Tuesday, July 22, 2014

"When Big is Beautiful: Megacaps Break Out"

From Barron's Focus On Funds:
Big, slow-growth, safe: These are a few of the adjectives frequently attached to some or all of the market’s biggest stocks. Lately, you can add outperforming.

The S&P 100, the index of the market’s truly giant stocks such as Apple (AAPL) and Exxon Mobil (XOM), is showing signs of life versus the plain-vanilla S&P 500.

The attached chart from Bank of America Merrill Lynch technicians Stephen Suttmeier and Jue Xiong show how these giant stocks are breaking resistance versus their merely large peers lately, having punched through the 200-day moving average.
http://s.wsj.net/public/resources/images/BN-DU333_OEX_P_20140722122617.jpg
“Sustaining the break above the 200-day moving average and relative chart resistance at the October 2013 low and April 2014 peak for the OEX vs. SPX ratio would confirm a bottom for mega caps relative to large caps,” Suttmeier and Xiong write.

“OEX” is the S&P 100. SPX refers to the S&P 500.

For funds, watch iShares S&P 100 ETF (OEF) or Vanguard Megacap ETF (MGC) versus the broad market....MORE
See also: 
Big Tech Surges Back - Barron's

"Donald Sterling Ready To Go All Argentina On Estranged Wife"

From DealBreaker:
He may not even be allowed to set foot in the Staples Center parking lot on game nights, but Donald Sterling is motivated by a much higher force: spite. Strong, powerful spite....MORE
They've lost me on the Argentina reference, I figured Mrs. Sterling would somehow be pari passu with the earlier Mrs.' Sterlings but that wasn't the case. The tags on the story appear to be clues:
but I don't really know how to interpret them.

While I ponder mixed-up memes here's a cat selfie getting photobombed:

Photobombers are literally everywhere these days, and they can completely ruin the effect of a selfie, especially if you are trying to look intellectual.

14 Tips For Taking The Perfect Cat Selfie 
So you’re a cat, and you’ve decided you need to update your profile pic. Don’t panic! Just follow these simple DOs and DON’Ts, and you will be well on your way to a high-quality cat selfie that your friends will absolutely love....

Hurricane Watch: Two Tropical Waves Coming Off Africa

Tropical Depression #2 doesn't look to develop but behind it are some potential mischief makers.
From Wunderblog:
...ELSEWHERE in the Atlantic, there are 2 Tropical Waves over the far eastern Tropical Atlantic that have brought along more ‘moisture laden air’ (versus dry, Saharan air). In addition, there are now several somewhat stronger appearing Tropical waves upstream over Africa (only 2 are shown in Fig 9) that will reach the Atlantic later this week and early next week, with one of these systems having a significantly higher potential for development next week.

Fig 8: Aside from TD#2, only 2 significant Tropical Waves are present over the eastern most Atlantic, and they are entangled in the African Monsoonal TROF and/or ITCZ.

Fig 9: Tropical Waves over Africa have become somewhat stronger over the past week, with the easternmost one in the above image showing a mid-level 'turning' on imagery loops.

In the meantime, however, no new tropical cyclone formation is expected during the remainder of the week.... 

"Banksy, Bitcoin, And The Winklevoss Twins: An Online Art World Love Story"

Figure out how to short "art as an asset class" and earn enough to bet against the Qataris.
From Fast Company:
Somewhere Andy Warhol is smiling a crooked smile.

Cameron and Tyler Winklevoss, the Internet entrepreneurs perhaps best known for their associations with Facebook and Bitcoin, are the latest techies to leap into the art world. This week, the twins’ Winklevoss Capital announced an investment round in Paddle8, a New York-based art auction house known for their high-profile charity events including a recent Faberge Egg auction. Paddle8 has flirted publicly with the use of Bitcoins for art transactions in the past and is one of the more tech-savvy of the online auction houses looking for a piece of the international market. Winklevoss Capital declined to discuss the specifics of the investment but said it was their first in the art or auction arenas....MORE
HT: Art Market Monitor who highlights this bit:
...After being introduced by an existing investor, Julka said, “we talked about how there has been so much conversation about art as an asset class, and while some people think of Bitcoin as a currency other think of it as an asset class. There’s a lot of commonality about how Bitcoin is thought of, and as we spoke with them it became clear they could be very helpful both in terms of global expansion and company building.”
By email, Tyler Winklevoss wrote to Fast Company that “The art market is global and like many global markets it currently feels the pain, inefficiencies, and high-costs of our current payment systems. Bitcoin rethinks the way we transfer value. It is borderless, frictionless, and instant and should be able to bring these qualities to art transactions just like any other transaction.”...

Google's $1,000,000 Little Box Challenge Is Now Open

From GigaOm:
Is anyone out there working on an innovation that can shrink a power inverter from cooler-sized down to tablet-sized? An inverter is a device that converts direct current, from sources like solar panels or batteries, into alternating current to be used in homes. Google has a brand new contest, called the Little Box Challenge, that is offering $1 million to a team that can make a powerful inverter as tiny as possible....MORE

What's Moooving: Cows as Safe Assets

As Carnegie Mellon Financial Engineering prof. Dogbert explains, we are dealing with aggregates here:

December 13, 2008

This, however, leads to a whole new set of problems that come from physically* bundling the gals into the Collateralized Cow Obligation wrapper.
They ask questions like "Does this CCO make my butt look fat" and seriously, how can you answer that without incriminating yourself?
For this reason some practitioners prefer to stick with synthetic livestock, not to be confused with....ummm..., where was I?

From FT Alphaville:

In defence of cows as safe assets
You’ll remember this from last year, we’re sure:
Our main finding is that, on average, [rural Indian] households earn negative returns on their investments in cows and buffaloes if labor is valued at market wages: we estimate average returns of negative 64% and negative 39% for cows and buffaloes respectively. If we value the household’s own labor at zero, estimated average returns increase, to negative 6% for cows and positive 13% for buffaloes… if cows and buffaloes earn such low, even negative, economic returns, why would rural Indian households continue to invest in them?
That, from Anagol, Etang and Karlan, led to a host of speculation about various economic and cultural factors which might explain India’s ability to slide past the “central tenets of capitalism”… h/t’s to the Onion all round.

Which is fine. India does have a religious, cultural, and political affinity with the cow — see the hindu nationalist RSS in 1952 or the just completed elections for a snapshot — and the lack of financial inclusion over here, something the RBI is working on, might add to the rationality of owning a negative yielding cow. (Gold too for that matter)

BUT whether those are sufficient explanations for the willingness to hold such negative returning assets (and the suspicion had to be they weren’t, and not just because buffaloes also came up negative) may be an oversimplified question. Because, well, the whole “cows disprove central tenet of capitalism” call seems a touch overdone....MUCH MORE
*Fortunately the Reserve Bank of India takes a very liberal view of dematerialized assets, with many purveyors offering 'demats' served up with a soupçon of quasi-mysticism:
"Dematerialising physical shares can be a horrible experience. It can take anywhere between three months to three years," warns Kartik Jhaveri, director, Transcend India....
Somehow related:
Can Hindu Deities Open Brokerage Accounts Allowing them to Trade Securities?

UPDATE: Bombay High Court Rules Hindu Deities MAY NOT Trade Securities
No demat accounts for Hindu gods...
Indian Central Bank Issues Guidelines on Dematerialized Gold in Effort to Reduce Need to Import Physical

Ya Baby! "The hunt for a monopoly position in business"

Having the Holy Roman Empire postal monopoly worked out pretty well for the Thurn und Taxis fam who Wikipedia describe as "well known as owners of breweries and builders of many castles."

From Simon Taylor's blog:
Economics students learn early in their microeconomics course that there is a desirable market condition called perfect competition, which consists of large numbers of more or less identical firms competing aggressively to meet the customer’s wants. The competition is so fierce that no firm has any ability to charge a price above the absolute minimum needed to stay in business. So the customer is assured of a low price and the economy makes efficient use of resources, since only the most cost effective companies can survive.
They then learn about how bad monopoly is. That is the opposite type of market in which there is a single supplier who naturally charges whatever the market will bear and has little incentive to be cost efficient or to be attentive to customer needs. A market with monopoly will be inefficient (*), will charge customers more than in perfect competition and probably won’t be innovative or offer a decent service.

The problem with this picture is that very few actual industries are like either case. Perfect competition is a fiction, an “ideal type”. The nearest we get to it is in agriculture and some other basic commodities, where the product is identical and firms have no market power or ability to add any sort of value or service that would merit a higher price. Many markets are competitive but with only a few companies, and the product is usually slightly differentiated.

Take coffee shops. There are plenty of choices for a customer in Cambridge looking for a coffee. There are the three big chains (Costa, Nero and Starbucks) plus various independents. All offer broadly the same product (though for my taste the brown milk that you get in Costa or Starbucks barely rates the name coffee) but they each have subtle differences in ambience, style, service and location. They compete on these features, not on price, but their products are broadly priced the same, which suggests some degree of restraint from competition.

That type of market is called monopolistic competition in economics textbooks because the product or service is not identical and each firm has some degree of influence over demand. Innovation is encouraged in that type of market because a small enhancement can cause customers to switch. But other customers are loyal or just conservative, which means that the coffee shops aren’t relentlessly trying to retain every single customer each day, which is the miserable fate of a company in a perfectly competitive market.

Pure monopoly in the sense of a single supplier is rare except in the natural monopolies of network utilities, where there is a strong cost argument for a single electricity transmission wire or water pipe. Competition would be wasteful and no new entrant would expect to make money. So these industries are inevitably monopolistic and are usually regulated as such.

But quasi-monopolies, in the sense of a dominant supplier, are quite common. And the goal of many businesses is precisely to try to establish such a position. Peter Thiel, the co-founder of Paypal and an early investor in Facebook, taught a course on start-ups at Stanford University in 2012 and this blog provides some notes on the course (it’s written by Blake Masters, Thiel’s co-author of the new book Zero to One so the notes are likely to be a reliable guide to what Theil said). One thing that struck me was his argument that successful capitalism and monopoly are not opposites, as the textbook view of economics might suggest. On the contrary, he argues that a start up should be intending to find or build a monopoly or at least dominant position that it can completely own. Unless a start up has that ambition or potential it’s not worth investing in or working for.

So monopoly is both the goal of a dynamic business and an outcome that reflects success. Perfect competition is neither a good guide to what most business looks like, nor a desirable goal that any business should accept.

Successful examples of quasi-monopolies would include Google, Facebook, LinkedIn and for a while Apple and Microsoft. None of these is or was a 100% monopolist, though Microsoft came very close with the dominance of Windows for a while. And none of them has an unassailable position, because technological change makes new disruptive entrants a possibility, which is why so few companies keep their monopoly position....MORE

Lay Off the Almond Milk, You Ignorant Hipsters

The main concern is the 1.1 gallons of water it takes to grow each almond.
As to the rest of it, hell, who cares?
From MotherJones:

 
Take almonds and just…wait, why add water?
Almonds are a precious foodstuff: a crunchy jolt of complete protein, healthful fats, vitamins and minerals, and deliciousness. Given their rather intense ecological footprint—see here—we should probably consider them a delicacy, a special treat. That's why I think it's deeply weird to pulverize away their crunch, drown them in water, and send them out to the world in a gazillion little cartons. What's the point of almond milk, exactly?

Evidently, I'm out of step with the times on this one. "Plant-based milk" behemoth White Wave reports that its first-quarter sales of almond milk were up 50 percent from the same period in 2013. In an earnings call with investors in May, reported by FoodNavigator, CEO Greg Engles revealed that almond milk now makes up about two-thirds of the plant-based milk market in the United States, easily trumping soy milk (30 percent) and rice and coconut milks (most of the rest).

Dairy is still king, of course, comprising 90 percent of the "milk" market. But as our consumption of it dwindles—down from 0.9 cups per person per day in 1970 to about 0.6 in 2010, according to the US Department of Agriculture—plant-based alternatives are gaining ground. Bloomberg Businessweek reports that sales of alternative milks hit $1.4 billion in 2013 and are expected to hit $1.7 billion by 2016, with almond milk leading that growth.

Now, I get why people are switching away from dairy milk. Industrial-scale dairy production is a pretty nasty business, and large swaths of adults can't digest lactose, a sugar found in fresh dairy milk. Meanwhile, milk has become knit into our dietary culture, particularly at breakfast, where we cling to a generations-old tradition of drenching cereal in milk. Almond milk and other substitutes offer a way to maintain this practice while rejecting dairy. (Almond milk has been crushing once-ubiquitous soy milk, perhaps partly because of hotly contested fears that it creates hormonal imbalances.)

All that aside, almond milk strikes me as an abuse of a great foodstuff. Plain almonds are a nutritional powerhouse. Let's compare a standard serving (one ounce, about a handful) to the 48-ounce bottle of Califia Farms almond milk that a house guest recently left behind in my fridge....MORE
Possibly also of interest:
Trading the California Drought: Almonds and Water
California Drought: Why Farmers Are 'Exporting Water' to China  
"California Almonds Saved by Diverting Water From Veggies" 

How Forbes Got to a $475 Million Valuation

From the Columbia Journalism Review:

That’s what a Hong Kong investor has agreed to pay for a firm that two years ago had trouble paying its rent
Integrated Whale Media Investments of Hong Kong is now the majority owner of Forbes Media, valuing the company at a whopping $475 million.

What the buyers get is a dwindling print magazine, digital growth, and the Forbes brand, which has been seriously diluted in the last four years. It’s hard to imagine an American investor paying half the price.

Fortunately for the Forbes family (and for Bono), the brand apparently still has outsized allure for rich people in Asia. The $475 million valuation, if it’s accurate, is an enormous number for a company that projected late last year that it would take in $21 million in earnings before interest, taxes, depreciation, and amortization in 2013, according to a pitchbook obtained by Ken Doctor. Ebitda doesn’t include the cost of servicing debt, and Forbes’ is large enough that it went into technical default in 2011. It also had trouble paying its rent in 2012.

Its business fortunes have turned since then, but that has come at the expense of Forbes’ journalistic credibility.

It may be hard to recall now, but Forbes was a journalistic force not so long ago. Now it has a boss whosays things like “content marketing just might be the full employment act for journalists.”
Four years ago, Forbes acqui-hired Lewis DVorkin and installed him as chief product officer. DVorkin implemented the model he had pioneered at True/Slant, where writers get paid by the traffic they bring, particularly repeat visitors.

This model allows Forbes to have a far larger stable of writers than it could ever employ under more traditional models of work that are subject to things like minimum wage laws. It’s sharecropper journalism. Writers effectively are tenants on Forbes.com, and Forbes gets a big cut of what they bring in. Or it gets everything: The median Forbes writer gets zip.

Forbes has just 40 staff reporters, but it churns out 400 pieces of content a day thanks to its 1,200 contributors. Four hundred of those are “paid freelance contributors,” who must write at least five times a month and interact with commenters. Sixty of them make more than $45,000 a year from Forbes, which means 85 percent of them make less than that. Throw in the unpaid contributors and that moves to 95 percent....MORE

Monday, July 21, 2014

DÏGG PÏCKS: The New Yorker Opened Their Archive — Here's Where To Start

You had me at superfluous umlauts.
From Digg:
In case you haven't heard, America's favorite magazine to carry in public has pulled a Willy Wonka and opened up part of their robust archive to the general public. Now you can finally join the ranks of your friends whose grandparents gave them the complete New Yorker on CD-ROM and see what all the fuss is about. But where to begin?

To help make sense of the overwhelming collection, the Digg editorial team has put together a selection of personal favorites. Of course we highly suggest reading as much of the New Yorker archive as possible, but if you're strapped for time and/or looking for some place to start, you can't go wrong with these:
Regrets Only by Louis Menand
Part intellectual history, part biography, Louis Menand's article about Lionel Trilling gave me my first real introduction to one of our most significant (and arguably last) public intellectuals. It's a piece about what happens when leading a life of the mind makes you famous. — Anna Dubenko
Life At The Top by Adam Higginbotham
Adam Higginbotham's look into New York City's most complex window-washing rig pulls you in with whimsy, carefully walks you through a history of the trade, and leaves you with a true appreciation of window cleaners. It's a great example of what reporting a story into the ground can produce. — Steve Rousseau
...MUCH MORE

Digg highlights one of the better recent New Yorker pieces that we also studied, back in 2013:

"The Spectacular Thefts of Apollo Robbins"

I'm Tellin' Ya: "Nervous Jitters Will Subside - Market Wants To Head Higher - Earnings Have Been Good"

S&P500 1973.63 down 4.59, DJIA 17,051.73 down 48.45, SPY 197.34 Down 0.37 (AH down another 0.23)

http://www.nakedcapitalism.com/wp-content/uploads/2014/05/Chameleon.jpg

From Options 1:
Posted 11:00 AM ET – Last Thursday, the market declined when the US and Europe imposed new economic sanctions against Russia. Hours later, a commercial jetliner was shot down by Ukrainian rebels and the situation deteriorated. There is little doubt that the weapons and training were provided by Putin and we can expect additional economic sanctions against Russia. The bid to the market is strong and stocks rebounded Friday.

If not for the political turmoil (Ukraine and Gaza), the market would be making new all-time highs. Earning season has started off on a strong note. Profits are up almost 7% and revenues are up 3.5%. Healthcare got a boost from UNH and HMOs have been strong. Cyclicals benefited from Alcoa’s strong number and growth in China is back on track (7.5%). Banks prepared for bad news and the results were better than feared. The financial sector has been moving higher. Intel set the tone for tech and Google also made a nice move after earnings.

We need tech to tread water after recent gains. Apple and Microsoft will post results after the close Tuesday. This is going to be a very busy week for earnings. The recent jobs recovery should be confirmed in statements made by CEOs. Guidance for Q3 needs to be positive if the market is going to extend this rally....MORE
image

Insurers May Not Get Hurricane Benefit From El Niño This Year: "High chance of cyclone near Lesser Antilles" Within 48 Hours

As the hype-n-tout about this season's El Nino begins to fade* the hurricane forecasts are going to have to be changed to reflect the increased risk of cyclone formation.
(see NOAA)

The largest change is in decreased wind shear which allows more storms to spin up. There are additional teleconnections that affect steering winds and even some hypothesized changes in sea surface temps. See below.
And today's blurb, from Reuters:
An area of low pressure located east of the Lesser Antilles now has a high, or 70 percent, chance of becoming a tropical cyclone during the next 48 hours, the U.S. National Hurricane Center (NHC) said in its latest advisory on Monday.

"Only a small increase in organization of shower activity would result in the formation of a tropical depression as the system moves westward to west-northwestward at 15 to 20 miles per hour during the next day or two," the Miami-based weather forecasters said.
*NOAA Changes El Niño Forecast From "We're All Gonna Die" to "Weak to Moderate"

From the University of Illinois:

AtlanticEastern Pacific

Average El Niño Avg. Average El Niño Avg.
Named storms 9.4 7.1 16,7 17.6
Hurricanes 5.8 4.0 9.8 10.0
Intense Hurricanes 2.5 1.5 4.8 5.5
The primary explanation for the decline in hurricane frequency during El Niño years is due to the increased wind shear in the environment.
In El Niño years, the wind patterns are aligned in such a way that the vertical wind shear is increased over the Caribbean and Atlantic. The increased wind shear helps to prevent tropical disturbances from developing into hurricanes. In the eastern Pacific, the wind patterns are altered in such a way to reduce the wind shear in the atmosphere, contributing to more storms.

"A New Digital Currency Whose Value Is Based on Your Reputation"

As an adjunct to Izabella Kaminska's July 16 Dizzynomics riff "Does trust imply collaboration?" we have Wired, July 18:
 hand-coin

Bitcoin turned money into something completely virtual. Using a worldwide network of machines and the power of pure mathematics, it put currency in the hands of computer programmers, free from the rules and regulations of big government and big banks. But J. Chris Anderson wants to do something even more radical.

Anderson is starting a new digital currency project tentatively dubbed Document Coin. It’s a bit of an odd duck, but it’s intriguing, and Anderson is worth listening to. He’s the co-founder and chief software architect of Couchbase, a kind of new-age database with some serious cred among Silicon Valley developers.
Instead of using pure mathematics to prevent things like the same person spending the same money twice, Document Coin will rely on personal reputation to keep all transactions in order. And each unit of currency created using Document Coin could have different values in different situations. If you use a coin in one place, it might be worth more than if you use it in another. The goal, Anderson says, is to get people to completely rethink the entire idea of money.

Unlike with bitcoin, anyone will be able to create a new Document Coin anytime they want.
Unlike with bitcoin—which keeps its currency scarce by rewarding it only to those who participate in what amounts to a race to solve complex cryptographic puzzles—anyone will be able to create a new Document Coin anytime they want. The value of each coin will be completely subjective, depending on who creates the coin and why. “For example, the coin my disco singer friend created and gave me at my barbeque might be what gets me past the rope at the club,” Anderson says. A coin minted by tech pundit Tim O’Reilly might be highly prized in Silicon Valley circles, but of little interest to musicians. “It’s a bit like a combination of a social network with baseball trading.”

Ultimately, he hopes to get developers thinking about the social implications of crypto-currencies, and to get people to question the idea that everything needs to have a set, numeric value. “If bitcoin is the toy version of what we’ll all be using the future, then I want to build the crazy art project version of the future,” he says. Document Coin’s usefulness as a real currency is limited, but Anderson does hope people will eventually want to use it. “If you build something, you don’t want to be disappointed if it succeeds,” he says. “You need to build things that you would be happy to see take off.”

To that, end, Anderson is working on getting the technology right. The idea is that each new Document Coin will be a cryptographically unique token that contains two parts: a set of encrypted data that only the owner of the coin can see, and a set of public data about the coin. “I could show you that I have a Tim O’Reilly coin without showing you exactly which one,” he says....MORE

Grantham, Mayo, Van Otterloo: "A Farmland Investment Primer"

From Grantham Mayo Van Otterloo:
July, 2014 White Paper
Julie Koeninger
Farmland is a real asset that combines solid investment fundamentals with the potential for attractive cash yields, inflation hedging, and consistent returns from biological growth. Furthermore, farmland total returns tend to be uncorrelated with financial asset returns, offering genuine portfolio diversification for institutional investors. While institutional ownership within the asset class has grown steadily over the past few years, it still accounts for less than 1%1 of total global agricultural land ownership, presenting significant opportunity for sustainable yield enhancement through targeted farmland investment in certain regions.

The pages that follow present an overview of the key characteristics and potential risks of farmland investing, consider the routes for implementation, and make the case for a diversified, cross-regional approach to the asset class.

Farmland Investments Defined
Farmland investments consist of direct investments in rural land along with crop and livestock assets that produce food, fiber, and energy. Farmland investments focus on the productive capacity of the land base, and returns are based on the biological growth of crops and livestock, as well as appreciation of land and related assets. By their nature, farmland investments are long-term illiquid investments in real assets.
Investments are grouped into three general categories:
1.Row crop investments include annual crops such as corn, soybeans, cotton, wheat, and rice.
2.Permanent crop investments include perennial crops such as fruit and nut crops, which have both pre-productive and mature periods. Pre-productive or “greenfield” investments where trees or vines are planted on bare ground have a “J-curve” return profile. Some mature permanent crops, like almonds, peak in productivity and then decline, so orchard age is an important factor in estimating productivity and value.
3.Livestock investments include land leased to local operators for grazing or direct livestock ownership and operation.

Institutional farmland investing typically focuses on globally competitive agricultural sectors including:
■Corn, soy, wheat, rice, and other bulk commodity row crops that can be produced most efficiently at scale.
■Relatively storable permanent crops such as nut crops or wine grapes.
■Large-scale livestock production, including dairy and beef cattle operations.
Efficient global producers, such as U.S. corn, soybean, and nut crop, New Zealand dairy, and Australian beef producers, benefit from participation in export markets, and receive a globally determined price for their output.
Management Style: Leasing vs. Direct Operation
In many regions of the U.S. and some other parts of the developed world, row crop properties can be leased to high- quality local farm operators at fixed or variable rents that provide attractive yields to the investor. These farmers leverage the scale and productivity of their operations by owning some land, but also leasing land from investors in order to maximize their return on investment. In other geographies lacking a robust farmland rental market, particularly in developing regions, a lack of leasing demand from qualified farmers makes direct operation the best approach to maximize returns. In direct operation, the farmland investment manager employs a farm manager to operate the farm. While direct operation involves a higher risk/return profile because the investor assumes both price and yield risk, it is often the preferred management style for permanent crops and livestock as it ensures that the long-term asset is well-managed and value is maintained.

Property Management
Like most real estate investments, farmland investment requires specialized property-level management. While more intensive property management is required for direct operations, property managers also provide critical oversight of tenants operating leased farms. Property management may be vertically integrated with investment management or outsourced to third-party providers. Outsourcing allows the investment manager to hire the property manager best suited to manage each type of investment in each region and can be more cost effective as the fund manager need not invest in property management infrastructure in multiple locations. Utilizing a third-party property manager enhances transparency, as it allows for a true separation of fund- and property-level expenses.

Investment Vehicles
Investors can participate in the farmland asset class through direct investments or through the use of a specialist farmland investment manager, that may offer funds, co-investments, or separately managed accounts. For most investors, developing a well-diversified portfolio of direct investments is prohibitively complex and time-consuming. Investing in farmland through a farmland investment manager can provide the benefits of diversification, experience, and scale. Closed-end funds have a fixed term with some potential for extension, but are generally illiquid for the term. As with private equity, fund terms can vary widely. Open-ended funds and publicly-traded REITs provide more liquidity, but valuation at entry and exit can be an issue in open-ended funds, and the performance of public REITs can be influenced by capital market trends and other factors apart from the underlying farmland investment. Co- investments and managed accounts often require a larger minimum investment, but offer investors a greater measure of control.

Sources of Return
Returns typically consist of current income from annual lease payments or from annual crop or livestock sales, plus land and related asset appreciation. Appreciation reflects the income-producing capability of the investment based on anticipated future crop/livestock prices and yields. While soil quality and climate/water availability are relatively fixed determinants of a property’s potential yield, technological and management improvements can be brought to bear on individual properties to enhance yields and returns to investors. Capital improvements such as irrigation, laser leveling, and drainage can increase current income as well as future value, as improvements that permanently increase productivity are eventually capitalized into land values.

The timing of cash flow distributions from farmland investments is dependent on both the investment vehicle and the actual investments in the portfolio and how they are managed (leased vs. direct operation). Cash flow available to distribute will depend on the relative proportion of developmental (pre-productive) properties and cash-flowing properties in the portfolio. Lease payments are typically received before the farmer enters the field, while revenue from direct operations is received as crops are sold over time. A leased U.S. row crop property may produce a relatively consistent annual income return of 3-5%, depending on its quality and location, while some directly- operated permanent crop properties can produce double-digit annual income returns, but with significant variability due to annual fluctuations in price and yield. Closed-end funds typically distribute cash flow net of working capital reserves and cannot reinvest income in additional properties, while evergreen funds and separate accounts may choose to reinvest a portion of income and realized gains. A REIT must distribute at least 90% of its taxable ordinary income to shareholders annually in the form of dividends.

How Farmland Fits in an Institutional Portfolio
Farmland has historically generated attractive returns, with excellent capital preservation and portfolio diversification at a low to moderate level of volatility. Some institutional investors allocate to farmland in the context of a diversified real asset portfolio that may include investments in real estate, infrastructure, forestry, and farmland. Others may include farmland in private equity or other illiquid asset categories. The exhibit below shows the 20-year realized correlation of U.S. farmland to other asset classes. While exhibiting low correlation to financial assets like stocks and bonds, farmland investments can provide a bond-like current income stream from lease payments or more variable income from direct operations, along with the potential for capital appreciation. In addition, through thoughtful portfolio construction, the risk/return profile of a farmland allocation can be varied to meet different risk/return preferences.2

Portfolio Diversification
Farmland portfolios can be structured as a balanced mix of row crops, permanent crops, and livestock or can be focused on a particular strategy/sector or other variations across the spectrum from fully-diversified to targeted investments. Portfolios may include ongoing farming operations or developmental “greenfield” or timber conversion strategy investments. As described above, leased row crops offer the lowest risk/return profile because the farmer takes on the price and yield risk, paying the investor a modest bond-like rate of return before beginning to farm each year. Participating or crop share leases allow both the farmer and investor to participate in some portion of annual upside/ downside. Directly operated permanent crops and livestock can provide higher returns, but the investor is exposed to both price and yield risk, thus increasing return volatility and potential for operating loss. Mixing low-risk leased investments with higher-risk directly operated strategies (including developmental/conversion properties) can provide current cash flow along with upside potential. Focused portfolios invested in a single sector such as leased row crops or livestock may fit a specific investor objective such as a desire for stable but modest returns (leased row crops), or an interest in higher income and appreciation potential (livestock and permanent crops), but more diversified strategies can help mitigate non-systematic risk.

Geographic diversification is also related to strategy choice. For example, globally competitive dairy and beef production might dictate investment in New Zealand and Australia, while leased row cropland is the norm in the U.S., but not necessarily in other geographies. In some regions, mixed-use properties that may include crops, livestock, and timber offer value-oriented opportunities relative to pure single strategy investments. Investing in emerging countries can provide greater upside potential, but at higher risk levels than developed country investments. Portfolios can be tailored to desired levels of diversification, but relative value and opportunity across sectors and geographies should be considered as well.

Investment Performance
Historical returns to direct farmland investments have been relatively high over the past two decades and particularly over the past decade as farmland investing has gradually gained popularity among institutional investors. Initially a long-term investment utilized by a small number of insurance companies and large pension plan investors, farmland investing has become more mainstream due to a convergence of factors: favorable supply/demand fundamentals, globally low investment yields in traditional “safe” assets like bonds, and increasing investor interest in diversifying real assets capable of providing an inflation hedge.
The National Council of Real Estate Fiduciaries (NCREIF) reports nominal annualized time-weighted total returns of 12.5% for its Farmland Index over the past 20 years and 17.5% over the past 10 years. On average, over the 20-year period, income has provided at least 50% of Farmland Index returns. Over both time periods, farmland, as represented by the Farmland Index, has generated higher returns than equity indices, with less volatility. It should be noted that this reduced volatility reflects in part the fact that farmland investments are not daily valued, but are typically appraised annually.3 The Farmland Index reflects the investment performance of a large pool of individual agricultural properties acquired in the private market for investment purposes only, and held in a fiduciary environment for the benefit of tax-exempt institutional investors, primarily pension funds. It includes property-level returns to U.S. farm properties only and is net of property management fees, but gross of fund-level fees. Given its tax-exempt, property-level focus, only the effect of property taxes is included in the Farmland Index. Despite its shortcomings as a benchmark for global agricultural investments funds, the NCREIF Farmland Index does provide evidence of trends in investment-quality farmland performance and is currently the only available index of its kind.

Supply-Demand Fundamentals
Given the strong performance of farmland in recent years, the question as to why today is a good time to invest is a reasonable one. The answer depends on global macroeconomic forces, but also on the specific global strategies employed and locations targeted for investing in farmland today....
...MUCH MORE (9 page PDF)
HT: Abnormal Returns

Trotting Ahead of Malthus: The Fodder/Horse/Coal/Lime Cycle

From Unenumerated:
Progress in the Malthusian isocline in England from the 13th through 19th centuries, as, among many other factors, horses slowly replaced oxen for farm work and transport, the ratio of draft animals to people increased, and more arable land was devoted to fodder relative to food.(click to enlarge)

I have previously discussed Great Britain's unprecedented escape from the Malthusian trap. Such escapes require virtuous cycles, i.e. positive feedback loops that allow productive capital to accumulate faster than it is destroyed. There are a number of these in Britain in the era of escape from the Black Plague to the 19th century, but two of the biggest involved transportation.

One of these that I've identified was the fodder/horse/coal/lime cycle. More and better fodder led to more and stronger horses, which hauled (among other things) coal from the mines, initially little more than quarries, that had started opening up in northeastern England by the 13th century. Coal, like wood, was very costly to transport by land, but relatively cheap to ship by sea or navigable river. As fodder improved, horses came to replace oxen in the expensive step transporting goods, including coal, from mine, farm, or workshop to port and from port to site of consumption. Many other regions (e.g. in Belgium and China) had readily accessible coal, but none developed this virtuous cycle so extensively and early.

Among the early uses of coal was for heating, fuel for certain industrial processes that required heat (e.g. in brewing beer), and, most interestingly, for burning lime. Burned lime, slaked with water, could unlike the limestone it came from be easily ground into a fine powder. This great increase in the surface area of this chemical base, which let it de-acidify the soils on which it was applied. The soils of Britain tend to be rather acidic, which allows poisonous minerals, such as aluminum, to absorb into plants and blocks the absorption of needed nutrients (especially NPK -- nitrogen, phosphorous, and potassium). The application of lime thus increased the productivity of fields for growing both food and fodder, completing the virtuous cycle. This cycle operated most strongly during the period of the consistent progress in the English Malthusian isocline from the 15th through 19th centuries.

Another, related, but even more important cycle was the horse/transport and institutions/markets/specialization cycle....MUCH MORE

It's Time to Stop Subsidizing Warren Buffett and the Rest of the Insurance Gang (BRK; TRV; ALL; CB)

We're not intending to call out just Mr. Buffett's heavyweight property/casualty and reinsurance operations but rather the whole herd of porkers feeding at this particular trough.

It's just that since his comments at the 2002 annual meeting that the odds of a nuclear attack on Manhattan were "inevitable" by 2052, Buffett has carried water for the whole industry.
Page 9 of the BRK 2002 Annual Report has some more of his thoughts. It's all about the money.

Because the "temporary" 'Terrorism Risk Insurance Act' backstop is in place, the insurers and reinsurers are able to sell product that has brought in at least $40 Billion in profits in the last thirteen years.
(premiums paid with no claims pretty much drops straight to the profit line)

I understand the New York Congressional delegation, from Schumer down to the newest Rep. being all for the reauthorization, it's a pretty sweet deal if you can get the rest of the country to subsidize your real estate market but be forthright and say you're in favor of corporate welfare.

One last point. A nuke in NYC causes at least a $Trillion in damage and I'm guessing the insurers haven't squirreled-away that $40 Bil so they'll be able to meet their obligations when the time comes or as capacity to do more risk-management-good-works.

What I'm saying is, just be honest: the government will end up paying anyway so there's no reason to hand out $3 billion a year while we wait for the "inevitable". And at his core, Warren is an insurance salesman from Omaha.

From Property Casualty 360°:
House TRIA bill back to square one as slimmed down version fails to gain support 
It’s back to the drawing board for House Republicans on legislation reauthorizing a federal backstop for terrorism risk insurance.

Rep. Maxine Waters, D-Calif., ranking member of the House Financial Services Committee, disclosed last night that House Republicans failed to gain enough support to push through a bill that would effectively phase out a federal backstop for terrorism risk insurance after five years except for nuclear, biological, chemical and radiation (NBCR) risks.

In the wake of the head count, Waters called on members of both parties “to work together to achieve consensus on the renewal of the Terrorism Risk Insurance Act (TRIA).”

The fact that Republicans lack the votes to pass the slimmed-down bill through the House comes against the background of a scheduled Senate vote today on a bill that makes only modest changes to the current TRIA legislation.

“Tomorrow, the U.S. Senate is likely to pass bipartisan legislation to renew TRIA without delay,’ Waters says in her statement.

“Until the House does the same, the uncertainty and instability that for months has plagued our largest venues, businesses and employers will continue unabated,” she says.

With all 27 House FSC Democrats voting “no,” the FSC Republican leadership pushed the bill through the committee June 20, with 32 votes.

Rep. Peter King, R-N.Y., had made it clear for weeks that urban, moderate Republicans would ultimately not support the legislation.

In a comment to The New York Times Tuesday, King said he had support from up to 30 other Republicans to oppose the House bill as written, and he was apparently true to his word. King argues the House bill “is a solution in search of a problem. [The existing program] hasn't cost us one penny. It’s brought in billions of dollars in tax revenues from the rebuilding of New York and it’s still needed.”...MORE
Some background from The Guardian June 19, 2014:

Congress prepares to renew $40bn bill terrorism insurance law
The Terrorism Risk Insurance Act has never covered a single company from terrorism costs and has earned $40bn in revenue for insurance companies. But Congress is too afraid to end it
tribute in light

The tribute in light at the site of the September 11 attacks memorializes a human tragedy that is still being used to justify corporate subsidies to insurers. Photograph: GARY HERSHORN/REUTERS

On Thursday, the House financial services committee debated whether to renew a law mandating a bailout of sorts for the insurance industry: a government backstop for insurance companies to provide terrorism insurance.

Even though this program has existed since 2002 and has never been used, by any US company, its path through Congress has always been frictionless.

Meet the screwed-up, scared congressional dynamic around 'Tria'.

The Terrorism Risk Insurance Act provides a government backstop to insurance companies in the event of a terrorist attack. Tria arrived in the wake of the September 11 attacks, when it arose as a way for the government to protect the insurance companies from taking huge losses that would put them out of business after a terrorist attack.

The rationale behind Tria is simple. Previously, there was no contract by which companies could protect themselves from terrorism costs. That was a disaster when the insured loss for 9-11 approached $40bn, with most of it paid by insurance companies and the firms who insure them, known as reinsurers.

The appeal is clear – to insurers, who have been raking in cash. Over 60% of all businesses have purchased government-subsidized terrorism insurance since 2002. The program has cost the government $1m a year – almost nothing – but has made an estimated $40bn in revenue for insurance companies, who have never paid a claim, or given a dime to the government for their reinsurance protection.

“This is largely a handout to the insurers and the insured industries,” said Mark Calabria, director of financial regulation studies at the libertarian Cato Institute....MORE
Speaking of Cato, here's their Sept. 2013 position paper "The Terrorism Risk Insurance Act: Time to End the Corporate Welfare" (20 page PDF)
And here is Marsh (what happened to McClellan?) with the industry view: "2014 Terrorism Risk Insurance Report".

Squeezing the Global Private Banks: The World's Wealth Managers as UBS Approaches $2 Trillion AUM

From Barron's Penta:
The 209 largest wealth management firms in the world boosted their assets under management by 19.7% last year, which means they globally lord over $14.9 trillion in what is estimated to be a $20.3 trillion industry. This increase in high-net-worth clients’ assets also allowed the 209 managers to collectively report a 10.9% jump in income last year, considerably better than the 2.3% increase in income ­reported in 2012.

These are the headline figures from Scorpio Partnership, a London-based data cruncher that will release its full Global Private Banking Benchmark 2014 report in just under two weeks. But its knowledgeable and affable managing director, ­Sebastian Dovey, has been compiling this global private bank ranking for 13 years, so I called him up to get an ­advance peek at the big picture.

Dovey says UBS is “a nip”—meaning a couple of months away—from being the first bank in the world to have $2 trillion under management. That’s after the Zurich-based colossus clocked a 15.4% ­increase in assets under management in 2013.

Scandals? What scandals? As the recent shrug over Citigroup’s $7 billion fine for mortgage whoopsies illustrates, it appears that clients and investors alike seem to have lost the moral outrage that had them fuming over skullduggery when the financial crisis was at its worst.

A moment of reflection is called for. UBS’ $2 trillion figure is not just a watershed moment for the wealth-management industry, but also an astounding development, considering that when Dovey started his list 13 years ago, not a single global wealth manager had more than $100 billion in assets under management....MORE

Sunday, July 20, 2014

Attention, Interest, Desire, Conviction

The headline is by Frank Hutchinson Dukesmith when he was editor of 'Salesmanship Magazine' who also wrote "Modern Air-brake Practice: Its Use And Abuse; A Book Of Instruction On The Automatic High Speed And Straight Air Brake. Together With Questions And ... For Enginemen, Trainmen And Motormen" (1906)

Dukesmith's phrasing eventually morphed into marketing's AIDA acronym.
From Flowing Data:

...4. Changes over time and space
Several mini-explosions are going off in your head at this very moment, so brace yourself for what comes next. The most telling of maps is the one that ebbs and flows with the people who reside in the area. The data flows like water in a bendy river with a lot of rocks. This is a picture of life as we know it — random, unorganized, and unpredictable. When life gives you lemons, you make a map of those lemons, because the result blows your mind every single time.
Animated map.
The animated map above is only a snapshot of the millions of lives that the lines and shapes represent. The animation likely shows something interesting. Sometimes a state turns orange, others turn black, and the rest turn white. What will happen in the next frame? It is hard to say. Just like tomorrow.
-19 Maps That Will Blow Your Mind and Change the Way You See the World. Top All-time. You Won’t Believe Your Eyes. Watch.

Milestone: The Value Of Y Combinator's Portfolio [Companies] Exceeds $30 Billion

From FastCompany:

Three YC alums in the billion-dollar-valuation club: Dropbox ($10 billion), Airbnb ($10 billion), and Stripe ($1.75 billion)
Y Combinator isn't known for doling the most amount of money to startups, but it's one of the most coveted accelerators due to its network and the success of its alums. On Wednesday, it released some fresh numbers to illustrate that success.
Including more than 400 active companies--Dropbox, Airbnb, Reddit, Stripe, Twitch, Homejoy and more--the market capitalization of Y Combinator startups exceeds $30 billion, according to the accelerator's president, Sam Altman.

Of course, much of that figure is inflated by Dropbox and Airbnb, each sporting a $10 billion valuation. The only other YC startup in the billion-dollar-valuation club is payments company Stripe. Its valuation jumped to $1.75 billion after raising its latest round in January. Overall, Y Combinator touts more than 20 companies worth at least $100 million. To date, its portfolio companies have raised more than $3 billion since its founding in 2005.

Y Combinator, which accepts less than 3% of startups, has 85 companies in its current class. Of interest, Altman noted, is that two of the startups focus on nuclear energy.

Harvard Business School First Look: "New working papers, case studies, and publications"

From the HBS Working Knowledge blog:
July 15
How information sharers squelch innovation
An article in a recent Academy of Management Journal looks at one issue that arises when venture capital firms often team up with multiple startups in the same industry. "VCs may be inclined to redirect information from one startup to another to increase their chances of being an investor in one of the outsized winners," write researchers Emily Cox Pahnke, Rory McDonald, Dan Wang, and Benjamin Hallen. They explain how information sharing affects innovation in "Exposed: Venture Capital, Competitor Ties, and Entrepreneurial Innovation."

How animals inspire innovation
Anyone who has seen a spider web or a beaver dam understands that the animal kingdom knows a thing or two about product design. The Center for Bioinspiration at the San Diego Zoo has made it its mission to build bridges between nature and industry by advancing "the development of nature-inspired products, services, and processes that benefit humanity, wildlife, and habitats." Karim R. Lakhani, Vish V. Krishnan, and Ruth Page discuss the organization's vision and business model in a new multimedia case, "Bioinspiration at the San Diego Zoo."

How the uninformed inform our decisions The consequence of a decision often depends on how someone else responds to it—even when the respondent knows much less about the subject than the decision-maker does. In a new working paper, experimental researchers William Schmidt and Ryan W. Buell discuss how people make decisions when the decision's value is dependent on a less-informed party. Read "Decision Marking Under Information Asymmetry: Experimental Evidence on Belief Refinements."
  • August 2013
  • Strategic Entrepreneurship Journal
Business Model Evaluation: Quantifying Walmart's Sources of Advantage
By: Brea-Solís, Humberto, Ramon Casadesus-Masanell, and Emili Grifell-Tatjé
Abstract—We develop an analytical framework on the basis of the economics of business performance to provide quantitative insight into the link between a firm's business model choices and its profit consequences. The method is applied to Walmart by building a qualitative representation of its business model and mapping that representation on an analytical model that quantifies the company's sources of advantage over time. The analysis suggests that the effectiveness of a particular business model depends not only on its design (its levers and how they relate to one another) but also, most importantly, on its implementation (how the levers are pulled).
Publisher's link: http://www.hbs.edu/faculty/Publication%20Files/13-039%20Nov%202012_612ce7e2-7f81-4eea-9126-3c0964f2be2f.pdf

...MUCH MORE

Here's last week's First Look:
July 8
Learning how to notice The first step to solving ethical problems is noticing that they exist in the first place. Unfortunately, many managers possess underdeveloped noticing skills. Fortunately, Max Bazerman offers some great tips in the article "Becoming a First-Class Noticer: How to Spot and Prevent Ethical Failures in Your Organization," which appears in the current issue of Harvard Business Review.

Analyzing hedge fund activism
Sometimes a hedge fund buys up a large stake in a company with the primary goal of gaining a seat on the company's board and, subsequently, effecting major change. A new working paper examines the causes and effects of hedge fund activism, using a sample of nearly 2,000 activist events between 2004 and 2012. Read "Activist Directors: Determinants and Consequences" by Ian D. Gow, Sa-Pyung Sean Shin, and Suraj Srinivasan.
...MUCH MORE

Apollo 11 Moon Landing 45th Anniversary: Complete Coverage

 From Space.com:
"One small step for man, one giant leap for mankind." That sentence, uttered by NASA astronaut Neil Armstrong from the surface of the moon 45 years ago, signaled the dawn of a new age. Watch Live Tonight: Moon Webcasts Celebrate Apollo 11 Lunar Landing

This month marks the 45th anniversary of the epic Apollo 11 flight that landed the first humans on the moon and safely returned them to Earth. Armstrong, Buzz Aldrin and Michael Collins launched from Florida on July 16, 1969. Armstrong and Aldrin ventured out onto the lunar surface on July 20, 1969. The two men spent 21.5 hours on the moon before taking off from the lunar surface to meet up with Collins in the command module and fly back to Earth. [NASA's 17 Apollo Moon Missions in Pictures]
NASA astronauts returned to the surface of the moon on multiple missions, however, no human has touched down on the natural satellite's surface since 1972. Space.com's complete coverage of the 45th anniversary of the Apollo 11 moon landing appears below:
Video: 
Exclusive: Buzz Aldrin Remembers Moon's 'Magnificent Desolation'
Exclusive: Buzz Aldrin Remembers Moments Before the Moon
Apollo 11 Retrospective: 'One We Intend To Win'
Apollo 11 45th Anniversary - NASA Administrator Remembers
Space Station Salutes Apollo 11 45th Anniversary 
 
Infographics and Multimedia:
Apollo Quiz: Test Your Moon Landing Memory
NASA's Historic Apollo 11 Moon Landing in Pictures
How the Apollo 11 Moon Landing Worked: Infographic
Buzz Aldrin, Apollo 11 Moonwalker, in Photos
Story Coverage: 

Sunday, July 20
'One Giant Leap': As Apollo 11 Moon Landing Turns 45, NASA Aims for Mars
Forty-five years ago, humanity took a giant leap forward in space exploration as the first people from Earth walked on the surface of the moon. Today, NASA is aiming for a much farther target: Mars, by way of asteroid. Here's how NASA's Next Giant Leap might work.

Apollo 11 Flight Log, July 20, 1969: The Moon Landing
It's the main event for the Apollo 11 crew. Neil Armstrong and Buzz Aldrin visited the lunar surface on the Eagle lander as an anxious Michael Collins awaited their return aboard the command module Columbia. Meanwhile, NASA's Mission Control held its breath....
...MUCH, MUCH MORE
Neil Armstrong about to take the first step on the moon
Image courtesy NASA

The unrelenting flatulence was not faked.
And going home:

Apollo 11 Lunar Module Rendevous with Command Module

Apollo 11 Lunar Module Rendevous with Command Module
Michael Collins—NASA (13); Gif by Mia Tramz for TIME
This series of images captures the Lunar Module approaching the Command Service Module at rendezvous and was shot handheld by astronaut Michael Collins. Earthrise is visible in the last four frames. TIME

Poynter has some of the front pages:
http://www.poynter.org/wp-content/uploads/2012/08/f_times.gif

Saturday, July 19, 2014

"How to cooperate with the future"

From The Physics of Finance July 11, 2014:
Very interesting paper published yesterday in Nature. It's an experimental paper, reporting the results of a cooperation game in which people try (of course!) to cooperate, but also have incentives to cheat and take more for themselves. If each pursues his or her own ends without regard for others, there's a tragedy of the commons in which a common pool resource gets wiped out. It takes cooperation and control over selfish actions to avoid disaster for everyone. Lots of experiments have looked at such matters before, of course. This one adds a twist.

The twist is to make the experiment more relevant to some of the tricky issues we face today in thinking about climate change, how to preserve the environment, etc. Someone who is today 60 years old doesn't have the same personal stake in avoiding climate change as someone who is 10, because the older one is much more likely to be dead by the time serious effects kick in. The twist in the experiment is to include this cooperation between generations effect. In effect, the experiment probes our abilities to cooperate with the future -- with people we will never meet. Clever idea to try to do this in an experiment, and I think they've managed it quite well.

Oliver Hauser and colleagues placed volunteers into groups of five people, which they called "generations." In a typical run of the game, they would give the first generation a common pool of 100 units of wealth, with each of the five individuals in this generation able to "extract"  between 0 and 20 wealth units from this pool. Their choice entirely as individuals. The people know that the wealth pool will be passed on to future generations ONLY if the current generation extracts no more than half of it (50 units). Hence, individuals caring about the future generation could choose to extract, say, 10 or fewer units, while those not caring could just take 20.

The individuals were told that there actually would be a future generation with some probability p -- say, 0.8. Hence, there's a 20% chance that the game will just end, so no need to worry about future the generation, and 80% it won't, in which case the wealth resource will or will not be passed on depending how people act in this generation. This game repeats for a number of generations as determined by the random process (on average 5 for p = 0.8).

So, what happens? The research was designed to look at two different scenarios. First, where people just act as they want to without any further pressures on their behavior, and second, in the presence of various kinds of mechanisms designed to help them cooperate more effectively, preserving the resource through generations. The results are interesting:

1. Anything goes -- no institutions at all

In this case, everything goes to the dogs immediately. Interestingly, many people aren't wholly greedy and readily reduce the amount they extract so as to preserve the resource for the next generation of total strangers. The study found that over 20 separate trials, about 68% of the individuals extracted no more than 10 units. Even so, this wasn't enough the overcome the anti-social actions of a greedy minority which extracted so many units that the common pool vanished fairly quickly. In this set of experiments, there were second generations in 18 games, and only in 4 of them was the pool passed on intact through one generation. In the other 14 it was immediately wiped out by over-extraction.

Lesson: people aren't all bad, most have pretty good intentions, but the persistent efforts of a small minority of greedy cheaters is enough to mess everything up. In no single case did the common resource pool persist past 4 generations....MORE

The Problem With Patenting Food, or: "Linux for Lettuce"

From VQR:
Revolutionizing American agribusiness from the ground up, one seed at a time. 
From a distance, Jim Myers looks like an ordinary farmer. Most autumn mornings, he stands thigh-deep in a field of wet broccoli, beheading each plant with a single, sure swipe of his harvest knife. But under his waders are office clothes, and on his wrist is an oversized digital watch with a push-button calculator on its face. As his hand cuts, his eyes record data: stalk length and floret shape, the purple hue of perfect heads and the silver specks that foretell rot. At day’s end his broccoli goes to the food bank or the compost bin—it doesn’t really matter. He’s there to harvest information.
Myers is a plant breeder and professor of genetics at Oregon State University. The broccoli in his field has a long and bitter story, which he told me last September at the university’s research farm. We sat at a picnic table under a plum tree that had dropped ripe fruit everywhere; around our feet, the little purple corpses hummed with wasps that had crawled inside to gorge on sweet flesh. Myers has dark hair and dark eyes that are often set behind tinted glasses. In public, he rarely registers enough emotion to move the thick mustache framing his mouth. Still, as he talked about the broccoli his voice buckled, and behind those shadowy lenses his eyes looked hard and tense.

In 1966, a breeder named Jim Baggett—Myers’s predecessor at Oregon State—set out to breed a broccoli with an “exserted” head, which meant that instead of nestling in the leaves the crown would protrude on a long stalk, making harvest easier. The method he used was basic plant breeding: Mate one broccoli with another, identify the best offspring, and save their seed for the next season. Repeated over decades by Baggett and then Myers, this process produced the broccoli in the field that day. The heads were so nicely exserted, sparrows used them as a perch.

Most classical plant breeders will tell you that their work is inherently collaborative—the more people involved, the better. Baggett had used versions of another broccoli called Waltham, released by the University of Massachusetts in the 1950s, as part of the foundation for his original exserted-head lines. Hoping to advance its evolution by letting others work on it, he and Myers shared their germplasm (an industry term for seed) with breeders throughout the United States. One recipient was the broccoli division of Royal Sluis, a Dutch company that had a research farm in Salinas, California. Through the channels of corporate consolidation, that germplasm ended up with the world’s largest vegetable-seed company, Seminis, which in 2005 was bought by the world’s largest seed company, Monsanto. In 2011, Seminis was granted US Patent 8,030,549—“Broccoli adapted for ease of harvest”—whose basic identifying characteristic was an exserted head. More than a third of the original plant material behind the invention was germplasm that Baggett had shared in 1983.

As Seminis began previewing its Easy Harvest broccoli to the farm press in 2011, the company’s lawyers began calling Myers, requesting more samples of broccoli seed. The patent they held covered only a few specific varieties that the company had bred, but now they were applying to patent the trait itself—essentially, any sizeable broccoli with an exserted head. They needed the Oregon State plants for comparison to prove their invention was, in patent language, truly “novel.”

Last August, the examiner seemed dubious, writing, “Applicant is in possession of a narrow invention limited to the deposited lines; however, they are claiming any and every broccoli plant having the claimed characteristics.” The application was given a “Final Rejection.”

And yet, as Myers told me at the picnic table in September, “That’s not necessarily final.” Just before Thanksgiving, Seminis appealed, beginning a process that may last for years. As one intellectual-property manager who helps write patents for the University of Wisconsin told me, some examiners simply “cave and grant the broader claims as they get worn down by the attorneys’ arguments.” If Seminis receives the patent, their claim would likely encompass the plants growing in Myers’s plots at Oregon State, meaning they could sue him for infringement.

Myers is not alone in this predicament. Irwin Goldman, a professor at the University of Wisconsin, had been developing a red carrot for fifteen years when, in 2013, he learned that Seminis had an application pending for “carrots having increased lycopene content”—in other words, very red carrots. Likewise, Frank Morton, a small-scale, independent plant breeder in Oregon, had finally achieved a lettuce that is red all the way to its core, only to find that the Dutch seed company Rjik Zwaan had received a patent on that very trait. Their cases are just some of many.

When Myers talks about the issue, his frustration seems to turn him inward toward greater silence. But Morton is considerably less reserved. “It rubs me the wrong way that works of nature can be claimed as the works of individuals,” he said, his voice growing louder and louder. “To me, it’s like getting a patent on an eighteen-wheeler when all you did was add a chrome lug nut.”

Myers contends that, when applied to plants, patents are stifling. They discourage sharing, and sharing is the foundation of successful breeding. That’s because his work is essentially just assisting natural evolution: He mates one plant with another, which in turn makes new combinations of genes from which better plants are selected. The more plants there are to mix, the more combinations are made, and the more opportunities there are to create better plants. Even some breeders who work for the companies that are doing the patenting still believe in—indeed, long for—the ability to exchange seed.

“It’s this collective sharing of material that improves the whole crop over time,” Myers told me. “If you’re not exchanging germplasm, you’re cutting your own throat.”

If all of this seems like the concern of a specialized few, consider that plant breeders shape nearly every food we eat, whether a tomato from the backyard or the corn in the syrup in a Coke. Because of intellectual-property restrictions, their work increasingly takes place in genetic isolation and is less dynamic as a result. In the short term, that can mean fewer types of tomatoes to plant in the garden, or fewer choices for farmers and, by extension, consumers. In the long term, it could hinder the very resilience of agriculture itself. Having access to a large genetic pool is critical for breeders who are adapting crops to the challenges of climate change. Every time intellectual-property protections fence off more germplasm, that gene pool shrinks....MORE

"Reciprocity and the difference between usury and interest"

From Magic, Maths and Money, June 13, 2014:
At the IASH meeting on the Human-Business interface I attended last week, Michael Northcott discussed the relationship between capitalism and sustainability.  Michael is an authority on both subjects, having written on environmental ethics and debt.  At the end of Michael's presentation I made the point that theologians distinguished interest ad usury in the past, a distinction that was missing in Michael's discussion.

Usury derives from the Latin usus, meaning 'use',  and referred to the charging of a fee for the use of money.  Interest comes from the Latin interesse, meaning 'compensation for loss', and originated, in the Roman legal codes as the fee someone was paid  if they suffered a loss as a result of a contract being broken.  So a lender could charge interest to compensate for a loss, but they could not make a gain by lending.

It is easier to understand this distinction with a simple example.  A farmer lends a cow to their cousin for a year.  In the normal course of events, the cow would give birth to a calf  and the cousin would gain the benefit of the cow's milk.  At the end of the loan, the farmer could expect the cow and the calf to be returned.  The interest rate is 100%, but it is an interest since the farmer, if they had not lent the cow to their cousin, would have expected to end the year with a cow and a calf.  Similarly, if the farmer lent out grain, they could expect to get the loan plus a premium on the basis that their cousin planted the grain, he would reap a harvest far greater than the sum lent.

Because money is 'barren', unlike land or labour it could not 'produce' anything.  As a result, money can have no intrinsic value, other than its use to facilitate exchange, and so charging for the lending of money is essentially selling something that has no value.  Thomas Aquinas argued that

To take usury for money lent is unjust in itself, because this is to sell what does not exist, and this evidently leads to inequality which is contrary to justice.
So, usury contradicts 'natural law'.  Even if you could convince the canon lawyers that you were, in fact, selling something that did exist, the theologians might argue that usury was an affront to God because, since money was barren, the usurer was charging for time, and "time was God's exclusive property''.

In theory, this is all very clear, in practice there was still the question of where the dividing line between usury and  interest was and almost everyone who was handling money was looking to charge as much interest as was permissible.

Around 1236, an English professor of canon (church) law, Alanus Anglicus,  argued that usury did not exist if the future price of the good was uncertain in the mind of the merchant.  These theories became established in the medieval legal system between 1246 and 1253 by Pope Innocent IV, a former professor of law at Bologna.  Not only could a merchant adjust the 'just price' to cover their labour and expenses, but also they could also adjust the price to take into account the risk they bore,  called an aleatory contract, from the Latin word alea for chance.  In establishing this principle, a Catholic jurist initiated the scientific study of financial risk....MORE