Tuesday, November 21, 2017

Faraday Future issues bombastic statement accusing former CFO of ‘malfeasance and dereliction of duty’

Uh Oh (see after the jump)

From The Verge:
Stefan Krause, previously of BMW, calls the claims ‘baseless’

Hours after it was made public that struggling electric car startup Faraday Future was losing three top executives, the company is coming out swinging against the one who was most deeply involved in trying to keep the lights on. In a post on the company’s website, Faraday Future is accusing now-former CFO Stefan Krause of “malfeasance and dereliction of duty,” as well as a “possible violation of law.” 

Faraday Future also claims that it terminated the executive when he left last month, as first reported by Jalopnik. The company says Krause was “hindering FF’s fundraising efforts.” 

“Stefan Krause’s possible violation of law and lack of contribution to FF’s goals over the course of his leadership since March has led to severe damages to the interests of FF and its investor,” the statement says. “FF is currently taking legal actions as a result of Stefan Krause’s malfeasance and dereliction of duty.” 

The company wouldn’t specify what those “violations of law” are, and, as Jalopnik reported, no legal action has been taken yet. In a statement, Krause reinforces that he resigned from the company and called the claims “baseless and defamatory.”
Faraday Future issued a statement today that falsely described my departure from the company. The truth is that I resigned from Faraday Future on October 14, effective immediately. The company’s statement inaccurately portrays the circumstances surrounding my departure, and includes baseless and defamatory statements about me and my contributions to the company. I have retained legal counsel and will be exploring all options available to me....

Our introduction to 2013's "How to Spot a Hedge Fund Fraudster":
Bombast. In my experience they are all bombastic.
And stripper poles. You would not believe the number of stripper poles that crooks collect....
And my all time favorite bit o'bombast, recounted as the intro to 2007's "Planktos Highlights Real Ocean/Climate Crises & Responds to Recent Misinformation Campaigns" about a Euro-American reinsurance scam that had reverse-merged its way onto the American Stock Exchange, gotten onto the Fed Board's margin list and then, rather than doing the dump half of a pump-n-dump as they gunned it from 50 cents to $15.00, had just margined  the hell out of their brokerage accounts, requested the excess buying power be wired out and skedaddled, picking up the remaining cash in the corporate bank accounts on their way out the door:
...But first, one of my favorite examples of a stock scam (I told you, I have a morbid fascination with the underbelly of the markets, it's like watching the lions approach the wildebeest at the watering hole, you don't want to see it but you can't look away):
...Peter Uttley, Equisure's chairman and a former Lloyds of London executive, took control of the company this week, assuming the chief executive post....

...Uttley said in the press release that his chairman role had been a "passive" one, but he now plans an active reorganization of the company, whose reputation has been stained by allegations that it is a scam insurance operation....
...In an unusually emotional statement to the press, sent from an Equisure board meeting Friday in London, Uttley told his version of events over the summer, which eventually led to the delisting of Equisure shares on the American Stock Exchange.
"The simple truth was consumed in the belly of deception, but now has been vomited for the world to see," Uttley began.
He then proceeded to tell a story of three men, whom he described as "liars," "cheats," and "scallywags," who worked with law enforcement officials and the press to spread false rumors about the company with the intent of buying Equisure out at 50 cents a share, a tiny fraction of the stock's trading price of $15, before AMEX suspended trading Aug. 1.
Isn't that damn fine bloviating? It's hard to research but I think Uttley et. al. got away with $100 mil.
Here's Russ George of Planktos responding (I think) to Greenpeace's submission to the recent meeting of the International Maritime Organization...
Who's going to top "The simple truth was consumed in the belly of deception, but now has been vomited for the world to see," in a press conference?
Scallywags is a nice touch as well.

Is Venture Capital Destroying Online Journalism?

I don't know but having spent some time trying to front run Sand Hill Road and understand things like Uber I have to say this is an interesting insight.
From Talking Points Memo, November 17:

There’s a Digital Media Crash. But No One Will Say It
Yesterday I appeared on a panel about digital publishers who are ‘pivoting to video’. I’ve written about this before. But in case you’re new to it, there have been numerous cases over the last six months to a year in which digital publishers have announced either major job cuts or in some cases literally fired their entire editorial teams in order to ‘pivot to video.’ The phrase has almost become a punchline since, as I’ve argued, there is basically no publisher in existence involved in any sort of news or political news coverage who says to themselves, my readers are demanding more of their news on video as opposed to text. Not a single one. The move to video is driven entirely by advertiser demand.

What crystallized for me from this and other discussions I had yesterday is that we’re actually in the midst of a digital news media crash, only no one is willing to say it. I’ve noted before that digital news media in the midst of a monetization crisis. But it’s more than that. It’s a full blown crash.
Here’s why.

You have three different factors coming together at once: two primary ones and one secondary but critical one.

First, digital publishing has always been ruled by a basic structural reality: there are too many publications. Now, how can there be too many publications? The more information the better. Well, it’s like this: There are too many publications relative to the funding available to support them, given that it has been almost universally assumed that the funding comes from advertising. That creates the furious competition for clicks and the ever growing intrusiveness of ads. The advertisers have all the power. So rates are always going down.

This has been a fact for more than two decades. It is driven by the extremely low costs of entry in digital publishing which makes it very difficult to set up the kinds of de facto monopolies that existed for big city newspapers for most of the second half of the 20th century.

Then came the platform monopolies: Google, Facebook and a few others. Over the last five years or so but accelerating rapidly in the last 24 months, they’ve gobbled up almost all of the growth in advertising revenue and begun to engross a substantial amount of the existing advertising revenue as well.

Let’s try a very simple visualization of what I’m describing. Remember, there are too many publications relative to advertising revenue. So let’s imagine there are 30 publications and 25 revenue seats. The publications fight like hell to secure one of the seats. Then the platform monopolies came along and sat down in maybe 5 or 10 of the 25 seats. You can see the problem. The competition of 30 publications competing for 15 seats gets insane. A bunch of the publications are going to die or be forced to find another way to fund themselves.

Now, here’s the too little discussed part of the equation. A huge, huge, huge amount of digital media is funded by venture capital. That’s not just to say they had investors at the start but in effect a key revenue stream of many digital publications has been on-going infusions of new investment.
Much of that investment has been premised on the assumption that scale – being huge – would allow publications to create stable and defensible business models. There are a lot of moving parts to the strategies. But it essentially comes down to this idea: get big enough and you can solve the chronic problem of over-supply of publications in your favor through sales at volume and being able to command stable, premium advertising rates. But that hasn’t happened. Just as one fact point, The Wall Street Journal reported today that Buzzfeed is going to miss its revenue target this year by as much as 20%. That’s a lot.

Now, this doesn’t mean Buzzfeed’s about to go under. I don’t know all the details of their internal business operations. And in any case, this isn’t really about Buzzfeed. That’s just a number I saw today. But it does probably mean BuzzFeed likely won’t do an IPO in 2018 – which means their investors aren’t going to be able to get their exit any time soon. Indeed, they may never be able to get it at the level they expected. The point is that investors are realizing that scale cannot replicate the kind of business model lock-in, price premiums and revenue stability people thought it would. Another way of putting that is that the future that VCs and other investors were investing hundreds of millions of dollars in probably doesn’t exist. That means that they’re much less likely to invest more money at anything like the valuations these companies have been claiming.

The big picture is that Problem #1 (too many publications) and Problem #2 (platform monopolies) have catalyzed together to create Problem #3 (investors realize they were investing in a mirage and don’t want to invest any more). Each is compounding each other and leading to something like the crash effect you see in other bubbles.

Let’s go back to our chair analogy....MORE
We posted that same day:
"Bad news from Mashable, BuzzFeed, and Vice shows times are rough for ad-supported digital media 

"Bill Gates and China partner on world-first nuclear technology"

This story slipped under the radar but may be important.
Plus, we've been following it for a decade and aren't quitters.
(I know, it's a fine line between perseverance and pig-headedness) 

From the Sydney Morning Herald, Nov. 7:
Bill Gates' nuclear firm TerraPower and the China National Nuclear Corporation have signed an agreement to develop a world-first nuclear reactor, using other nuclear reactors' waste
TerraPower chairman Bill Gates and Chinese premier Li Keqiang signed a joint venture agreement to create the Global Innovation Nuclear Energy Technology company, which will build a Travelling Wave Reactor and commercialise the technology.

This joint venture aims to design and construct multiple nuclear power plants generating around 1150 megawatts over the next two decades which utilise this fourth generation nuclear technology.  
It expands a joint technology agreement between the two businesses signed in 2015.

Fourth generation Travelling Wave Reactors would differ from third generation, more traditional light water nuclear reactors, as they would not require enriched uranium to generate energy, and could instead use waste uranium

Travelling Wave Reactors would require less fuel per kilowatt-hour of electricity than light-water reactors, due to TWRs higher fuel burn, energy density, and thermal efficiency.

It is also safer as spent fuels, such as depleted uranium, from other reactor types could be recycled without separating out plutonium, and could operate without refuelling for up to 40 years.

TerraPower states that the US currently holds approximately 700,000 tonnes of depleted uranium, and the reactor would only need eight tonnes of this material to power 2.5 million homes for a year....MUCH MORE
"How Moore’s Law Has Spoiled Us for The Energy Revolution"
Bill Gates: ‘We Need an Energy Miracle’
Q and A: Bill Gates on Energy
July 2013
Nuclear: "Bill Gates Is Beginning to Dream the Thorium Dream"
Nov. 7, 2011 
Bill Gates and China Aren't Building a Traveling Wave Nuclear Plant (yet)
Feb. 2009
Inventing the Future
May 2008 
Who says big ideas are rare? (Using Nuclear Waste) 
"Bill Gates’ Children Mock Him With ‘Billionaire’ Song"

How Turkey, Iran, Russia and India are playing the New Silk Roads (hint: think Syria)

From Asia Times:

A pacified Syria is key to the economic integration of Eurasia through energy and transportation connections
Vladimir Putin, Recep Tayyip Erdogan and Hassan Rouhani will hold a summit this Wednesday in Sochi to discuss Syria. Russia, Turkey and Iran are the three power players at the Astana negotiations – where multiple cease-fires, as hard to implement as they are, at least evolve, slowly but surely, towards the ultimate target – a political settlement.

A stable Syria is crucial to all parties involved in Eurasia integration. As Asia Times reported, China has made it clear that a pacified Syria will eventually become a hub of the New Silk Roads, known as the Belt and Road Initiative (BRI) – building on the previous business bonanza of legions of small traders commuting between Yiwu and the Levant.

Away from intractable war and peace issues, it’s even more enlightening to observe how Turkey, Iran and Russia are playing their overlapping versions of Eurasia economic integration and/or BRI-related business.

Much has to do with the energy/transportation connectivity between railway networks – and, further on the down the road, high-speed rail – and what I have described, since the early 2000s, as Pipelineistan.
The Baku-Tblisi-Ceyhan (BTC) pipeline, a deal brokered in person in Baku by the late Dr Zbigniew “Grand Chessboard” Brzezinski, was a major energy/geopolitical coup by the Clinton administration, laying out an umbilical steel cord between Azerbaijan, Georgia and Turkey.

Now comes the Baku-Tblisi-Kars (BTK) railway – inaugurated with great fanfare by Erdogan alongside Azerbaijani President Ilham Aliyev and Georgian Prime Minister Giorgi Kvirikashvili, but also crucially Kazakh Prime Minister Bakhytzhan Sagintayev and Uzbek Prime Minister Abdulla Aripov. After all, this is about the integration of the Caucasus with Central Asia....

Dec. 2013
"The New New Great Game: Geography, Energy, The Dollar and Gold"
Just about the time 'the 'stans' start receding from the Western headlines it is probably most important to think about them.  

"Private equity to face competition from investors, says Carlyle Co-CEO"

From Reuters via PE Hub:
Private equity firms are awash in cash, with nearly US$1trn of available capital, but the industry is facing internal competition as limited partner (LP) investors seek to play a more active role in buyouts, according to David Rubenstein, co-founder and co-CEO of the Carlyle Group.

The structure and composition of private equity funds will change significantly as LPs that would previously have invested in the funds increasingly branch out into arranging buyouts themselves, Rubenstein said.

Rubenstein was giving his views on the future development of private equity firms, based on his 30-plus year career in the industry, at the SuperInvestor Conference in Amsterdam this week.
“I expect we’ll see longer duration funds become more prevalent, with consequently lower fees for LPs and carried interest for general partners [private equity firms].” Rubenstein said.
Many LPs are looking for longer-term investments with lower return targets, which will ripple through the conventional buyout community, Rubenstein said, adding that more permanent capital will also be sought to match longer investment duration needs.

Several LPs that would have previously invested in private equity funds, including Canadian pension funds PSP Investments and the Canadian Pension Plan Investment Board, have built their own operations to buy assets in recent years and some European firms are also looking at co-investment buyouts.

Rubenstein predicted that sovereign wealth funds will replace US public pension funds as the largest source of capital for buyout firms, and said that retail investors will also play a more significant role going forward.

“Individual retail investors will be the biggest new entry as regulations relax on investing in private equity,” he added.

He also highlighted private debt as a significant growth area....MORE
HT: Pension Pulse who also highlights Financial News' "David Rubenstein’s five predictions for the future of private equity"

May 2016
Family Offices Doing Private Equity On Their Own
August 2014
GS, JPM: "Here, Let Us Turn That Worthless Corporate Equity Into Valuable Fee Income"
April 2014
"McKinsey Gives “Dare to Be Great” Speech to Private Equity Investors as Returns Fall"

 And as a final note, the introduction to a December 2016 piece:

For some reason I still see Warren Buffet's 2008 Shareholders Letter when someone mentions the term "Private Equity":

...Some years back our competitors were known as “leveraged-buyout operators.” But LBO became a bad name. So in Orwellian fashion, the buyout firms decided to change their moniker. What they did not change, though, were the essential ingredients of their previous operations, including their cherished fee structures and love of leverage.

Their new label became “private equity,” a name that turns the facts upside-down: A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing. A number of these acquirees, purchased only two to three years ago, are now in mortal danger because of the debt piled on them by their private-equity buyers. Much of the bank debt is selling below 70¢ on the dollar, and the public debt has taken a far greater beating. The private- equity firms, it should be noted, are not rushing in to inject the equity their wards now desperately need. Instead, they’re keeping their remaining funds very private...

Driving Amazon's Last Mile (AMZN)

From Gizmodo:
Who delivers Amazon orders? Increasingly, it’s plainclothes contractors with few labor protections, driving their own cars, competing for shifts on the company’s own Uber-like platform. Though it’s deployed in dozens of cities and associated with one of the world’s biggest companies, government agencies and customers alike are nearly oblivious to the program’s existence.

In terms of size, efficiency, and ruthlessness, Amazon has few equals. The least publicly accountable of the big tech companies—Google, Apple, and Facebook face considerably greater scrutiny—Amazon’s stock is one of the most valuable on the market, it’s among the fastest-growing companies in the United States. Atop its vast empire, CEO Jeff Bezos commands the single largest personal fortune on the planet. Estimates place Amazon as the recipient of approximately one third of all dollars spent online. Control over the manufacture, storage, sales, and shipping of an extraordinarily diverse set of products has led the company to expand into film and TV production, web hosting, publishing, groceries, fashion, space travel, wind farms, and soon, pharmaceuticals, to name just a few. It’s a new kind of company, the likes of which the American economy has never before seen and is legislatively ill-prepared for.

Ingenuity alone doesn’t account for Amazon’s dominant position. The company’s Economic Development Team works hard to secure state and local subsidies, which research from watchdog group Good Jobs First indicates surpasses $1 billion, a figure which the advocacy group’s executive director, Greg LeRoy, freely admitted to Gizmodo is far from comprehensive. Infrastructure in the company’s home base of Seattle has strained to keep pace with Amazon’s meteoric growth, and the city has experienced massive increases housing costs. While North America’s metro areas—including Seattle—scramble to offer attractive incentives to host Bezos’s second headquarters, research indicates that when Amazon comes to town, it might be killing more jobs than it creates.
The majority of consumers, however, either don’t know or don’t care. Strip Amazon to its most familiar elements, and it’s a devilishly simple everything-store with limitless stuff-supply. You buy it. It shows up. Fast.

Near the very bottom of Amazon’s complicated machinery is a nearly invisible workforce over two years in the making tasked with getting those orders to your doorstep. It’s a network of supposedly self-employed, utterly expendable couriers enrolled in an app-based program which some believe may violate labor laws. That program is called Amazon Flex, and it accomplishes Amazon’s “last-mile” deliveries—the final journey from a local facility to the customer.

While investigating the nature of the program, we spoke to 15 current or former independent drivers across nine states and two countries whose enrollment spanned between a few weeks and two years, as well as three individuals attached to local courier companies delivering for Amazon. Their identities have all been obscured for fear of retribution.

A great opportunity to be your own boss

To understand the issues faced by the independent contractors handling last-mile delivery for Amazon requires some knowledge of how Flex works.

When Amazon selects one of its facilities—what drivers refer to as a Fulfillment Center* (FC)— for participation in Flex, it blankets Craigslist and other sites with local ads describing Flex as “a great opportunity to be your own boss,” sometimes as many as twelve ads a day. Each FC is distinguished by three letters and a number—DLA5, for instance, refers to Riverside, California—and many of the over 50 cities Flex operates in have more than one.

An interested driver goes through a preliminary screening online and finishes their application through the app, passes a background check allegedly administered by a company called Accurate Background. Accurate Background did not respond to multiple requests for comment and Amazon declined to comment on which companies or services it uses for this purpose, but claimed the check pulls from, among other signals, court records, the sex offender registry, and data analysis from US and global organizations. One driver told Gizmodo he was approved in under four hours. Others wait over a month. According to a Flex contract furnished to Gizmodo, the only requirements to entry are modest: be 21 or older, pass Accurate Background’s vetting, own a smartphone with Flex installed, and have access to a car, bike, or public transportation. No company cars. No uniforms. Just a non-photo ID badge.....MUCH MORE
Related at recode:
Amazon has privately blamed the U.S. Postal Service for grocery delivery issues that led to Amazon Fresh changes

And last week:
Sure, Come On In: "Amazon Key Flaw Could Let Rogue Deliverymen Disable Your Camera" (AMZN)

ConocoPhillips Won't Invest In New Projects Unless Profitable at $50/Bbl

From OilPrice:

ConocoPhillips Sets Price Ceiling For New Projects
ConocoPhillips will only invest in new projects that can be profitable at an oil price of below US$50 a barrel, CEO Ryan Lance told the FT, adding that the company will continue to focus increasingly on U.S. shale despite skepticism about its growth potential among analysts.

Conoco believes that in addition to operational efficiencies that have been improving in the shale patch over the last few years, shale is more resilient to oil price swings than other segments of the industry. That’s despite the inability of a lot of shale boomers to cover their drilling costs and expand without taking on more debt.

Conoco, which recently reported it had returned to black in the third quarter of the year, posting a profit that beat analyst estimates, will now focus more on shareholder returns than on growth. The company has already started buying back shares it issued during the crash to keep going and will keep the buyback program in place until 2020. The program will cost it US$7.5 billion.

Investment-wise, the US$50 per-barrel ceiling is not even the most ambitious profitability level for new projects. Said Lance, “You don’t even get through the door unless you are below $50 cost of supply, and you don’t really get to the table in the capital allocation fight unless you are $40 a barrel or below.”...MORE

"Apple’s Cash Pile is Approaching $300 Billion"

From MoneyBeat:
Apple pile of cash could soon be worth more than the economy of Vietnam.

A report released Monday by Moody’s Investors Service estimates that Apple’s cash hoard will top $285 billion by the end of 2017, up 16% from a year earlier. That’s more than the annual gross-domestic product of nations including Vietnam and Chile, according to International Monetary Fund data, and twice the market value of McDonald's

Apple already has the largest cash pile of any non-financial company in history, but strong quarterly results and a recent bond sale are expected to boost its cash holdings further when the company next reports its results.

Multinationals like Apple have been building overseas cash piles for years to avoid the 35% U.S. tax rate. Offshore cash reserves are expected to rise 8% to a record $1.4 trillion by the end of 2017, according to Moody’s. A group of five tech giants–Apple, Microsoft, Cisco Systems, Alphabet and Oracle–are expected to account for more than 40% of that amount....MORE

Monday, November 20, 2017

"Goldman Sachs Downgrades Surging Walmart Stock Because Nobody Understands Walmart More Than Goldman Sachs"

The headline is cute, funny and wrong (remind you of anyone?)

WMT is running because their online operation is making them look like geniuses for picking up Jet.com for only $3.3 billion last year.

WMT Wal-Mart Stores, Inc. daily Stock Chart

In regular trade the stock was up a penny at $97.48, after-hours off three cents.

From DealBreaker:
Despite the much-reported “Death of Retail,” stock in Walmart has been on something of a little tear over the last year.

In fact, while Amazon has put the biblical “Fear of Bezos” into the rest of the retail sector, WMT has put on about $30 in new weight. The run was been a low-key surprise for many, and as a result Walmart has become the most unlikely thing that Walmart can be; a sexy pick.

The whole affair has also given rise to a fun little parlor game of watching finance types on the coasts misread the potency of Walmart. Bentonville has beaten Wall Street consensus estimates the last four quarters....MORE

"Tractor-trailer carrying elephants to winter retreat catches fire"

Elephants evacuated, as did the arriving  fire fighters.
Thanks to a reader.


The Chattanooga Fire Department says a tractor-trailer carrying three African elephants caught fire on I-24 near the Georgia state line at about 2 a.m.

Chattanooga Firefighters and deputies with the Dade County Sheriff's Department, both responded. Dispatchers warned fire crews to cut their sirens before they got to scene, saying "I really don’t want to spook these things.”...MORE, including an update on the pachyderms.
Chattanooga Fire Department Facebook page.

"Timeline: How ‘Salvator Mundi’ Went From £45 to $450 Million in 59 Years"

From ArtNet:

The painting, marketed as the last Leonardo da Vinci in private hands, has a history fit for a feature film.
Leonardo da Vinci‘s Salvator Mundi just sold at Christie’s for $450.3 million, becoming the most expensive work of art ever sold. But not so long ago, an eagle-eyed buyer purchased it at auction for a mere £45. How did we get from there to here? We’ve compiled a handy timeline of the painting’s history below. You really can’t make this stuff up.

• 1500 – Around this time, Leonardo da Vinci paints Salvator Mundi, likely for King Louis XII of France and Anne of Brittany, shortly after the conquests of Milan and Genoa.

• 1625 – Believed to have been commissioned by the French Royal Family, the painting accompanies Queen Henrietta to England when she marries King Charles I.

• 1651 – King Charles I dies in 1649, and shortly thereafter the canvas is used to settle part of his massive debt. It covers a whopping £30 worth.

• 1763 – After remaining in the Royal family’s collection for years, the painting goes missing—and doesn’t surface again for 150 years.

• Late 19th century – The painting enters the collection of the Virginia-based Sir Frederick Cook.

• 1958 – Salvator Mundi pops up at a Sotheby’s London auction on June 25, 1958. Attributed to Boltraffio, who worked in da Vinci’s studio, it sells for £45 to someone named “Kuntz.”

Nov. 17
Felix Salmon Talks Da Vinci: "Notes on $450,312,500 "
Nov. 16
ICYMI: Leonardo da Vinci’s ‘Salvator Mundi’ Sells for Record-breaking $450.3 Million

Factor Investing: Factors Hated and Loved

From Validea's Guru Investor blog:

The Most Hated (And Most Loved) Investing Factor
Factor investing requires a lot of patience. Despite the fact that research shows that many factors can produce outperformance over long periods of time, all of them will struggle at times in the short-term. And those struggles are typically long and difficult enough that most investors will abandon underperforming strategies in favor of what is working now. When that happens, that typically signals a bottom for the factor is near.

At Validea, we track several hundred factors in our guru-based models that run the gamut from value to growth to momentum. Our historical testing shows that mean reversion in factors, particularly value factors, can be a very powerful force. The longer and more a factor is out of favor, the stronger its performance tends to be when things reverse.

So I thought it would be interesting to take a look across the factors we follow to see what is the cheapest right now.

Value stocks have been underperforming for a decade now, so it’s no surprise that nearly all the cheapest factors are value related. The cheapest one, however, also has the distinction of being the most loved factor, and the most unloved factor, all at the same time, which makes the discussion of its future prospects an interesting one.

The Price/Book ratio is probably the most commonly used factor in value. When Fama and French published their three factor model in the early 90s, they found that a low Price/Book ratio was positively correlated with future stock returns. That led to a huge uptick in money following it.

Price/Book has more money following it than any other factor. It is the primary factor Russell uses when it build its value indices, which have a lot of capital invested in them. It is also the value factor used by Dimensional Fund Advisors, which manages over $500 billion, for its funds.
That huge pool of money following Price/Book makes it the most loved value factor in terms of the assets following it.

With that amount of capital following the factor, you would expect its effectiveness to be reduced. And data indicates that may be exactly what has happened. Since January of 1995, the Russell 3000 Value Index has returned 9.99% annually, while the Russell 3000 Index has returned 10.12%. So adopting a value tilt using Price/Book has not produced the outperformance predicted in the academic research for the last 20+ years.

There are a couple of arguments as to why this has happened. First, as previously mentioned, when you put a huge amount of capital behind a factor, and when that capital tends to be permanent (sticking with the factor through ups and downs), that factor should lose some or all of its effectiveness. Second, share buybacks have become more common as time has gone by. When a company buys back shares, it reduces both its market capitalization (by reducing shares outstanding) and its book value (since either cash is subtracted to buy the shares or debt is added). The net result of this is a higher Price/Book ratio.  This can have the effect of making a company look less attractive from a valuation standpoint, even though it is engaging in behavior that is beneficial to shareholders.

This combination of significant permanent capital tied to the Price/Book and the accounting basis for the reduction in its effectiveness has led to a transition. The best and most thoughtful minds in the quantitative investment business now almost universally hate the factor. They tend to prefer more advanced ratios like Enterprise Value to Operating Earnings or even different more common metrics like the Price to Earnings ratio. And those factors have all worked better in recent years. So despite being the most loved value factor in terms of money following it, the Price/Book has become the most hated one in the active management community....MORE

HT: Alpha Ideas, Nov. 17

Dear Elon, Batteries May Not Be the Answer For Trucks (TSLA)

From Inverse, Nov. 10:

Never Mind Electric Cars: Why Electric Roads are the Real Key to the Future
“Breathe in that smog and feel lucky that only in L.A. will you glimpse a green sun or a brown moon. Forget the propaganda you’ve heard about clean air; demand oxygen you can see in all its glorious discoloration.”
As is often the case, cult film director John Waters captured it more colorfully than anyone when he wrote about Los Angeles’s pollution in his book Crackpot. The smog of L.A. is as iconic as the Hollywood sign or the surf of Santa Monica.

There’s no single reason the haze of pollution defines Los Angeles more than any other American city. The second-largest city in the nation has been allowed to sprawl and stretch in a way New Yorkers could only dream of. Its location in a basin surrounded by mountains serves to trap more toxic air particles than might otherwise be the case.

But mostly, it’s the cars. No, scratch that: The millions of cars are a problem. The trucks are the problem. Nothing is responsible for more smog-causing emissions in southern California than the trucks that haul freight between the region’s cities and ports. And these trucks may just be too big to realistically run on electric batteries like the passenger cars built by Tesla and others.

One possible answer? Don’t electrify the trucks, electrify the roads. That process actually was revealed this week on a mile’s stretch of highway in Carson; located between the heart of Los Angeles and the main port of Long Beach. It’s called an eHighway, and its creators at Siemens, the electrification, automation and digitalization multinational, tell Inverse it can considerably lessen highway emissions.
“We know there’s so much noise and pollution in this area,” says Andreas Thon whose title is “head of Turnkey Projects & Electrification” in North America.
Thon oversees highway electrification projects for the power and industrial technology company Siemens, which is building the road in Carson and has tested similar highways in Germany and Sweden. 

“The advantages of this system is, first, it’s zero-emission,” Thons says. “So the noise level is really reduced. And furthermore you have economic benefits because the electric drive requires less energy than the diesel one.”

The road’s setup will be familiar to anyone who has seen a trolley or streetcar trundle through a city. Specially designed trucks run underneath electric lines, each equipped with an instrument called a pantograph that makes connection to the lines and draws power to propel the vehicle. Currently, three trucks — a battery-electric, natural gas and electric hybrid, and a diesel hybrid — are testing out the mile-long road, which cost $13.5 million to build.

That may sound like a lot, but Thon says the future cost should be closer to $5 million. That price would make it competitive with building more railroads, which are the only other option for the kind of heavy freight shipping that trucks can provide....MORE
Siemens Is Building Germany's First Electrictrified Highway

China Energy Investment signs MOU for $83.7 billion in West Virginia projects

Memorandums are not money but still, this seems like a big deal.
From Reuters, Nov. 8:
China Energy Investment Corp, the world’s largest power company by asset value, has signed a memorandum of understanding (MOU) to invest $83.7 billion in shale gas, power and chemical projects in West Virginia, the U.S state said on Thursday.

The agreement was the biggest among a slew of deals signed during U.S. President Donald Trump’s state visit to Beijing. The total value of the deals done during Trump’s trip could be as much as $250 billion. 

The gas and power agreement marks the first overseas investment for newly founded China Energy, which formed from a merger of China Shenhua Group [SHGRP.UL], the country’s largest coal producer and China Guodian Corp [CNGUO.UL], one of its top five utilities. 

Beijing is supporting and encouraging its power companies to expand globally, and the agreement underscores China Energy’s ambition to diversify into natural gas and the refining sector. 

The touted investment would extend over a 20-year period, covering projects for power generation, chemical manufacturing and the underground storage of liquefied natural gas (LNG), West Virginia’s Department of Commerce said in its announcement....MORE

Mag Maven Tina Brown Is Pissed At Google and Facebook (GOOG; FB)

We're trying out a bit of tabloid style in the headline, it doesn't seem to work for us.
Additionally, just thinking of a "style" in that context (rather than, say, doin' it Tina Brown style) I think of this gruesome story from a few years ago: "4 Copy Editors Killed In Ongoing AP Style, Chicago Manual of Style Gang Violence".

On to recode:

Why magazine mogul Tina Brown is 'angry and upset' at Google and Facebook
It’s time for the most powerful companies in digital media to stop playing dumb, Brown says.
Starting in her 20s as the editor of Tatler Magazine in London, Tina Brown rode a wave of print magazines to become one of the most influential people in the media. She tells a good portion of that story in her new no-holds-barred memoir, “The Vanity Fair Diaries: 1983 - 1992.”

But after editing Vanity Fair, the New Yorker and the short-lived Talk magazine (which was financed by Harvey Weinstein), Brown moved her editing online, founding the Daily Beast in 2008. On the latest episode of Recode Decode, hosted by Kara Swisher, she explained why she left that publication after six years, and why the new power players in media — tech companies like Google and Facebook — have left her feeling frustrated.

“I am very angry and upset about the way advertising revenue has been essentially pirated by the Facebook-Google world, without nearly enough giveback — no giveback, really — to the people who create those brilliant pieces that are posted all over their platforms,” Brown said. “It’s high time they gave back to journalism.”

She proposed the creation of a “huge journalism fund” for local media, even though she doubts that that would ever happen.

“They have no interest, I realize that,” Brown said. “It’s like, ‘Oh, we’re not a media company, we’re a platform.’ Okay, well, guess what? When you don’t have human beings who have judgment, who have taste, who have a sense of responsibility, you can have any old Russian hacker dishing it out to the American public.”

“Opinion-forming, influential content, it’s very hard to find and support and have an impact with,” she added. “People don’t know what’s important or where to find it. So it doesn’t wash to say, ‘There’s so many transactions, everybody can find it.’ It’s a needle in a haystack for so many people....MUCH MORE, including podcast.

"Google and VW partner on quantum computing to improve electric car batteries"

Volkswagen is spending a lot of money on their futurecar projects. More on that later today.
From 9to5 Google, Nov. 7:
Volkswagen has been heavily investing in batteries in order to support its planned ramp-up of electric vehicle production starting next year.

Their efforts have so far been focused on actual battery production and securing the rarer raw materials needed, like cobalt, but they are also exploring more future-oriented options to improve batteries at the technological level.

Today, VW is announcing a partnership with Google to use quantum computers to improve electric car batteries and others parts of the future of transportation, like traffic optimization and new machine learning processes.

Quantum computing is still very much in its infancy, but Google has been an early leader in the field and earlier this year, it started offering AI researchers quantum computer access to drive application development.

Artificial intelligence and quantum computing are both seen as having a lot of potential to solve difficult problems in material science and help create new materials to optimize existing technologies, like batteries.

Earlier this year, Toyota announced a similar initiative to work on the next generation of batteries for electric cars.

Now it looks like VW is trying to do the same by securing this new partnership with Google.
Martin Hofmann, Chief Information Officer of the Volkswagen Group, commented on the partnership:
“Quantum computing technology opens up new dimensions and represents the fast-track for future-oriented topics. We at Volkswagen want to be among the first to use quantum computing for corporate processes as soon as this technology is commercially available. Thanks to our cooperation with Google, we have taken a major step towards this goal.”
The companies say that they will focus on research for “practical applications” and that specialists from the Volkswagen Information Technology Centers (IT labs) in San Francisco and Munich will “develop algorithms, simulations and optimizations together with the Google experts.”...MORE
Here's the Volkswagen U.S. press release:

Volkswagen Using D-Wave Quantum Computer To Fight Beijing Traffic (plus the VW Level 5 autonomous vehicle)
Porsche [which produces cars profitability] admits EV investment to take on Tesla is an “enormous burden” (PAH3; TSLA)
Volkswagen To Invest Up To 10 Billion Euros In New Battery Factory

Russian Banking Sector Begins to Recover

From BNE Intellinews:

Russia’s banking sector is starting to recover after a catastrophic summer and is back in overall profit – just.
Russia’s banking sector earned an aggregate profit of just RUB18bn ($300mn) in the first 10 months. However, if you exclude state-owned retail giant Sberbank’s stellar third quarter results,  then the sector is actually still loss-making.

Until September monthly profits were running well ahead of last year’s results,  averaging between RUB100bn and RUB200bn for most of the year. But the sector was walloped in September when it booked an aggregate loss of RUB322bn because of the near-miss banking crisis in the summer caused by the collapse of Financial Corporation Otkritie, which the Central Bank of Russia (CBR) was forced to bail out at the end of August, followed by sister “Garden Ring” bank Binbank a few weeks later.

Among the biggest bailouts in Russia’s history, the clean up of the Russian banking sector is likely to take between one and two years, Elvira Nabiullina, chairwoman of the Central Bank of Russia (CBR), said on November 2.

Despite the slow return to health of the sector, banks are still operating in a toxic environment and more than half of Russian companies consider the sector to still be in crisis, a study found this week.
Companies are still unwilling to borrow from banks because of the high cost of money.  Loans to companies have fallen for a year and now are ticking over at a low level, as companies prefer to borrow cheaper for longer on the international capital markets if they can. A series of cuts to the monetary policy rate by the CBR this year has made domestic borrowing more attractive, but the rates are not expected to make a difference to the corporate borrowing volumes until next year, according to analysts. The corporate loan portfolio declined 3.6% y/y in October (and was down -1.2% y/y, if you exclude the FX factor, as the ruble strengthened 8.0% y/y), the CBR reported.
Retail lending, on the other hand has come back to life this year and expanded a robust 9.9% y/y in October, which has given economists some cause for optimism.
They speculate that consumption is slowly returning as an economic driver. So far this year’s increased retail spending, such as it is, has been largely fuelled by consumer credits as real disposable incomes are flat and retail turnover growth is still hovering just above zero....MUCH MORE

"Mayoral Powers in the Age of New Localism"

One of the problems with politics is that the people attracted to power are exactly the ones who should not be allowed anywhere near it.
Go figure.

We've been watching the mission-creep trend in municipal governance for a while now, trying to get in front of it—"Il faut bien que je les suive, puisque je suis leur chef"*—to make a bucko or two but, to date, have only come up with the tautology that these people would rather jet off to Buenos Aires during the Northern Hemisphere winter for the Global Parliament of Mayors** than stay home and fix potholes.
It was ever thus, or at least has been since 1967 when John Lennon noted "4000 holes in Blackburn, Lancashire"

*Ledru-Rollin, 1848—schoolboy French translation: "I must follow them for I am their leader."
**This year the get-together was actually held in Stavanger in late September. Nice 'hood, nice time of year.

From CityLab:

U.S. mayors are on the front lines of major global and societal change. It’s time for them to lead beyond the limits of their formal powers.

Last week, residents of more than 30 U.S. cities voted to elect their top leader. Whether four-term veterans like Cleveland’s Frank Jackson or first-time politicians like Helena’s Wilmot Collins, U.S. mayors are now more than ever on the front lines of major global and societal change. The world’s challenges are on their doorsteps—refugee integration, climate change adaptation, economic transition—yet the federal government has withdrawn and many state governments are actively opposing cities’ agendas. What do these new leaders need to do to succeed in a climate that is at worst hostile and at best indifferent to pressing urban priorities?

Mayors must first recognize that we are in the midst of a paradigmatic shift in urban governance and problem solving that is catching up to an established fact on the ground: Cities are networks of public, private, and civic institutions that power the economy and shape critical aspects of urban life. This “new localism” is pragmatic and solution-oriented, and by design includes exemplary leadership across sectors and segments of society. Yet mayors, as the top political and executive office in cities, have a special responsibility to set the vision and activate their networks to design, finance, and deliver everything from basic services to transformative infrastructure projects.

For such an important office, we know frustratingly little about the specific mechanics that make mayors effective. A new Brookings Institution report, “Leading Beyond Limits: Mayoral Powers in the Age of New Localism” examined the sources and uses of mayoral powers and the capacities they need to lead and govern. Though cities and governance contexts vary tremendously around the world, there are plenty of common challenges—fragmented governance environments, the need for increasingly technical skill sets to address complex problems—and some broader recommendations that could strengthen mayoral leadership in cities everywhere....MUCH MORE

Sunday, November 19, 2017

Real Estate: "Indian man declares himself king of ungoverned land between Egypt and Sudan"

Location, location, location.
From The New Arab:
Indian man declares himself king of ungoverned land between Egypt and Sudan
A man traveled nearly 200 miles to become king of a piece of ungoverned land between Egypt and Sudan and made his dad president of his new kingdom as a birthday present for him.

Suyash Dixit, an Indian national travelled from India to the land of Bir Tawil, an unclaimed area of land between the Egyptian-Sudanese border to claim it for himself and declare himself king of the new-found "Kingdom of Dixit".

"I call myself, King Suyash First from today. I declare this unclaimed land of Bir Tawil as my country from now to the eternity of time. I pledge to continue to work for the prosperity of my people of the country and this motherland," Dixit announced in a Facebook post.

"I travelled 319KM (to and fro) in far desert with no roads to claim this unclaimed land of Bir Tawil. This 800 square miles of land belongs to no country. It is the only place on earth where humans can live and survive but is not a part of any state/country.

"Following the early civilization ethics and rule, if you want to claim a land then you need to grow crops on it. I have added a seed and poured some water on it today. It is mine," he added.
He also claimed his new country's national animal as a lizard, but only because he did not see any other animal there....MORE
There is, at minimum, one prior claimant. Via Opinio Juris:
The Man Who Would Be King, Daddy’s Little Princess, and their Territorial Claim

Somehow related: this morning's "The Financial Times' Izabella Kaminska Examines Seasteading and Is Bemused".

"Scientists are about to test a devastating hypothesis: 2018 will suffer a lot of big earthquakes"

From Quartz:
Every so often, the Earth’s rotation slows by a few milliseconds per day. This is inconsequential to the average human, and causes only mild annoyance to the people whose job it is to measure Earth’s rotation with great precision.

That may be about to change, if the hypothesis set out by two geologists proves true. In a study published in Geophysical Research Letters earlier this year, Roger Bilham of the University of Colorado and Rebecca Bendick of the University of Montana predict that, because of Earth’s slowing rotation, the world will see a significant spike in large earthquakes in 2018.

To make this prediction, Bilham and Bendick studied every earthquake since 1900 that recorded more than 7.0 on the moment magnitude scale. They found that approximately every 32 years, there is an uptick in these large quakes. The only factor that strongly correlates is a slight slowing of the Earth’s rotation in a five-year period before the uptick.

“Of course that seems sort of crazy,” Bendick told Science. But think through it a little and it might not seem so outlandish. The Earth’s rotation is known to go through regular decades-long periods in which it slows down and speeds up. Even seasonal changes, like a strong El NiƱo, can affect the planet’s rotation.

But to have the kind of effect that would produce more severe earthquakes, we have to look deeper. Starting from its very center, the planet is made of a solid iron and nickel “inner core,” liquid iron and nickel “outer core,” a thick liquid mantle, and finally a thin solid crust. Earthquakes occur on the crust, but the crust floats on the mantle.

Though Bilham and Bendick don’t know for sure, they believe that every so often the Earth’s mantle might stick a little more to the crust. That could change how the liquid outer core flows. And because it’s all metal down there, the change in flow will affect planet’s magnetic field, which would ever so slightly affect the Earth’s rotation and thus change the length of the day by milliseconds. The Earth’s rotation has been slowing down for the past four years....MORE
Always remember that earthquakes can be tricky for equity analysts.
From August 08's "Long-time bear joins bulls: Controversial Joe Granville says Dow could rise 800 points":
Published: January 11, 1981
Joseph Granville doesn't use the word ''forecasting.'' He prefers to say that he applies to the stock market a ''theory'' that he declines to reveal but whose results he communicates to clients in a weekly investment newsletter.
Last week, as his latest bullish issue was still in the mails, Mr. Granville's theory suddenly turned bearish and advised selling. That advice, transmitted to about 3,000 clients in emergency telephone calls, triggered a selloff that drove the Dow Jones industrial average down 23.80 points and resulted in a new one-day volume record on the New York Stock Exchange. The next day, Mr. Granville predicted an earthquake of Richter magnitude 8.3 would hit Los Angeles in May.

From the New York Times:

NOTES ON PEOPLE; As a Seismologist, He's a Good Stock Analyst

At Gettysburg, November 19, 1863

The Gettysburg PowerPoint presentation with technical support from Peter Norvig:

Author: Abraham Lincoln
Email: president@whitehouse.gov
Home Page: http://www.whitehouse.gov
Download presentation: Gettysburg.ppt
And now please welcome President Abraham Lincoln.
Good morning. Just a second while I get this connection to work. Do I press this button here? Function-F7? No, that's not right. Hmmm. Maybe I'll have to reboot. Hold on a minute.

Um, my name is Abe Lincoln and I'm your president. While we're waiting, I want to thank Judge David Wills, chairman of the committee supervising the dedication of the Gettysburg cemetery. It's great to be here, Dave, and you and the committee are doing a great job.

Gee, sometimes this new technology does have glitches, but we couldn't live without it, could we? Oh - is it ready? OK, here we go: 
 slide 1 of 6

slide 2 of 6

 slide 4 of 6


Speaker Notes

[Transcribed from voice recording by A. Lincoln, 11/18/63]
These are some notes on the Gettysburg meeting. I'll whip them into better shape when I can get on to my computer.
Four score and seven years ago our fathers brought forth on this continent a new nation, conceived in liberty and dedicated to the proposition that all men are created equal.

Now we are engaged in a great civil war, testing whether that nation or any nation so conceived and so dedicated can long endure.

We are met on a great battlefield of that war.

We have come to dedicate a portion of that field as a final resting-place for those who here gave their lives that that nation might live.

It is altogether fitting and proper that we should do this. But in a larger sense, we cannot dedicate, we cannot consecrate, we cannot hallow this ground.

The brave men, living and dead who struggled here have consecrated it far above our poor power to add or detract. The world will little note nor long remember what we say here, but it can never forget what they did here.

It is for us the living rather to be dedicated here to the unfinished work which they who fought here have thus far so nobly advanced. It is rather for us to be here dedicated to the great task remaining before us--that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion--that we here highly resolve that these dead shall not have died in vain, that this nation under God shall have a new birth of freedom, and that government of the people, by the people, for the people shall not perish from the earth.
This is a repost of our 150th-anniversary-of-the-speech post.

Newspaper Retracts Editorial on Gettysburg Address
A Cutting-Edge Second Look at the Battle of Gettysburg
"The Improbable Origins of PowerPoint"
Power Corrupts, Powerpoint Corrupts absolutely

The Financial Times' Izabella Kaminska Examines Seasteading and Is Bemused

More accurately, she comes down on the concept somewhere between bemused and dubious.
We've looked at the idea of islands or ships full of geeks, nerds and billionaire geek/nerds a few times over the years:


Oops that's Brighton Pier by Landscape Photographer of the Year, 2017 finalist Matt Cooper via Geographical.
How embarrassing, the roller coaster should have been a tip-off. 
Here's Izabella. I'll go look for the intended picture.

From FT Alphaville:

On the (non) viability of start-up islands
“Governments just don’t get better,” Mr. Quirk said. “They’re stuck in previous centuries. That’s because land incentivizes a violent monopoly to control it.”
So noted Joe Quirk, president of the Seasteading Institute to the New York Times this week.

For those who don’t know, the Seasteading Institute aims to liberate the world from the tyranny of governments by constructing dozens of self-governing floating islands by 2020. Initially, they will be based in and around French Polynesia and feature everything from homes, hotels, offices, restaurants (and no doubt casinos) for the bargain price of $60m.

The project is being part-bankrolled by Facebook investor and PayPal co-founder Peter Thiel, but also aims to raise funds through the hottest fundraising mechanism in town: the initial coin offering. (Because… well, even independent islands are better off on the blockchain apparently.)

But Quirk’s vision doesn’t stop there. He believes one day (c. 2050) there will be thousands of such islands offering different forms of governance options to would-be citizens from all around the world. What’s more, due to climate-change these islands may one day prove to be the Noah’s Ark-type solution for low-level lands threatened by rising sea levels.

It’s a nice utopian dream. But how do you go about forging it?

In the introductory video a good wedge of time is spent explaining that there’s a shortage of shallow waters to place such islands in, because, who could have anticipated, such territories are mostly already claimed by nation states. Darn it....

Although she doesn't go there I could envision a whole "Lord of the Flies" societal breakdown or at minimum something along the lines of 2015's "The Billionaire Battle in the Bahamas".
Or maybe "Sardinians Want Rome to Sell Them to the Swiss".

November 2011
Genius Engineer/Can't Get an H-1b Visa? "Blueseed: A Startup That Plans to House Would-Be Immigrant Innovators 12 Nautical Miles from Silicon Valley"
January 2013
Blueseed (Bringing a Whole New Meaning to Offshoring) Gets an Initial Investor
October 2016
Silicon Valley Artificial Island Nears Government Backing
Ah, here we go, 2012's "Why Buy a Yacht When the Same Money Will Get You a Floating Island?":
Okay, maybe not exactly the same money. This 57,000 square foot beauty runs "hundreds of millions of euros to build.”
From GizMag:
Owning one's own yacht must surely be one of man's greatest indulgences. The ability to take your own tailored environment anywhere you want....MORE

Yacht Island Design creates tailored environment like no other. Following on from its "Streets of Monaco" design is the "Tropical Island Paradise", a 90 metre island with a top speed of 15 knots.
The main deck is a beach "cove" of cabanas surrounding a massive ocean view swimming pool, with a waterfall falling nearby from the volcano.
A bar area, outdoor dining, there's a private spa and four VIP suites for friends, all with their own private balcony.
There's also a helicopter landing pad so those friends can drop in....MORE 

Artificial Intelligence: "We build machines that read and write"

That pretty much cuts out the middle man.
It's also the sales pitch of a company called Primer:
Organizations today face a problem. The amount of data we are collecting is growing exponentially. At the same time the number of human analysts who can read it is at best growing linearly. We require new ways to close this intelligence gap and accelerate our understanding of the world.

Primer is a machine intelligence company that uses machine learning and natural language processing to automate the analysis of large datasets. We build systems that read documents, discover insights and automatically generate reports comparable to those of a human analyst....Primer homepage
_Technical Summarization
Intelligence Engines
Our products are built on top of a core set of computational engines. Their architecture is modular by design, allowing for continuous development on our analytic pipeline. These engines allow our customers to process a diverse set of document types across multiple languages. They do the work of extracting information, identifying key insights, performing analysis at scale, and generating output as human-readable text and graphics....MORE
In other news:

—University of Chicago Magazine

Saturday, November 18, 2017

On AI and Algos, Bayesian Optimal Portfolios and Bureaucracies and Culture

From Edge.org:

The Human Strategy
Alex "Sandy" Pentland [10.30.17]
The idea of a credit assignment function, reinforcing “neurons” that work, is the core of current AI. And if you make those little neurons that get reinforced smarter, the AI gets smarter. So, what would happen if the neurons were people? People have lots of capabilities; they know lots of things about the world; they can perceive things in a human way. What would happen if you had a network of people where you could reinforce the ones that were helping and maybe discourage the ones that weren't?

That begins to sound like a society or a company. We all live in a human social network. We're reinforced for things that seem to help everybody and discouraged from things that are not appreciated. Culture is something that comes from a sort of human AI, the function of reinforcing the good and penalizing the bad, but applied to humans and human problems. Once you realize that you can take this general framework of AI and create a human AI, the question becomes, what's the right way to do that? Is it a safe idea? Is it completely crazy?

ALEX "SANDY" PENTLAND is a professor at MIT, and director of the MIT Connection Science and Human Dynamics labs. He is a founding member of advisory boards for Google, AT&T, Nissan, and the UN Secretary General. He is the author of Social Physics, and Honest Signal. Sandy Pentland's Edge Bio page

The big question that I'm asking myself these days is how can we make a human artificial intelligence? Something that is not a machine, but rather a cyber culture that we can all live in as humans, with a human feel to it. I don't want to think small—people talk about robots and stuff—I want this to be global. Think Skynet. But how would you make Skynet something that's really about the human fabric?

The first thing you have to ask is what's the magic of the current AI? Where is it wrong and where is it right?

The good magic is that it has something called the credit assignment function. What that lets you do is take stupid neurons, these little linear functions, and figure out, in a big network, which ones are doing the work and encourage them more. It's a way of taking a random bunch of things that are all hooked together in a network and making them smart by giving them feedback about what works and what doesn't. It sounds pretty simple, but it's got some complicated math around it. That's the magic that makes AI work.

The bad part of that is, because those little neurons are stupid, the things that they learn don't generalize very well. If it sees something that it hasn't seen before, or if the world changes a little bit, it's likely to make a horrible mistake. It has absolutely no sense of context. In some ways, it's as far from Wiener's original notion of cybernetics as you can get because it's not contextualized: it's this little idiot savant.

But imagine that you took away these limitations of current AI. Instead of using dumb neurons, you used things that embedded some knowledge. Maybe instead of linear neurons, you used neurons that were functions in physics, and you tried to fit physics data. Or maybe you put in a lot of stuff about humans and how they interact with each other, the statistics and characteristics of that. When you do that and you add this credit assignment function, you take your set of things you know about—either physics or humans, and a bunch of data—in order to reinforce the functions that are working, then you get an AI that works extremely well and can generalize.

In physics, you can take a couple of noisy data points and get something that's a beautiful description of a phenomenon because you're putting in knowledge about how physics works. That's in huge contrast to normal AI, which takes millions of training examples and is very sensitive to noise. Or the things that we've done with humans, where you can put in things about how people come together and how fads happen. Suddenly, you find you can detect fads and predict trends in spectacularly accurate and efficient ways.

Human behavior is determined as much by the patterns of our culture as by rational, individual thinking. These patterns can be described mathematically, and used to make accurate predictions. We’ve taken this new science of “social physics” and expanded upon it, making it accessible and actionable by developing a predictive platform that uses big data to build a predictive, computational theory of human behavior.

The idea of a credit assignment function, reinforcing “neurons” that work, is the core of current AI. And if you make those little neurons that get reinforced smarter, the AI gets smarter. So, what would happen if the neurons were people? People have lots of capabilities; they know lots of things about the world; they can perceive things in a human way. What would happen if you had a network of people where you could reinforce the ones that were helping and maybe discourage the ones that weren't?

That begins to sound like a society or a company. We all live in a human social network. We're reinforced for things that seem to help everybody and discouraged from things that are not appreciated. Culture is something that comes from a sort of human AI, the function of reinforcing the good and penalizing the bad, but applied to humans and human problems. Once you realize that you can take this general framework of AI and create a human AI, the question becomes, what's the right way to do that? Is it a safe idea? Is it completely crazy?

What we've done with my students, particularly Peter Krafft, and with Josh Tenenbaum, another faculty member, is look at how people make decisions on huge databases of financial decisions, and also other sorts of decisions. What we find is that there's an interesting way that humans make decisions that solve this credit assignment problem and make the community smarter. The part that's most interesting is that it addresses a classic problem in evolution.

Where does culture come from? How can we select for culture in evolution when it's the individuals that reproduce? What you need is something that selects for the best cultures and the best groups, but also selects for the best individuals because they're the things that transmit the genes.
When you put it this way and you go through the mathematical literature, you discover that there's one best way to do this. That way is something you probably haven't heard of. It's called “distributed Thompson sampling,” a mathematical algorithm used in choosing the action that maximizes the expected reward over a set of possible actions.

It's a way of combining evidence, of exploring and exploiting at the same time. It has a unique property in that it's the best strategy both for the individual and for the group. If you select on the basis of the group, and then the group gets wiped out or reinforced, you're also selecting for the individual. If you select for the individual, and the individual does what's good for them, then it's automatically the best thing for the group. That's an amazing alignment of interests and utilities. It addresses this huge question in evolution: Where does culture fit into natural selection?...
...MUCH MORE, including video and/or audio  

To Create A "1%" In A Social Hierarchy You Don't Need An Economic Surplus, Just A Storable Form Of Wealth

This is a repost from January 2, 2017 which ties in to some ideas we'll look at next week.
Original post: 

So there I was, reading the abstract of "Hazelnut economy of early Holocene hunter–gatherers: a case study from Mesolithic Duvensee, northern Germany", thinking about Nutella and Frangelico when this grabbed my eye:
...High-resolution analyses of the excellently preserved and well-dated special task camps documented in detail at Duvensee, Northern Germany, offer an outstanding opportunity for case studies on Mesolithic subsistence and land use strategies. Quantification of the nut utilisation demonstrates the great importance of hazelnuts. These studies revealed very high return rates and allow for absolute assessments of the development of early Holocene economy. Stockpiling of the energy rich resource and an increased logistical capacity are innovations characterising an intensified early Mesolithic land use...
Stockpiling, storage, commodities, well that's right in our wheelhouse,* and if I can combine it with the last remnants of interest in Piketty's approach to inequality.....maybe I can synthesize something halfway original...

Yeah, it's already been done.

Here's VoxEU, September 2015:

Cereals, appropriability, and hierarchy
The Neolithic Roots of Economic Institutions
Conventional theory suggests that hierarchy and state institutions emerged due to increased productivity following the Neolithic transition to farming. This column argues that these social developments were a result of an increase in the ability of both robbers and the emergent elite to appropriate crops. Hierarchy and state institutions developed, therefore, only in regions where appropriable cereal crops had sufficient productivity advantage over non-appropriable roots and tubers. 
What explains underdevelopment?
One of the most pressing problems of our age is the underdevelopment of countries in which government malfunction seems endemic. Many of these countries are located close to the Equator.1 Acemoglu et al. (2001) point to extractive institutions as the root cause for underdevelopment. Besley and Persson (2014) emphasise the persistent effects of low fiscal capacity in underdeveloped countries. On the other hand, Diamond (1997) argues that it is geographical factors that explain why some regions of the world remain underdeveloped. In particular, he argues that the east-west orientation of Eurasia resulted in greater variety and productivity of cultivable crops, and in larger economic surplus, which facilitated the development of state institutions in this major landmass. Less fortunate regions, including New Guinea and sub-Saharan Africa, were left underdeveloped due to low land productivity.

In a recent paper (Mayshar et al. 2015), we contend that fiscal capacity and viable state institutions are conditioned to a major extent by geography. Thus, like Diamond, we argue that geography matters a great deal. But in contrast to Diamond, and against conventional opinion, we contend that it is not high farming productivity and the availability of food surplus that accounts for the economic success of Eurasia.
  • We propose an alternative mechanism by which environmental factors imply the appropriability of crops and thereby the emergence of complex social institutions.
To understand why surplus is neither necessary nor sufficient for the emergence of hierarchy, consider a hypothetical community of farmers who cultivate cassava (a major source of calories in sub-Saharan Africa, and the main crop cultivated in Nigeria), and assume that the annual output is well above subsistence. Cassava is a perennial root that is highly perishable upon harvest. Since this crop rots shortly after harvest, it isn't stored and it is thus difficult to steal or confiscate. As a result, the assumed available surplus would not facilitate the emergence of a non-food producing elite, and may be expected to lead to a population increase.

Consider now another hypothetical farming community that grows a cereal grain – such as wheat, rice or maize – yet with an annual produce that just meets each family's subsistence needs, without any surplus. Since the grain has to be harvested within a short period and then stored until the next harvest, a visiting robber or tax collector could readily confiscate part of the stored produce. Such ongoing confiscation may be expected to lead to a downward adjustment in population density, but it will nevertheless facilitate the emergence of non-producing elite, even though there was no surplus.

Emergence of fiscal capacity and hierarchy and the cultivation of cereals
This simple scenario shows that surplus isn't a precondition for taxation. It also illustrates our alternative theory that the transition to agriculture enabled hierarchy to emerge only where the cultivated crops were vulnerable to appropriation.
  • In particular, we contend that the Neolithic emergence of fiscal capacity and hierarchy was conditioned on the cultivation of appropriable cereals as the staple crops, in contrast to less appropriable staples such as roots and tubers.
According to this theory, complex hierarchy did not emerge among hunter-gatherers because hunter-gatherers essentially live from hand-to-mouth, with little that can be expropriated from them to feed a would-be elite.2
  • Thus, rather than surplus facilitating the emergence of the elite, we argue that the elite only emerged when and where it was possible to expropriate crops....

*See, for example:
The Golden Age of Commodities Market Manipulation: Corners, Storage and Squeezes

These days however, to purloin that wealth, you don't even need to be dealing with storables:
How to Manipulate Non-storable Commodities Markets
From September's "The Paradox of Profit Margins and Another Look at the Theory of Everything":
...If you're interested in the effect of hoarding on commodities prices Janet Netz, PhD did a paper I liked, "The Effect of Futures Markets and Corners on Storage and Spot Price Variability". I'll see if we have an ungated copy.

Remember, the spectrum runs from storage to hoarding to market corners.
And corners in commodities refers to physical, you can't corner a commod by simply buying futures or forwards, you also have to take up the physical supply.
Conversely, squeezes are accomplished in the futures..

A couple decent papers on this aspect of the abundance theory are:
"Large Investors, Price Manipulation, and Limits to Arbitrage: An Anatomy of Market Corners" and
"Market Manipulation, Bubbles, Corners and Short Squeezes"
The only way to combat abundance is with artificial scarcity, i.e. manipulation....
Well we don't have an ungated copy of the Netz but we do have a snappy little 66 page paper by Craig Pirrong who you may know by his nom de blog The Streetwise Professor. His is one of the few blogs that posts on Gazprom more than we do though we probably have more on Enron.

Via the University of Houston's Bauer College of Business and hosted at ScienceDirect:
On the other hand, storing electricity is pretty much the ultimate dream of venture capitalists:

Storage: How to Hoard Electricity (GE; SI)
Bill Gates: "It Is Surprisingly Hard to Store Energy"
Batteries: The Venture Capitalist's Holy Grail
And quite a few more, use the search blog box if interested.  

Somehow related:
Oil Tankers and Interest Rates and Scallywags and Time