Thursday, July 30, 2015

Société Générale's Albert Edwards Descends Into A Nightmare World of Dream Demons and Market Depravity

Oops, sorry.
That was a headline from eighteen months ago.
Here's Albert's latest, via ZeroHedge:

"The Virtuous Emerging Market Cycle Is Turning Vicious" Albert Edwards Remembers The 1997 Asian Crisis
Given that some two-thirds of Wall Street traders have never experienced a Fed tightening cycle, SocGen's Albert Edwards is not surprised he gets blank looks when he tries to explain how recent events in commodity and EM markets are in many key ways similar to the 1997 Asian crisis.

SocGen's Albert Edwards explains...
Investors are right to feel that the recent rout in commodity prices differs from that seen in the second half of last year. Back then there was more of a feeling that the decline in the oil price was just partly a catch-up with the weakness seen in other commodities earlier in the year and partly due to a very sharp rise in the dollar ? most notably against the euro.

Indeed the excellent Gerard Minack in his Downunder Daily points out that ?US$ strength and expanding supply have been headwinds over the past four years. But the recent sharp decline in prices has been noteworthy for its breadth: prices have fallen in all major currencies, and across all major commodity groups (see charts below). This suggests that global growth has slowed.” But why?
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/07-overflow/20150730_ed1.jpg
One theme that has played out as we expected over the last year has been the rapidly deteriorating balance of payments (BoP) situation of emerging market (EM) countries, as reflected in sharply declining foreign exchange (FX) reserves (the BoP is the sum of the current account balance and private sector capital flows). We like to stress the causal relationship between swings in EM FX reserves and their boom and bust cycle.

The 1997 Asian crisis demonstrated that there is no free lunch for EM in fixing a currency at an undervalued exchange rate.

After a few years of export-led boom, market forces are set in train to destroy that artificial prosperity. Boom turns into bust as the BoP swings from surplus to deficit. Why? When an exchange rate is initially set at an undervalued level, surpluses typically result in both the current account (as exports boom) and capital account (as foreign investors pour into the country attracted by fast growth). The resultant BoP surplus means that EM authorities intervene heavily in the FX markets to hold their currency down. We saw that both in the mid-1990s and before and after the 2008 financial crisis (see charts below)....MORE

Blackstone's Byron Wein On The Current Investment Climate: Dark Clouds Clearing

Despite this morning's feeble GDP report there are some underlying strengths, one of the reasons I figured I wouldn't look like a total idiot calling for market grey skies to clear up byAugust 10th or so:
July 8th
Chartology: "S&P 500 Suffers Technical Breakdown; Cash Is King"
Not a huge deal if you've been paying attention. We are allowing for another three to four weeks of downside before panicking, still sticking with the offhand comment that intro'd a June 25 Grantham post for the time frame, as to extent, who knows?:

S&P 500 2108.58; all time high 2134.72.
We would not be at all surprised by a decline into early August but, contra Carl Icahn, don't think we've seen the top yet....
You didn't come here to see me do my répétez, répétez schtick so here's Mr. Wein's Market Commentary blog:
07/28/2015
At the beginning of the year I had a rosy view of how 2015 would play out:

1.  The United States economy would grow close to 3% and the unemployment rate would drop below 5%.
2.  The Standard & Poor’s 500 would rise more than 10% by Christmas.
3.  With some monetary and fiscal help, Europe and Japan would grow more than 1%.
4.  After turbulent negotiations, Greece would stay in the European Union and maintain the euro as its currency.
5.  There would be a deal with Iran on its nuclear development program that would be both credible and enforceable but nobody would like it.
6.  The Chinese economy would slow and the stock market there would be dangerously overvalued, but while China would not be the engine of growth it had been for the past decade, its reduced pace would not destabilize the world economies.

Then, as we entered the second half of the year, each aspect of this outlook began to run into trouble.
We are at a point when various macroeconomic events could have a significant impact on the financial markets.  Here are my thoughts on recent events in Greece, the Iran negotiations, China and the United States.

I have a somewhat different view of the Greek situation from the consensus.  Most observers believe Alexis Tsipras was forced to give in on all of the demands of the International Monetary Fund, the European Central Bank and the European Commission and that he is in serious political trouble as a result.  My assessment of the situation is that, in the eleventh hour, Tsipras correctly concluded that Europe would, for a number of reasons, do almost anything to keep Greece in the European Union.  The first is the fear that there would be contagion in the southern-tier countries like Spain and Portugal, who might believe their economies would improve if they had control of their own currencies, and the European “project” would die.  The second is that a Greek default would destabilize the financial health of Europe generally, and the fragile economic recovery taking place there would be aborted.  In that circumstance, Tsipras would be forced to face the domestic consequences of default and withdrawal from the European Union and the euro.  Greece itself would be in revolutionary turmoil.  The banks would remain closed; pension beneficiaries, the military and public employees would be paid in scrip or IOUs.  The country would not have the funds to pay for gasoline and other imported goods.  Greece’s borders would become porous and Middle East immigrants would flood in through Turkey and elsewhere.  In the event of a default, it could potentially be persuaded to look toward Russia for support, despite currently being a member of NATO.

While Tsipras would appear to have capitulated on his anti-austerity program, he did keep Greece in the European Union, kept the euro as its currency and secured a third bailout of over $96 billion (a huge amount; more than 50% more than what was being discussed a few weeks ago) to reopen the banks and keep the country operating.  About half of this money will be used to meet external financial obligations.  Greece will also sell $55 billion in assets to repay loans.  The “No” vote on the referendum, which Tsipras encouraged, solidified his political position, so he should be able to withstand some of the criticism he will get by agreeing to the reforms.  His political party may be forced into a coalition and cabinet ministers may resign in protest, but he has guided his country through a terrifying economic storm and some collateral damage was to be expected.  There are many Tsipras critics who believe he could have achieved a better deal earlier, but I question whether the Greek people were desperate enough until now to agree to the harsh terms of creditors.  He has obtained what the Greek people wanted: money to move forward and continuing membership in the European Union with the euro as Greece’s currency.  The story is not over.  The Greek economy is in shambles and the prospect of running a budget surplus is dim.  While the current deal buys some time, we may be wringing our hands about Greece six months from now. 

I believe there will be a “best efforts” attempt to implement the reforms, but progress will be slow and the European review board will be tolerant because a crisis has been averted.  I doubt that Greece currently has the institutional structure to carry out all the required reforms, like tax collection and work rule changes.  Greece is not likely to be able to revise its pension program without provoking more public protests, and other austerity measures may hold back any recovery in the economy.  From an investment viewpoint, the temporary solution probably means that Europe will continue its modest recovery this year and that the dollar will strengthen.

In spite of the complexity of the issues, a deal with Greece resulted from two simple objectives: Europe’s intent to avoid a destabilizing default by a member of the Union and a desire by Greece to get a third bailout and keep the euro.  The Iran talks reached an agreement because of two similar controlling factors:...MUCH MORE
Markets and fundamentals don't always run together but for right now I expect they will.
Until they don't, of course.

"Peak Food-Delivery Bubble? Groupon Gets Into the Act"

Hey, Groupon has to do something.
GRPN Groupon, Inc. monthly Stock Chart 
From recode:
We are a hungry people. And damn it, we just cannot for the life of us have enough options for getting food from a restaurant into our salivating mouths.
sandwich
Luckily, the heavens produced GrubHub and Seamless and Delivery.com. And then DoorDash and Postmates and Caviar. Oh, and Uber with its new UberEats service. There’s Eat24, which Yelp gobbled up, and Tapingo to feed the college masses. And there’s also that test Amazon is running in Seattle, which is a little weird but we’ll take it, because we are so, so hungry. But sometimes you kinda feel like ordering a meal from a restaurant that doesn’t actually have seating — a place that’s all delivery all the time. Munchery and Sprig can help you out with that.

Still, maybe, just maybe, we the hungry people of the United States need one more delivery option. It turns out Groupon has our backs.

The company still best known for its daily deals said on Thursday that it was launching its own restaurant delivery and pick-up service, starting in Chicago and then expanding to other cities this year. Some of the better known partners participating in the program are the sandwich shops Quiznos and Subway, along with Popeye’s and Papa John’s. Hundreds of local Chicago restaurants are taking part, too. The announcement comes shortly after Groupon acquired OrderUp, a food delivery startup that’s live in dozens of smaller cities.
Groupon’s pitch to us, the hungry people: A 10 percent discount on all orders. Groupon is taking the hit on this, not the restaurant, and essentially looks at it as a marketing expense....MORE
At about the same time the above was showing up in one feedreader, this was dropping from another:
Handpick’s Smart Groceries marries meal and grocery delivery

"Economists React to Second-Quarter GDP: ‘By No Means Satisfying’"

From Real Time Economics:
U.S. gross domestic product,  the broadest sum of goods and services produced across the economy, grew by a seasonally adjusted annual rate of 2.3 percent in the second quarter of 2015, the Commerce Department said on Thursday. Here’s what economists had to say:

The mixing and matching of what drives GDP growth has shifted to consumption and housing, what the Fed was indicating yesterday. Overall growth is certainly strong enough and steady enough, despite the lack of any upside dynamics, to suggest the real cost of short-term money should be more than zero. The [Federal Open Market Committee] increasingly agrees from our read and, after all, they only want to raise the funds rate to 25 basis points from 12.5 basis points and then think about it the next move.” –Steven Blitz, ITG

“Second-quarter growth was powered by strong vehicle demand. But households bought nondurable goods and spent a fair amount on services. In contrast, business investment declined. Much of that came from a drop in equipment spending, which is probably the oil-patch retrenchment….The federal government continues to do whatever it can to kill the economy but at least state and local governments are spending again. There was a new measure created that reflects private domestic demand as it excludes trade, inventories and government spending. It rose solidly. This will be watched closely as it relates to what is happening in the domestic economy.” –Joel Naroff, Naroff Economic Advisors

Spending on intellectual property products grew at an annual rate of 5.5% in the second quarter, continuing a nice string of advances which offers some hope for improved productivity growth in future quarters.…The bottom line is slow productivity growth remains an issue which must be dealt with but first has to be more fully understood than it now is. All in all, today’s report doesn’t alter the broader view of the U.S. economy, with growth still in the steady though by no means satisfying range that has persisted since the end of the 2007-09 recession.” –Richard Moody, Regions Financial Corp.

“Final sales to private domestic purchasers, which is one of our favorite measures of underlying demand, increased 2.5% in the second quarter compared to 2.0% in the prior quarter. However, this is below the 3.2% annual average for 2014, and inventories were much larger than expected ($110 billion vs. $113 billion and a trailing three-year average of around $60 billion). However, we are not changing our estimate of 3.0% current-quarter real GDP in part because the residual seasonality that has been seen in a weak first quarter has tended to result in a stronger third quarter. Moreover, we expect robust consumer spending this quarter.” –Joseph LaVorgna, Deutsche Bank
...MORE

Quants and Black Box Trading: Why They All “Blow-Up”

Even RenTec has an off year now and then.
From Acting Man, June 26:

“We Are All Doing The Same Thing”

I recently listened to a podcast with some all-star [there are awards for everything now] “Black Box” equity trader. It was quite a “telling” interview & I thank him for his insights but I’d heard it all before. His confidence was staggering considering the general unpredictability of the future and, of course, the equity markets. He explained how he had completely converted from a generally unsuccessful, discretionary technical trading style to a purely quantitative and scientific trading mode. He seemed to be so excited that his models, according to him, were pretty much “bullet proof”. Having had more than just some tangential experience with black box modeling and trading myself I thought … you know … some people will just never learn.
maxresdefault
Image via iwatchapple.it

You see some years ago I was particularly focused on quantitative investing. Basically, “screw” the fundamentals and exclusively concentrate on price trends/charts and cross security/asset correlations [aka “Black Box” trading]. I was fascinated with the process and my results were initially stellar [high absolute returns with Sharpe Ratios > 2.0]. And, after looking at the regression data many others agreed. I was in high demand. So I “made the rounds” in Manhattan and Greenwich to a group of high profile hedge funds. It was a very exciting time for me as the interest level was significant.

As it turned out I had the good fortune of working with one of the world’s largest and best performing hedge funds. Their black box modeling team had been at it for years … back-testing every conceivable variable from every perceived angle … twisted/contorted in every conceivable/measurable manner … truly dedicated to the idea that regression tested, quantitative trading models were the incremental/necessary “edge” to consistently generate alpha while maximizing risk-adjusted, absolutely positive returns. We worked together for some time and I became intimately involved with their quantitative modeling/trading team … truly populated with some of the best minds in the business.

While in Greenwich Ct. one afternoon I will never forget a conversation I had with a leading quantitative portfolio manager. He said to me that despite its obvious attributes “Black Box” trading was very tricky. The algorithms may work for a while [even a very long while] and then, inexplicably, they’ll just completely “BLOW-UP”. To him the most important component to quantitative trading was not the creation of a good model. To him, amazingly, that was a challenge but not especially difficult. The real challenge, for him, was to “sniff out” the degrading model prior to its inevitable “BLOW-UP”.
And I quote his humble, resolute observation:
because, you know, eventually they ALL blow-up
… as most did in August 2007.
It was a “who’s who” of legendary hedge fund firms that had assembled “crack” teams of “Black Box” modelers: Citadel, Renaissance, DE Shaw, Tudor, Atticus, Harbinger and so many Tiger “cubs” including Tontine [not all strictly quantitative but, at least, dedicated to the intellectual dogma] … all preceded by Amaranth in 2006 and the legendary Long Term Capital Management’s [picking up pennies in front of a steam-roller] demise one decade earlier.

Years of monthly returns with exceedingly low volatility were turned “inside out” in just 4-6 weeks as many funds suffered monthly losses > 20% which was previously considered highly improbable and almost technically impossible … and, voilà … effectively, a sword was violently thrust through the heart of EVERY “Black Box” model. VaR and every other risk management tool fell victim to legitimate liquidity issues, margin calls and sheer human panic.

Many of these firms somehow survived but only by heavily gating their, previously lightly-gated, quarterly liquidity provisions. Basically, as an investor, you could not “get out” if you wanted to. These funds changed the liquidity rules to suit their own needs … to survive … though many did fail.

Anyway … to follow up on my dialogue with the esteemed portfolio manager … I asked why do they all “BLOW-UP”? What are those common traits that seem to effect just about every quantitative model despite the intellectual and capital fire-power behind them? And if they all eventually “BLOW-UP” then why are we even doing this?”

He answered the second part of the question first … and I paraphrase …
“We are all doing this because we can all make a lot of money BEFORE they “BLOW-UP”. And after they do “BLOW-UP” nobody can take the money back from us.” He then informed me why all these models actually “BLOW-UP”. “Because despite what we all want to believe about our own intellectual unique-ness, at its core, we are all doing the same thing. And when that occurs a lot of trades get too crowded … and when we all want to liquidate [these similar trades] at the same time … that’s when it gets very ugly.“.
I was so naive. He was so right.

Exactly What Were We All Doing?

We all knew what the leaders wanted and, of course, we wanted to please them. Essentially they wanted to see a model able to generate 4-6% annual returns [seems low, I know, but I’ll address that later] … with exceptionally low volatility, slim draw-down profiles and winning months outweighing the losing months by about 2:1. They also wanted to see a model trading exceptionally liquid securities [usually equities]....MORE
HT: ValueWalk's "Why Most Quantitative Investing And Trading Systems Fail".

"British land prices ease as farmer buyers step back"

Farmland is "worth" some multiple of the cash flow it can generate. What someone will pay for it is another story.
From Agrimoney:
UK farm prices have eased for the first time since the global financial crisis, led by a retreat in the market for prime arable land, as weaker agricultural commodity prices have prompted farmer buyers to step back.

Farmland prices in Great Britain, comprising the vast majority of the UK, eased by some 0.3% in the April-to-June quarter from the record highs set in the first quarter of 2015, data from Savills show.
The decline, the first in more than six years, was led by the market which has proved consistently most buoyant - prime arable land, and in East Anglia, the core UK wheat belt, and a region which has shown particular growth to become, for the past five years, the most expensive.
Prices of top-quality cropping land in the East of England fell by 4.8% in the first half of 2015 overall, with values in the neighbouring East Midlands dropping by 3.9%, although values further west and north did maintain growth....MORE
Previously:
Jan. 2015  
U.S. Farmland Has Been the Top Performing Asset Over the Last 20 Years: Goodbye to all that
Oct. 2013 
Real Estate: It's Not Just London, Big Money Lining Up to Buy British Farmland
June 4, 2012 
Factoid: Price of English Farmland Has Risen 10,745% During the Reign of Elizabeth II Regina
June 2012  
"French Farmland Offers Better Value than UK Land"
We've been posting on British Farmland for years but, outside of the odd Chateau listing and the effects of climate on wine growing I think this is the first French farmland post.
Two things to be very, very wary of: The Common Agricultural Policy and the French tax code.
March 2012
Absolute Return Partners on Investing in Farmland
 Gerald Grosvenor might beg to differ with the answer to the question in the first sentence below.
Although his 300 acres got hit hard in the downturn it has come back strongly.

Half the Mayfair District, most of Belgravia, and Grosvenor Square where the U.S. Embassy is one of his many lessees make a nice hedge for the 4500 acre farm.

Throw  in the 17 acres in Silicon Valley and the 1200 acre Annacis Island off of Vancouver, B.C. and you've got a bit of diversification....
Oct. 14, 2009 
Green Acres is the Place to Be: "The UK farmland grab"
 
 

And many more. Use the 'Search Blog' box if interested.

Wednesday, July 29, 2015

"Market Odds For September Rate Hike Drop To 0%"

Something to think about amongst all the "It's coming in 6 weeks" pontificating
From Short Takes:
Market Leans Dovish After Fed Statement
The implied probability of a September rate increase from the Fed, based on 30-day Fed funds futures prices, dropped to 0% following Wednesday’s dovish policy statement from the FOMC. In recent weeks, the implied probability for a September rate increase was hovering between 17% and 21%.

"Oil scores July’s 2nd biggest percentage gain "

We're going lower.
Last I saw the front futures were at $48.82 up 84 cents.
There's a very good chance WTI will undercut the $41.39 low print from earlier this year.

For right now though, upticks. From MarketWatch:

EIA data show U.S. weekly crude supplies, production down
Oil futures settled higher on Wednesday, with U.S. prices scoring their second-biggest one-day percentage gain of July after U.S. government data showed sizable weekly declines in crude supplies and production. 

West Texas Intermediate crude for September delivery CLU5, +1.79%  added 81 cents, or 1.7%, to settle at $48.79 a barrel on the New York Mercantile Exchange. It was trading down at around $47.70 before the supply data. The biggest percentage gain for the month was seen on July 9, when prices rose about 2.2%.
ICE September Brent crude LCOU5, +0.62%  tacked on 8 cents, or 0.2%, to $53.38 a barrel.

Early Wednesday, the U.S. Energy Information Administration reported a drop of 4.2 million barrels in crude supplies for the week ended July 24. Analysts polled by Platts forecast a crude-stock fall of 700,000 barrels, while the American Petroleum Institute Tuesday said supplies declined 1.9 million barrels.

“The reports seems to suggest that, at least in the short term, the bearish news has been over played,” said Phil Flynn, senior market analyst at Price Futures Group. “Despite a recent uptick in [drilling] rigs, it looks like production still may be peaking.”...MORE

Marketing: While You're Looking At The TV, The TV Is Looking At You

The headline is reminiscent of but not as clever as Spın̈al Tap's David St. Hubbins on umlauts:

"It's like a pair of eyes. You're looking at the umlaut, and it's looking at you."
From TechDirt:

Vizio Latest Manufacturer To Offer More Ways For TVs To Watch Purchasers

from the buy-our-things-so-we-can-sell-your-data! dept

Vizio is the latest consumer electronics manufacturer to announce -- publicly, but not, like, PR-onslaught publicly -- that its TVs will be watching purchasers as much as purchasers are watching them. The details of its strategy to generate the most ROI from each and every purchaser willing to blow past the fine print during setup are contained in the company's SEC filing for its debut as a public company. Engadget's Richard Lawler has the details. (h/t to Techdirt reader MarcAnthony)
According to the filing, Vizio has sold more than 15 million smart TVs, with about 61 percent of them connected as of the end of June. While viewers are benefiting from those connections, streaming over 3 billion hours of content, Vizio says it's watching them too, with Inscape software embedded in the screens that can track anything you're playing on it -- even if it's from cable TV, videogame systems and streaming devices.
Here's the potential shareholder-friendly description included in the S-1 filing:
Our Inscape data services capture, in real time, up to 100 billion anonymized viewing data points each day from our over 8 million VCUs. Inscape collects, aggregates and stores data regarding most content displayed on VCU television screens, including content from cable and satellite providers, streaming devices and gaming consoles. Inscape provides highly specific viewing behavior data on a massive scale with great accuracy, which can be used to generate intelligent insights for advertisers and media content providers and to drive their delivery of more relevant, personalized content through our VCUs.
And here's the grand plan, which is a slice of a multi-billion dollar data sales market:
We believe our business focus enables a self-reinforcing consumer use and engagement model that we expect to fuel our growth while driving revenue. Our connected entertainment products and discovery and engagement software increase usage of our platform, enabling Inscape to gather more anonymized data on viewing behaviors, which we can deliver to advertisers and media content providers. These companies in turn can deliver more relevant and personalized content for viewers, further enhancing the entertainment experience. We believe this self-reinforcing cycle will increase our brand awareness and enhance demand for our connected entertainment products.
What's curious about the wording isn't the gung ho appropriation of viewer data to sell to advertisers. What's curious is Vizio's claim that "anonymized data" will result in "more relevant and personalized content" for purchasers....MORE

Well That Was A Pretty Good Call: Corn, Wheat and Soybeans

On July 22 the headline was "Red hot grains, hit resistance, cooling off"".

And here's the last few day's action via Inside Futures:
...MORE

Corn        379-2 down 6-2
Wheat      498-0 down 12-6
Soybeans 944-2 down 0-4
The guy who we linked to last week was Kimble Charting Solutions who we sometimes take to task for putting any emphasis on long term (beyond the price memory) trendlines but who certainly nailed the turn in all three grains.

"GE describes its vision of next generation robots" (GE)

Our second GE post in 24 hours, must be something in the zeitgeist.
Or something.
The stock is at $26.19 up nine cents but still 20.3% below the split adjusted price on the day the current CEO took over 13+ years ago.
From Next Big Future:
Gizmodo interviewed John Lizzi, Manager of the Distributed Intelligent Systems Laboratory at GE Global Research, about General Electric's approach to the future of robotics.

If you look at the practical applications of robotics, the vast majority of robots that you see today are in factories doing high precision, high speed work, such as sticking, placing, grinding, deburring, painting, that sort of thing. The first generation robots are extremely good for a lot of things, but they're not very aware of their environments; they're not adapted to work around humans. They're in cages, where they're separated from humans, and they're extremely expensive in terms of both the robots and the support equipment around them.

The new generation of robotics is riding a lot of trends, such as Moore's Law, so we can put more intelligence on the robot itself. The costs of computation and sensors are coming down. There's this whole movement around collaborative robotics with robots that are very easily taught, very cheap, and very able to work closely with humans, while employing new technology, such as SLAM (Simultaneous Localization And Mapping) for autonomous vehicles and similar applications. These are coming together and allow us to let the robots out of those cages and working in more dynamic, more unconstrained environments that I've mentioned.

Are we talking about a robotic apprentice that would be working alongside a more skilled human?

We see a range of different things. For example, there are applications around assembly. There are some tasks that humans are really good at and it will take some time to catch up with these. There's dexterity, manipulating small things, creative tasks in terms of assembly. We still want humans to do what they're better at, but there are others where robots could do a lot of work on things like going and grabbing parts, handing the person tools, transporting materials from one place to another. There's a lot of places where we can leverage the skills of both humans and robots.

You can also think of it as a contest of nonhuman skills. Imagine a larger robot that could give a human superhuman strength or imagine something large that GE makes that a human could use a robot to guide into place.

When we get to the more non-factory industry environments, such as power plants, you could have a robot being an apprentice to the human. The human and robot could start by working together and then over time the robot could start learning some things and that robot will start doing some of that more proactively, while the human focuses on other tasks....MORE

Mandatory retirement at GE is age 65 but Immelt may be leaving before he hits that marker in 2021.
At that time I may be willing to go back in for the first time since 1999.
In the nearer term the stock may catch a tailwind if it can clear the resistance around $27.50.
GE General Electric Company daily Stock Chart

The Next Great Reinsurance Opportunity: Cyber Attacks!

From Artemis:

Cyber catastrophe bonds & a public-private sector solution
The rising threat of cyber attacks to economies and businesses across the globe can be mitigated through public and private sector relationships, utilising the benefits of alternative risk transfer solutions such as catastrophe bonds, according to Z/Yen Group Limited.

Cyber risks are seen as one of the great opportunities for the insurance and reinsurance sector, as well as a great unknown and a key risk. Not only is the potential exposure enormous, so needing insurance and reinsurance capacity to cover it, but right now quantifying the risks is extremely difficult due to a lack of data and re/insurers risk accumulations and exposure concentrations.

The world today is reliant on electronic systems that operate global, and regional economies and, as international assets and business values continue to grow, the potential threat of property damage, business interruption and third-party liabilities as a result of cyber attacks, increases also.

The general opinion of many industry experts and analysts is not ‘if’ the next large cyber attack is going to happen, but ‘when,’ as the greater the volume of information and sensitive data that exists in the electronic landscape, the more it seems data is leaked, stolen, or misplaced.

It’s a vast, burgeoning risk that the insurance and reinsurance industry could help to protect against, but one that would require the support of the public sector, according to a recent report by Z/Yen Group Limited, published by Long Finance.

Cyber is seen as a catastrophic risk, thus requiring an approach akin to that taken to provide insurance, reinsurance and retrocession for large global natural disaster risks and other exposures such as terrorism or nuclear risks.

“If society wishes to bring insurance to bear on helping to manage cyber­-risk, then cyber­-catastrophe reinsurance needs to be available for property damage, business interruption, and third party liabilities in order to remove blockages to rapid take­-up of cyber insurance by businesses,” says the report, which despite focusing on the UK, is applicable to other nations.

The report argues the case for a public-private sector cyber catastrophe reinsurance scheme, which would act like a pool that was funded by the insurance, reinsurance and the insurance-linked securities (ILS) industry, but utilises the expertise and support of the public sector.

Interestingly, the study highlights the potential for cyber catastrophe bonds and explains how ILS structures could be used as a successful means of mitigating the potential impacts of cyber attacks.

The report says; “The scheme would in effect be a pool funded by the insurance industry, seeking its own further reinsurance and possibly issuing insurance linked securities such as a cyber-catastrophe bond for further cover.”

Continuing to provide a couple of examples of what the trigger might look like for such a catastrophe bond, as follows: “More than 10% of the nation’s computers unusable for more than 12 hours,” or, “a power loss of more than one hour for more than 15% of the nation.”...MUCH MORE

Tuesday, July 28, 2015

"Macroprudential policy: from Tiberius to Crockett and beyond - speech by Sir Jon Cunliffe"

I don't know who to thank for this.
I mean I wasn't lurking at the BoE or anything but it popped up in a reader.

From the Bank of England:
Historians still argue about the exact causes of the financial crash of AD 33 that rocked the Roman Empire.  The commentators of the day did not unfortunately have, let alone record, the vast amounts of data that we have become used to today.  But in a world still painfully extricating itself from the crash of 2008, the key features look eerily familiar, as a number of modern day commentators have observed.  An extension of credit across the empire, a sudden deleveraging, debtors failing and bank closures in a number of Roman provinces, the total drying up of liquidity in the financial system and widespread panic.
The remedies look familiar too.  The Emperor Tiberius was not able to rely on a modern independent central bank with the ability to print money to staunch the crisis.  But notwithstanding that immense shortcoming, Tiberius took effective action, injecting into the system a huge amount of liquidity stored in coin in his treasury, setting interest rates at zero for a three year period – an early example of forward guidance – and doubling loan to value requirements for property loans.  He also executed those he thought most responsible: though some might advocate that today, I think in that respect at least we have moved on from AD 33.
Systemic financial crises, as this episode shows, are not new.  The invention of credit and the development of banking and financial systems have been key to the improvement of human living standards throughout history.  But they bring with them the boom and bust extremes of the credit cycle, driven by greed and fear, and the risk of systemic crises which can badly damage the real economy.
As financial systems have developed and spread, public authorities, from Tiberius’ administration to the Financial Policy Committee (FPC) of the modern Bank of England today, have had to adapt both to deal with financial crises when they occur and to try to prevent them occurring in the first place.  It has often been an unequal struggle....MORE

"Michael Faraday Was the World's Most Badass Insurance Investigator"

From io9:
Michael Faraday, the guy famous for the Faraday cage, didn’t just spend his life tinkering with electricity. He was also an insurance investigator who, just occasionally, set stuff on fire in the courtroom if a jury didn’t believe him.

Even geniuses need to pay the rent, so though Michael Faraday is best known for uncovering the secrets of electromagnetism, he spent his day-to-day life as a gunslingerscientist for hire. One of his most famous employers was Imperial Insurance Company. They were being sued by a sugar processing plant. As we’ve seen before on io9, flour and sugar processing plants occasionally explode. All those tiny little particles form a kind of flammable cloud which can first burst into flames and carry those flames through an entire building in an instant.

The sugar factory, Severn and King, had suffered an explosion in 1819, and claimed that they were owed quite a bit of money from Imperial. Imperial claimed that Severn and King had quietly, without notifying them, updated their factory with a new sugar-heating system that heated up whale oil. That system, the insurance company claimed, is what probably started the explosion, and that system was why they weren’t obligated to pay.

Faraday was hired to show that the heating system was unsafe, and he did a good job. While he proved that the hot whale oil itself wasn’t a problem, the fumes that emanated from it were more flammable than the oil. In court, one of the jurors didn’t believe him, and was foolish enough to say so out loud. Faraday calmly took out a jar full of hot whale oil product and a lighter. Boom....MORE

Why Byron Wien's "Smartest Man In Europe" Says You Must Have Exposure To Biotech

In our July 2nd post, "Blackstone's Byron Wein On The Only Way to Make Serious Money" the linked Barron's article had a couple sentences that were definitely worth the price of  admission:
...But if you want to make real money investing, you will have to do it by picking stocks in technology and biotechnology, and I would emphasize the latter. 

“Most people still don’t recognize the gigantic implications of this phenomenon. Major breakthroughs are going to be taking place in cancer, heart disease, Alzheimer’s, diabetes, multiple sclerosis and other diseases. Picking the right companies can produce impressive returns in a difficult overall market environment. Right now there are literally hundreds of small companies working on significant products. Many of them will fail, but a few will change the world the way Google and Facebook did....
Mr. Wien is Vice Chairman of Blackstone Advisory Partners and is about as far from a wild-eyed speculator as you're likely to find. His friend sounds even more grounded, if that's possible.

Here's an example of what "The smartest man in Europe" is talking about, from Quartz:

The staggering success of Gilead’s hepatitis drugs, in one chart
When Gilead paid $11 billion for Pharmasset in 2011, it was seen as a risky move. Now, it’s clearly one of the biggest biotech steals in many years.

Gilead announced today another quarter of blockbuster sales for its extremely effective Hepatitis C drugs Sovaldi (the reason it acquired Pharmasset) and Harvoni, a once a day combination of Sovaldi with another drug. Sales rose 26% from a year ago to $8.24 billion, more than half of which came from those two drugs. Net income was $4.49 billion.

The rise of these drugs has been nothing short of meteoric. For the past two quarters, Harvoni alone has outsold AbbVie’s Humira, an anti-inflammatory drug that had been the world’s best seller for years. When you combine Sovaldi and Harvoni together, it’s not even close. They’re the top selling new drugs in the history of the industry:...MORE
 That just one disease with an estimated 29,718 acute cases in 2013.
(granted there are 2.7 million chronic infections, the majority of whom are baby boomer with the money to handle co-pays but still)

"Is Artificial Intelligence the Next Step in Advertising?"

Well yeah.

From the Guardian:
Ads that adapt to users reactions could represent the future for engagement with out-of-home campaigns
Artificial intelligence (AI) has rarely been out of the public eye in the past 12 months. Stephen Hawking’s grave warning, Channel 4 drama Humans and big screen outings Ex Machina and Terminator Genysis have all asked questions about the the potential of AI, and what it could mean for humans.
While for some the notion of AI represents a step into science fiction (or at least science future), there are iterations that have real world implications at this moment. This version of AI will probably not bring about downfall of humanity, but rather be used to shape how advertising is created and targeted.

A partnership of M&C Saatchi, Clear Channel and Posterscope, last week revealed what they dubbed “the world’s first ever artificially intelligent poster campaign”. David Cox, chief innovation officer of M&C Saatchi describes its significance: “It’s the first time a poster has been let loose to entirely write itself, based on what works, rather than just what a person thinks may work.”
 
The basic premise is that the poster, based around a fictional, rather nondescript coffee brand Bahio, can read the reactions of it’s audience and adapt itself accordingly. From its initial “gene pool” of pictures and copy, 22 ads are created in each generation, with the poster assessing the level of success of an ad. If successful, a particular ad will move onto the next gene pool and be part of the next generation. Those unsuccessful will be removed.

“It’s a Darwinian algorithm, it’ll evolve to be more and more effective” says Cox. “So we’re hoping to see fewer outcomes emerging over time.” As of 20 July, 1540 ads had been automatically generated over 70 generations. Initial results are showing that shorter copy was more popular, with heart images a particularly frequent occurrence during our viewing....MORE
Throw in a little virtual reality....as we noted in "Facebook, Oculus, And Businesses' Thirst For Virtual Reality":

One of the least talked about aspects is the use of VR in education. Because the mind has trouble distinguishing between virtual reality and the outside world you should be able to get people to believe almost anything you want them to accept, given enough repetition and an engaging story line. Whether the learner has deep understanding is pretty much immaterial.

Pearson, the edu/testing co. with the Financial Times and Economist attached will be moving in this direction.
Think deeply immersive multiplayer gaming as an example, then put on some virtual reality goggles.
Quite amazing. 

Goldman In Ventureland: How GS Became a Tech Investing Powerhouse

From Bloomberg Magazine:
“They weren’t coming just to get wasted,” says Mel Cavaricci—aka DJ Mel—recalling the crowd milling in front of his sound table at a party in March.

It was at the height of the annual South by Southwest (SXSW) conference, held in Austin, Texas. The event, which started as a music festival, more recently has become famous for propelling the likes of Twitter, Foursquare, Meerkat, and other fast-growing startups. Tech and media companies throw liquor-soaked bashes to celebrate themselves, promote products, and woo hard-to-hire software developers. Music service Spotify hosted a week-long concert series. MRY, a digital marketing firm, hosted a party featuring rapper Busta Rhymes and dancers with big Day-Glo sticks.

This year, Cavaricci had been hired to spin for a company he’d never seen around SXSW before: Goldman Sachs. The party was different from his usual gigs; it was hard for the deejay—a veteran of many SXSW raves—to figure out what to play. “From the looks of the crowd, they didn’t want to hear EDM,” he says. So instead of electronic dance music, he picked oldies. One in particular, Edwin Starr’s 1970s classic Easin’ In, seemed to fit: “There’s a man coming into town ... Like a cat that’s stalking its prey, he don’t wanna let it get away ....”

Goldman Sachs, arguably the most powerful bank in the world, quietly, without fanfare, is making a play to become one of the most influential investors in technology startups. According to research firm CB Insights, the Wall Street bank has participated in 132 fund-raising rounds in private technology companies since 2009, with 77 of those deals made in the past 2.5 years alone.

Its activities rival those of the top venture capital firms in Silicon Valley. Goldman has backed Uber Technologies, Pinterest, Dropbox, and 12 other so-called unicorns, that once-rare breed of startup valued at $1 billion or more. Goldman ranks in the top 10 of CB Insights’ unicorn backers—ahead of such Silicon Valley heavyweights as Peter Thiel’s Founders Fund and New Enterprise Associates. And unlike many of Silicon Valley’s top financiers, Goldman’s reach is truly global: It’s in startups ranging from an online pet store in China to a food delivery site headquartered in Germany, to a Korean app developer.

What’s driving Goldman into venture territory? This is where the action (and the big money) is. At last count, there were 119 startups valued at more than $1 billion—almost all created within the past few years. Consider Uber, whose private valuation in just six years has soared from zero to $50 billion based on reports that it’s trying to raise more money.

That kind of skyrocketing growth is hard for Wall Street veterans to resist. Blackstone co-founder Steve Schwarzman, 68, recently confessed that if he were 30 years younger, he’d move to California. “There’s so much disruption and so much amazing value creation,” he said at a conference in late May. Ruth Porat left her post as chief financial officer of Morgan Stanley earlier this year to become Google’s CFO. Sarah Friar, a Goldman alum, is now CFO of Square, the payments company started by Twitter co-founder Jack Dorsey. Ex–Goldman banker Anthony Noto is Twitter’s CFO.

Wall Street used to wait for startups to go public before investing in them. These days, however, entrepreneurs don’t need the public markets like they used to; private capital is plentiful. Uber has raised some $6 billion in equity and debt, and it hasn’t announced any plans to go public. “By the time you IPO as a company with a $60 billion market cap, you are really in the stratosphere,” says Joshua Spencer, manager of T. Rowe Price’s Global Technology Fund. “The opportunity to invest has passed; the explosive growth is often behind them.”

This market moves fast: When Airbnb raised money in April 2014, the company was valued at $10 billion; a year later, that valuation had more than doubled to $25 billion, when it raised another $1.5 billion. Included in the latest round were East Coast investors, most of whom would never have invested at such an early stage in the last tech boom: Fidelity Investments, T. Rowe Price, and Tiger Global Management—all now prolific operators in Silicon Valley.

For Goldman, however, this isn’t just about chasing returns. Startup investing isn’t a game changer for a firm with a $95 billion market cap and $860 billion in total assets on its balance sheet. “The return-on-equity impact isn’t going to be that intense,” says Jeffery Harte, an analyst who covers financial institutions at Sandler O’Neill & Partners. But, he says, “being on the cutting edge of technology has become more important then ever.”...MUCH MORE

Some Outfit Calling Itself "General Electric" Thinks It Can Do Batteries As Well As Tesla (GE; TSLA)

As I said in May's "HBR: "Tesla’s Not as Disruptive as You Might Think" (TSLA)":
I'll tell you what's not disruptive, it's Tesla's new battery, that's what.
There's a reason you haven't seen us gushing, the thing is just so...pedestrian.
More next week, for now, the Harvard Business Review where they don't use the "I'll tell you what...that's what" locution...
Because progress on battery technology has been so slow the chief differentiators among producers is manufacturing efficiency. That's something GE can do.
Even if Immelt is a loser who damn near destroyed the company.

From Reuters:
General Electric Co wants to be a "sizable" player in the market for systems that store energy to manage power volatility, a sector the company expects to quadruple to $6 billion by 2020, the head of GE's energy storage business told Reuters. 
Demand for industrial battery systems is being driven by increasing reliance on intermittent energy sources such as wind and solar power and the potential to add energy to the grid quickly when power needs spike.
This need has attracted a wide range of companies, including Elon Musk's Tesla Motors Inc, which said in April it plans to package batteries for use for utilities as well as homes and businesses.

"We believe in the space and its ability to grow," Jeff Wyatt, GE's general manager for energy storage, said in a recent interview. "We think we can be a sizable player within it, and that’s really what we’re intending to do."
GE over the past year has overhauled its approach to the energy storage market, as it saw weaker demand for the battery it developed.

Now Fairfield, Connecticut-based GE is repositioning itself as a one-stop shop for power producers seeking to install energy storage systems, offering inverters, control systems, software as well as financing options. 
Earlier this year, it scaled back production of its own Durathon industrial batteries, reducing its manufacturing workforce from 200 to 50 at the Schenectady, New York plant where the battery is made. The company is focused on improving Durathon's longevity, including managing its chemical degradation.

As part of its new energy storage package, GE is offering customers the option to install lithium-ion batteries made by other companies.

DAUNTING COSTS
Despite the allure of battery systems, experts say their expense is a major factor preventing power operators from using them more broadly.

American Electric Power Inc has not invested in a significant energy storage installation since 2010, because it is unclear whether the benefits outweigh the costs, said Tom Weaver, AEP's distribution planning manager. 
"Long term, energy storage is the answer to a lot of issues that need an answer, but the cost has to come down," said Weaver.

Since April, GE has struck two deals to supply energy storage projects with lithium ion batteries in California and Ontario, Canada, and Wyatt said the company intends to announce similar agreements this year. 
Wyatt is relaunching GE's storage business in a market that is highly-fragmented, with as many as 20 significant players vying for deals, including large energy rivals such as Siemens AG, ABB Ltd and AES Corp, according to Cosmin Laslau, senior analyst with Lux Research.

There are also as many as 10 major battery cell manufacturers not to mention the many startups chasing energy storage business, Laslau said.

"By no means is GE the only supplier to the industry at this scale," Laslau said. "But their strategy is much better than it used to be."

"COMPETITIVE OFFERING"
GE would consider acquisitions to propel its new strategy, Wyatt said, but GE is well-positioned on its own as it can utilize its established relationships in the energy industry....MORE
See also:
Gates, Pritzkers vs. Musk: "The $5 Billion Race to Build a Better Battery" (TSLA)
Checking In On The Gigafactory: Pacific Crest's Downgrade Of Tesla (TSLA)
"Quest to Mine Seawater for Lithium Advances" (TSLA)
"Boston-Power Aims to Rival Tesla With Gigawatt Battery Factories" (TSLA)

And a couple dozen others, use the 'Search Blog' box if interested.

This Sunday Reuters story was not well received by Tesla shareholders although truth be told the market crash in China probably had as much to do with Tesla's decline yesterday, anyhoo the stock has recovered $9.60 today, $262.61 last:
Chart forTesla Motors, Inc. (TSLA)

"UBS Exposes The 'Scary Reality' Of High Yield Energy"

I expect the more succinct term "Junk" may come back into vogue.

http://www.zerohedge.com/sites/default/files/images/user92183/imageroot/2015/07/20150727_HYENRG.jpg

From ZeroHedge:
To be sure, we’ve written plenty on the rough road ahead for HY energy.
The darkening outlook for the sector not only reflects a decisively bearish forecast for crude (see Morgan Stanley’s "far worse than 1986" call), but also the fact that time appears to be running out on the various lifelines that have kept heavily indebted producers afloat over the course of the crude downturn. 
For instance, the hedges which accounted for some 15% of Q1 revenues for nearly half of North American O&G companies are set to roll off which, along with persistently low commodity prices, should weigh heavily on banks’ reassessments of credit lines due in October. Meanwhile, investors’ appetite for HY issuance and equity offerings may soon wane as even the retail crowd gets wise to the fact that this is one dip that most assuredly should not be bought.
For an in depth review of the above, see the following:
Here with more on the coming carnage and why HY investors may be profoundly unaware of just what’s in store, is UBS.
*  *  *
From UBS
High yield: The scary reality
The current sell-off in US high yield bond market appears controlled based on the consistent but moderate declines in daily cash bond index prices, but underneath the hood several participants are characterizing the price action as carnage. At an index level the average HY bond has fallen about 2 points week-over-week, but index data is notoriously stale and lagging; there are numerous examples of issues down 5, 7 or 10 points on light volumes despite no direct exposure to commodity prices and no material firm specific news. In our view, recent market behavior has exposed several hidden fragilities in the market ecosystem.

First, too many investors were overweight heading into the sell-off, in particular in the energy complex. The plunge in oil and commodity prices following the Iran deal and Chinese demand fears has intensified the potential fundamental stress in resource related sectors, and this outcome was not anticipated by the consensus. Anecdotally we've heard several credit funds have raised cash balances, but there are two problems with this thesis: one, the rise is arguably structural as outflow risks rise in an environment of tighter monetary policy, rising credit risks and lackluster performance. Two, many of those who raised cash we believe added beta to continue producing above-benchmark returns and limit tracking error. This strategy fails in a decompression scenario where low quality and illiquid credit underperforms.

Second, the sensitivity of energy firms to oil prices is not linear anymore- at depressed levels what would be considered 'normal' levels of commodity price volatility can have outsized effects on fundamentals and market prices. Simply put, the risk symmetry in stressed sectors is to the downside for bondholders. The rub is central bank quantitative easing drove traditional investors seeking mid-to-high single digit yields out of investment grade/ crossover credit into high yield, loan and emerging market debt to satisfy yield bogeys. The problem, however, is some of the tourists underappreciate the exponential loss and mark-to-market functions for low quality high yield assets. As we have noted previously when the credit cycle turns annual triple C default rates can surge from 5% to 30% while average triple C prices can fall into the $40 - $50 range (versus $83 currently) - especially given expected recoveries average in the $20 - $25 context1. The scary reality is those investors in triple Cs are seeking high single digit returns when they are likely to end up with negative total returns over the next several years (if our view of the credit cycle proves correct)....
...MORE

Natural Gas: As Buyout Talks Swirl Around Chesapeake Carl Icahn Prays Its Not A Takeunder (CHK)

The last time I looked Mr. Icahn still held the stock he'd been accumulating since 2012, 73 million shares with the bulk at $23 so most any bid would be under his average price.

On the other hand, with 10.98% of the outstanding he may have something to say about any corporate doings.

The stock is up 5.66% to $8.84 on what looks like a reaction to this piece, or it might just be the 2% move in natural gas today, to $2.832.

CHK Chesapeake Energy Corporation daily Stock Chart
From Barron's Stocks to Watch:

Chesapeake Energy: ‘We Would Not Be Surprised to See an Entire Company Sale’
SunTrust Robinson Humprey’s Neal Dingmann and team upgraded Chesapeake Energy (CHK) to Buy from Neutral today, in part, because they see the potential for a sale of the struggling oil & gas company. They explain:
Chesapeake shares have fallen 48% since May as lower commodity prices along with relatively wide differentials have caused further liquidity/leverage concerns. However, we would not be surprised to see another asset sale with one or two of the company’s seven primary operating regions. Though we do not look at the nearly $7B in liquidity as an issue considering we have a projected outspend of less than $1.5B this year (even a much larger outspend would not provide any challenges), investors remain concerned in the current commodity environment. It appears

Chesapeake’s operating efficiencies are getting buried in the current troubled commodity environment even though EURs such as in the Utica have recently increased over 20%…MORE

Monday, July 27, 2015

Dilbert and Skill Vs. Luck in the Stock Market

I lied, big fat whopper.
It's not Dilbert, it's not even Dilbert's creator, Scott Adams, who is not nearly as touchy about his creation as the "I am not Spock" gentleman was about his.

That's a rather long, rambling, borderline incoherent introduction leading to Mr. Adams co-blogger Paul Worthington in the Top Tech vertical of the Adams empire:
Here comes a little company that is about to change the world with a small device that scans your food and tells you what is in it.

You might be saying this is no big deal. It is just another way for diet Nazis to obsess over something new.
But imagine being able to scan your food and have the device tell you it is unhealthy (in essence). How many parents would keep serving unhealthy food to their kids if they have an option? I think a food scanner changes the world (if it works.)

How?

Well, for starters, Warren Buffett’s investments in crap-foods will start to suffer. So your notions about skill versus luck in the stock market will dissolve at the same rate as the sales of Kraft and Coke....MORE
I feel bad about the outright fabrication in the headline so here's one of Mr. Adams' technology related strips.
From 1992 and via GoComics Dilbert Classics series:

Bb80781016c00133f844005056a9545d

And just so you know, when Leonard Nimoy died we changed the blog's motto to "Live Long and Prosper" for the week following his demise.

California Drought: We Are Adding Another Tool To The Kit

Because of methodology issues the familiar U.S. Drought Monitor map does not reflect the recent actual situation.
For example, the state of Texas has been essentially drought-free since May while the map is just now catching up:
Current U.S. Drought Monitor

NOTE: To view regional drought conditions, click on map above. State maps can be accessed from regional maps.

As El Nino continues to strengthen, the probabilities favor a dramatic and rapid change in California hydrology that the 'Monitor' map won't capture.
As another example, here's what the Drought Monitor commentary was for "The West" in the week ending July 21, 2015:
During the past week, average temperatures were below normal across much of the West with the exception of western portions of California and Oregon, eastern New Mexico, and Washington. During the weekend and into Monday, moisture associated with Hurricane Dolores triggered showers and thunderstorms across parts of southern California and western Arizona. Some locally heavy accumulations (two-to-four inches) and flash flooding were reported. Despite well-above-average precipitation during the past 90-days in parts of central and southern California, the Sierras, and portions of the Great Basin, the recent rains have not impacted the overall drought situation in these areas because significant precipitation deficits remain as well as agricultural and hydrological (low reservoirs, below normal streamflows) impacts. In the Pacific Northwest, precipitation has been below normal since the beginning of the Water-Year (Oct. 1). The trend has continued during the past 60-days leading to very low streamflows, dry soils, and increasing concern in the agricultural sector. In the Southwest, some improvements were made on this week’s map in areas of Severe Drought (D2) in west-central New Mexico as well as east-central and northern Arizona where long- and short-term drought indicators (precipitation, soil moisture, streamflows, and vegetative health) have shown improvement during the past year. However, according to the Natural Resource Conservation Service (NRCS), statewide reservoir storage remains below normal in both Arizona and New Mexico. According to the Salt River Project (SPR), the Salt River system reservoirs are currently 53% full while the Verde River system reservoirs are 52% full. In New Mexico, Elephant Butte (the state’s largest reservoir on the Rio Grande) is currently 27% of average – up 9% from the same time last year. Elsewhere, statewide reservoir storage is above average in Colorado, Idaho, Montana, and Wyoming.
You just don't get that from the map.
So in addition to the University of Nebraska-Lincoln map we will be adding the Palmer Drought Severity Index map from NOAA's Climate Prediction Center via the U.S. Drought Portal:
http://www.cpc.ncep.noaa.gov/products/analysis_monitoring/regional_monitoring/palmer.gif
An adjunct, not a substitution.
The Palmer has its own short term issues but between the two of them we'll get closer to reality.
We'll have more as California gets nearer to mud season.

"Gallery: from nets to lasers, there’s a lot of new ways to take down drones"

The most sublime method is to go old school, just have your ghillie hand you the Purdey.
From The Ministry of Innovation:
As drones of all flavors become increasingly ubiquitous, it was only a matter of time before countermeasures began to pop up—and they have in spades, across a spectrum of prices and tactics. These range from the high-tech (lasers and RF interference) to something as basic as a handheld "net gun."

Still, as we reported earlier this year, a shotgun can also be a particularly effective way of downing a drone.
"While kinetic counter-measures are good for battlefields, they are less than ideal for domestic scenarios," Arthur Holland Michel, the co-director of the Center for the Study of the Drone at Bard College, told Ars by e-mail.

"If you use a laser to burn a hole through a quadcopter hovering over a city, you will now have a heavy flammable object falling from the sky, which is extremely dangerous," he said. "Some are turning to electronic countermeasures as a way of keeping drones away without having to shoot them down. One option for countering small drones is to use jamming systems. The Secret Service is experimenting with jamming systems that would interfere with the communication system of any small drone within a given area (say, the White House). Jamming systems are an appealing option, but they have their drawbacks: they can interfere with Wi-Fi and radio frequencies."

He also specifically mentioned a new startup company, called Drone Shield, which was deployed during this year's Boston Marathon....MORE

"Uber can't be stopped. So what happens next?"

From The Verge:
Last week New York City backed down from a plan to cap the explosive growth of Uber's vehicle fleet. The mayor's office declared the deal it reached to be a win-win for both sides, and warned Uber that an eventual cap is still a possibility if it doesn’t comply. But that threat seemed hollow given how abruptly the city had caved. Rather than highlighting a corporation brought to heel, the ending seemed to affirm Uber's enormous ability to shape the political process.
 "Even the mob can't stop Uber"
In the week leading up to the scuttled vote, Uber rolled out a tidal wave of attack ads, robocalls, influential allies, and an advanced get-out-the-vote campaign among its users. And in hundreds of cities, states, and countries around the globe, it's waging a similar campaign, with astonishing success. At this point it’s worth asking: if Uber can't be stopped, what does the future look like?
"Uber's goal is to replace private car ownership"
China would seem to have the best chance at reining in Uber. It’s a market that has stymied giants like Google and Facebook, and local technology firms often enjoy the tacit or explicit support of the government against foreign competitors. But Uber is braving these challenges. Its offices have been raided and equipment has been seized. Its two largest Chinese rivals merged, creating Didi Kuidai, which claims a 95 percent market share. But Uber is also growing incredibly quickly. It recently hit nearly 1 million rides a day in China alone, and says the country will soon be its largest market. Uber is moving to raise a $1 billion war chest so it can grow from 11 cities to 50 in China....MORE
It was only a couple months ago we posted "Big Money: Uber Guts Carnegie Mellon Robotics Lab To Hire Autonomous Car Developers" with the intro:
Raising money at a $600 illion zillion fafillion valuation allows you to buy pretty much anything.
The way this is going to pan out is: you won't be able to own the vehicle but its use will be mandated. The car is autonomous but the people aren't.
Mark my words.

Chinese Equities: Action Baby, Action!

Bright light city gonna set my soul
Gonna set my soul on fire
Got a whole lot of money that's ready to burn,
So get those stakes up higher...
A threefer from FT Alphaville:

Shanghai Comp — tin hats back on please [updated]
We hate to concentrate on the dives alone, but this is getting serious....MORE  

Putting that Shanghai Comp dive into context

And finally:
TANSTAAFL, China equities and the wider economy edition
Chinese equity markets have continued puking. Yes, they’re still up on a longer timeframe, but were off a sudden 8.5 per cent on Monday, the worst fall since 2007. The Shanghai Comp now looks like this:
As the FT said, the Shenzhen Composite sank 7 per cent, and the ChiNext start-up board dropped 7.4 per cent. Significantly, more than 1,700 stocks fell by the maximum daily amount of 10 per cent, while only 78 rose. Large caps like PetroChina, the country’s largest company by index weighting, lost 9.6 per cent. Xinhua has thus declared the “The return of debacle!”.

So a reminder of the constraints that China’s powers-that-be are labouring under seems more than appropriate. The point is that, as quoted below, “what just happened in the A-share market will likely have profound impact on China’s economy and financial system one way or another”.
From BofAML’s David Cui, pubbed this morning to his (serendipitous) credit and with our emphasis:

Leverage, inflated collateral & unclear risk responsibility


We estimate that margin outstanding, only from the seven channels that we can estimate reasonably, easily exceeds Rmb3.7tr. Assuming an average 1x leverage, it means that at least Rmb7.5tr market positions are being carried on margin, equivalent to some 13% of A-share’s market cap and 34% of its free float....MORE
 As to the intro, after reading today's "On This Day In Elvis History":
 July 27, 1975 Back in Memphis Elvis bought 14 Cadillac's.
I couldn't get Viva Las Vegas out of my head.

Sunday, July 26, 2015

"The make believe world of eurozone rules"

The Eurocrats really do think they are important.
From The Financial Times:

The disagreement between Germany and the ECJ is not about the law, but politics and economics 
50-euro notes
Whenever you are in a room with European officials and discuss the euro, there is usually somebody who raises his finger and says: “This is all well and good, but it is ‘against the rules’.” It then gets very quiet. “Against the rules” is a big thing in Europe. Most people do not really know what the rules are. But they do know that rules have to be followed.

The situation reminds me of a short story by Franz Kafka, Before the Law, where a man tries to seek entrance to a courthouse. A door keeper tells him that this is possible in principle, but not at the moment.
The man spends his entire life in front of the court waiting to be admitted. At the end of his life he was told that he could have gone through the door at any time. That man followed the wrong set of rules — rules of the mind, not of the law.

Rules of the mind is what we are dealing with in the European debate about the single currency. Many of these rules either do not exist, or they constitute some rather far-fetched interpretation of existing rules.
During the recent Greek crisis, I came across a completely new rule. I first heard it from Wolfgang Schäuble, the German finance minister. It says that countries are not allowed to default inside the eurozone. But a default was perfectly fine once they leave the euro, on the other hand. 

I later read that Otmar Issing, the former chief economist of the European Central Bank, used almost exactly the same phrase as Mr Schäuble in an Italian newspaper interview. If so many important people say it, then surely it must be true, mustn’t it?

Actually, as it turns out, there is no such rule. There is only Article 125 of the European Treaty on the Functioning of the European Union. Article 125 says that countries should not take on the debt of other countries. This is also known as the “no-bailout” clause — though that, as it turns out, is a rather loaded interpretation....MORE
Over the years I've wondered:  When EUrocrats dream, are they Capetian or Carolingian?
Capetian, methinks.

I've always liked the Carolingians better,
they seemed more human-

Charles II, the Bald
Louis II, the Stammerer
Charles, the Fat
Charles III, the Simple
Along the lines of the Brit's Aethelred II, the Unready
(my fav. royal nickname)

Anyhoo...