, Muni Bonds) and a handful of experiments (BP, Greece, Fannie Mae bonds).

Certainly time to rationalize it all, but tricky to do without triggering a lot of capital gains.

Friday, April 17, 2015


No idea how it works, but these will be great (.pdf).

Monday, April 13, 2015

LinkedIn acquires

Yesterday, on Crunchbase, I could sweat that the Lynda entry said it raised it's series B at a pre-money valuation of $1B in Jan 2015, giving it a post-money valuation of about $1.2B. The LinkedIn acquisition at $1.5B then represents a poor cash-on-cash return, it seems.

I wonder why the company sold for $1.5B just 4 months after raising money at a $1B-$1.2B valuation? What does this say about the online education space?

If anyone has insights, I'd love to hear them in the comments.

Friday, April 10, 2015

Job-to-be-done by the Economist

It's worth reading the entire interview of Economist deputy editor Tom Standage, but this really stuck out:
...what we actually sell is what I like to call the feeling of being informed when you get to the very end. So we sell the antidote to information overload — we sell a finite, finishable, very tightly curated bundle of content.
I have to believe that this came out of some deep customer insight work, because it is not normally how media organizations present what they do, or more precisely, what role they play in their readers' lives.

This level of understanding what job your product does, in the Economist's case, giving the reader all they need to know in 90 minutes a week, with a clear finish line, is very specific and insightful. As the Economist continues to move to move to digital, the question will become, is this job important on the phone? And if not, what new job takes its place?

Friday, March 20, 2015

California has plenty of water

I was driving through the Central Valley recently and saw an orchard of uprooted trees. I don't know what they were, but I assume that they'd been dug up because the farmer didn't want to irrigate them any more.

A pity. But California still grows rice.

Which is why I say California has plenty of water, it just does not use it particularly well. Since farmers do not pay for water in a metered way, or at market prices, they waste it. And since ground water is not regulated, they waste that too. Instead, we have a series of hairshirt awareness raising measures that do little to address the real, long term water needs of this area, and may actively hurt by crowding out such considerations with theater.

Some good references in this MR post.

Tuesday, March 17, 2015

Why MMT is still important

Mosler refers to individuals who understand MMT as being "in paradigm", which those who do not as "out of paradigm". I've had pushback from JKH about the term "paradigm" when talking about this, which is fine, but I think this post from Sankowski on China and consumer demand, who I would consider someone to understands this stuff, illustrates just how, well, paradigmatic the whole thing remains.

The issue is China switching from a production economy to a consumer one:
“China is changing from a producer model to a consumer model,” said Stephen Roach, a senior fellow at Yale University in New Haven, Connecticut, and former chairman of Morgan Stanley Asia. “That’s an enormous opportunity for the U.S.”
Surging Chinese exports blew a big hole in the U.S. labor market over the last quarter-century, all but wiping out some industries. As many as 2.4 million American jobs were lost from 1999 to 2011 as a result, according to calculations by David Autor, a professor at the Massachusetts Institute of Technology in Cambridge, and his fellow authors in a paper last year.
Sakowski adds:
“The bleeding has stopped” China is really the only economy large enough to do significant damage to the US at this point.
So who is next? Which countries can disrupt the U.S. economy with both low wages AND the the supply chain which supports those low wages.
But this whole notion of exporting countries, such as China, damaging labor markets in the US is completely out-of-paradigm. The MMT argument goes, that if China wants to trade real goods and services for US$, then the US Gov needs to run higher deficits to satisfy the Chinese demand for US$ while maintaining full employment at domestically. Any domestic labor market weakness is due to insufficient spending (as always) and not actions by the exporter. The terms of trade, in this case, are firmly in favor of the importer as deficit spending is easy, while the exporter needs to forgo the real output of their labor.

I think this highlights just how much of a mental shift you need to really look at fiat currency as what is it, instead of the various barbarous relics that continue to cloud our thinking.

Tuesday, February 24, 2015

Social in the Media Age

A number of interesting articles about how various social media phenomenon came into being and have grown over time.

1. The argument that Snapchat is like a TV channel and so may be better for brand advertising:
If the growth in Ads is primarily all driven by higher click-through rates due to better relevant ads on mobile, than all of the private mobile companies that have a great medium for advertising will be viewed much more favorably and be more valuable…Specifically if ads on mobile are more engaging for consumer and more relevant than desktop ads than the addressable ad market for mobile will be bigger than desktop ad market and the valuations of mobile companies will be greater than desktop all else equal on audience size etc. This would be a very positive factor for Snapchat.
If Facebook knows this to be true it would result in them being willing to pay higher valuation for mobile companies than other acquirers because Google won’t know nor will yahoo msft etc because none of them have scale in mobile to understand these powerful secular trends and in essence they under value mobile vs FB and thus under invest and fall farther and farther behind.
Viewers, particularly younger ones, may be viewing more media on Snapchat, but have there been any truly aspirational marketing messages on mobile (aside from the inherent "medium is the message" quality inherent in the device and popular apps themselves?). My experience with FB is that it's driven by being the only channel you can make a mass buy in which delivers installs because it has good size. And the buys are made because it's the only way to get into Apple's top 10 lists. If/when Apple develops it's own Adsense, FB's mobile market goes away.

2. Great essay on the history of YouTube. Nice to see how the positive feedback mechanisms created social economies of scale. This is something I see a lot of in consumer facing entertainment businesses.
The constant stream of copyright-infringing Family Guy and Daily Show clips fed YouTube’s exploding traffic. Uploaders of “user-generated content” (as YouTubers used to be called) were able to mooch off of some of that traffic, and so chose YouTube either when starting consistent projects or uploading potentially viral videos. YouTube built the initial audience, and the more content it had, the more that audience grew.
3. In music, the artist is now the product:
There have been numerous successes in the music industry in recent years that were clearly not built on music, but on the extreme popularity of an artist’s online profile. Some artists branded themselves and promoted themselves to the point of becoming veritable online reality stars, before they had even released any music. Some of these online reality stars were picked up by large record labels; their music was just good enough to release, and with the notoriety already established on social media, the artist became a marketing machine for the record label.
In these cases the music was a loss-leader; it was showcased as the product being sold, but all of the money the artist generated was through ancillary income: touring, merchandise, endorsements and live events, maybe even public appearance fees. Nobody was buying their music, people were buying their image. These artists essentially achieved some sort of twisted fame, but not on the strength of their music.
People were never buying the music. They were buying the zeitgeist. Art is called into being to fill the space which precedes it. Venue first, content second.