Tuesday, November 22, 2016

Arthur Demarest, on Collapse

I am big fan of Odd Lots, a podcast hosted by Tracy Alloway and Joe Wiesenthal. They are editors at Bloomberg.

Their latest episode is an interview with Arthur Demarest, an anthropologist at Vanderbilt who spends most of his time living in a tent at an archaeological site in central America.

Because he does what he does, Demarest has deep insights into what civilizations look like before they collapse.

One of his ideas is that florescence, which we see in the pyramids of the Maya, and in the art and architecture of the Renaissance, is often a sign of trouble, not health. Grand projects of this kind historically have preceded, and often contributed to, collapse. A related point of his is that even as highly specialized, hyper-connected economies create wealth, they are much more vulnerable to catastrophic disruption than simpler ones.

Demarest made similar points in an interview two years ago. So, no, this is not about politics.

Recommended listening.

Friday, November 11, 2016

Warren Buffett's Post-Election Views

New interview of Warren Buffett by Poppy Harlow, from CNN.

The topic is the economy, and the world, after the election of Donald Trump as president.

Buffett has his concerns; he supported Hillary Clinton, and it is clear that he would have preferred that we had her finger on the nuclear button rather than Trump's.

On balance, however, Buffett is reasonably optimistic. He compares Trump to Harry Truman. Truman was not a great businessman, yet he still made a very good president.

Worth watching.

Thursday, August 11, 2016

A Face in the Crowd

I recently re-watched A Face in the Crowd, the classic 1957 film. Elia Kazan directed. It is about how American society might react to the rise of a populist.

Wow! So much of it speaks to what is happening in the current presidential election. A great example of how good art gives us true insights.

Highly recommended. You can find it streaming at Amazon.

Thursday, July 7, 2016

Everyone Else is Doing It

A thought that is semi-deep, and a bit dark:

Normally, in finance, when “everybody is doing it,” it’s a bad idea.  For example, if everyone is piling into internet stocks, it’s a bad idea to buy them (because they will be overpriced).  If everyone is selling, it’s a bad idea to sell (the shares will likely be underpriced).

But there’s a big exception to the wisdom of contrarianism, in the case of credit risk. If everyone is taking a certain credit risk, you might want to go ahead and take it. Why? Because if it goes bad, the government will bail you out in order to prevent societal collapse.

If only a few people will be hurt by the collapse of money market funds, they are not safe. If everyone will be hurt, then they are safe not in the first instance, but in a second order way: because of the implied federal guarantee that their widespread use has brought into being. So because something is unsound enough (and big enough) to be a threat to the system, it is safe!

This is the sort of insight that almost physically repulses me. I do not recommend factoring it into an investment approach. Yet the world does work this way, sadly. At least in some areas, at some times.

Tuesday, May 3, 2016

VCs and "Dirty Term Sheets"

A recent blog post by Bill Gurley, "On the Road to Recap," has been getting shared lately. It is well worth reading. The topic is the current excesses in venture capital, which appear to be in the process of deflating.

In particular, Gurley explains "dirty term sheets," which keep up the appearance of high valuation for a so-called unicorn.

There can be clauses in the terms of later-round capital raises that beggar earlier rounds, if certain contingencies come to pass. For example, the ownership percentage of those investing in the last round can go up (costing earlier investors) if the company does not make a public offering by a certain date. Such terms make valuation look higher on paper than it really is, because it is hard to make appropriate (downward) adjustments to a company's value for the presence of such contingencies. Human nature is to overlook them, as the post explains.

Gurley is saying that terms of this kind are a form of structured finance -- but for venture capital, rather than for mortgages. That is a really interesting way to think of this.

This is a likely area in which more problems will surface. Also, the post makes a persuasive case that there is pent-up demand for going public in Silicon Valley.

Wednesday, April 20, 2016

Nice Global Shiller CAPE Tool

This page from Star Capital in Germany is a great tool that shows the Shiller 10-year CAPE (and more) for markets all around the world.

There is a related page that turns the valuation into expected long-term returns.

Thursday, April 7, 2016

Wisdom on Sanders and Trump, from 1837

History doesn't repeat itself, but it rhymes, as the saying goes.

American politics today is a decent rhyme for events from 180 years ago. When you read the following, replace "Republican" for "Whig," and think of the financial crisis of 2008:
There were immediate reasons for youthful rhetoric and high drama in 1837. Throughout the spring, just as Martin Van Buren inherited the presidency, a terrible panic gripped the American economy. The price of cotton fell precipitously in the South, while banks suspended specie payments and unemployment climbed in northern cities. The panic severely shook public confidence and galvanized Americans to take sides, defining themselves both politically and in a generational sense. Whigs and Democrats bitterly blamed each other for the disaster. But for many young Americans, the Panic of 1837 exposed the bankruptcy of all American politics, and an older generation conducting its affairs selfishly.
The text is from the book Young America, by Ted Widmer, published by Oxford Univesity Press. I am quoting from the 1999 edition. Ted is a smart guy: he got his Ph.D. at Harvard, is formerly the librarian of Brown University, worked in the White House, and is currently a fellow at the Center for American Progress.

For a more timely view, I recommend Paul Solman, the economics correspondent for the PBS NewsHour. He recently interviewed Robert Reich, a liberal, and Charles Murray, a conservative, about the economic forces behind the rise of Sanders and Trump. What Reich and Murray say is consistent with 1837: there is now a general disillusionment with the establishment, grounded in economics, that transcends party, and that helps explain why the two breakout candidates are off to either side of mainstream. Paul's interviews with Reich and Murray, linked here and here, are well worth watching.

By the way, returning to the quoted text: Ted Widmer, its author, who is a friend of mine from college, used to play heavy metal guitar for a semi-famous rock band, The Upper Crust. In the linked video, Ted is in the red coat, singing the second song. The band may be the answer to the musical question, what would Paul Revere and the Raiders sound like, if they had graduate degrees? Recommended listening.