Links

"Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object." --John Maynard Keynes

Warren Buffett’s Optimistic? Pessimistic? No, Realistic - by Andrew Ross Sorkin (LINK)

Sam Zell on Market Valuations, Real Estate, Post-Virus Economy (video) [H/T Linc] (LINK)

Spring 2020 issue of Graham & Doddsville (LINK)

Content, Cars, and Comparisons in the "Streaming Wars" - by Matthew Ball (LINK)

Invest Like the Best Podcast: Ali Hamed – An Update on Private Credit (LINK)

Against the Rules with Michael Lewis (podcast): The Invisible Coach (LINK)

The Case for Deeply Negative Interest Rates - by Kenneth Rogoff (LINK)

MacroVoices Podcast #217 Dr. Lacy Hunt: The Road Through Deflation Toward Eventual Hyperinflation (LINK)

Hope, Through History Podcast: Episode 3 | The Polio Epidemic (LINK)

The Daily Stoic Podcast: Ask Daily Stoic: Ryan and Robert Greene Talk Plagues, Politics, and Polarization (LINK)

All You Need Are a Few Small Wins Every Day - by Ryan Holiday (LINK)

Our message to the class of 2020 - by Bill and Melinda Gates (LINK)

It is time to take seriously the link between Vitamin D deficiency and more serious Covid-19 symptoms - by Matt Ridley (LINK)

Links

"If the business changes in a material way, you’d better change your business model. Or somebody else will. And then you’ll even have more changes facing you.... Capitalism is creative destruction. And sometimes, you’re on the short end of that." --Warren Buffett (2009)

"Some of our businesses have a shared-hardship model, where they don’t layoff, at least not yet. And the businesses with that model tend to be very strongly placed economically. So I guess it shows that Benjamin Franklin was right, when he said, 'It's hard for an empty sack to stand upright.' So we’re all over the map on that, and so is all of industry. But I do think an ideal model would be a business so strong that it could operate in the shared-hardship mode instead of the layoffs." --Charlie Munger (2009)

"Yeah, some are doing that, where you give up hours. But a lot of operations don’t lend themselves to that very well, either. So...in other cases, you basically have to close down whole plants. That’s just the nature of it. You really can’t operate every plant at 50 percent and have it work as effectively as shutting down the least-productive plants." --Warren Buffett (2009)

"In a world where you sometimes have to amputate a limb to stay alive, you can’t expect that every business can stay exactly as it is." --Charlie Munger (2009)

***

Klarman Made $1 Billion Hedging Markets. He Still Lost Money (LINK) [If anyone happens to have a copy of a Baupost quarterly update letter during this time, and is willing to share, it would be greatly appreciated (valueinvestingworld@gmail.com).]

The first 4 video replays of Grant Williams' 2020 Hmmminar Series are available online (LINK) [Marc Cohodes is the latest one from last night, and the next one is scheduled for tonight, with John Hussman.]

FUNDSMITH Annual Shareholders' Meeting - 25th February 2020 (video) (LINK)

Apple, Amazon, and Common Enemies -  by Ben Thompson (LINK)

Invest Like the Best Podcast: Sarah Tavel - Consumer & Marketplace Investing (LINK)

The Daily Podcast: A Kids’ Guide to Coronavirus (LINK)

The Peter Attia Drive (podcast): #104 - COVID-19 for kids with Olivia Attia (LINK)

Recode Decode Podcast: Niall Ferguson: How viruses (and fake news stories) spread, and how America screwed up its coronavirus response (LINK)

TED Connects: Why sleep matters now more than ever | Matt Walker (video) (LINK)

The Gene | Part 1: Dawn of the Modern Age of Genetics | PBS (video) (LINK) [A Ken Burns documentary, inspired by Siddhartha Mukherjee's book The Gene.]

WHO must answer serious questions before it is trusted with leading a Covid-19 inquiry - by Matt Ridley (LINK)

The Shelves Are Empty, the Test Swabs Are Gone - by Michael Lewis (LINK)

Some of Warren Buffett’s comments on inflation over the years (LINK)

Book of the day (PDF): Dying of Money: Lessons of the Great German and American Inflations - by Jens O. Parsson

Links

"You might have good reason to pray for a tornado, whether it comes in the shape of swirling winds, or a politician. You imagine the thing doing the damage you would like to see done, and no more. It’s what you fail to imagine that kills you." --Michael Lewis ("The Fifth Risk")

What Is a Tech Company? - by Ben Thompson (LINK)

GMO Quarterly Letter | Bigger’s Been Better (LINK)

The Absolute Return Letter, September 2019: Is Ageing Inflationary? Really? (LINK)

The Exclusive Inside Story Of The Fall Of Overstock’s Mad King, Patrick Byrne [H/T @pcordway] (LINK)

Fairfax to invest $5 billion more in India in next 5 years (LINK)

Odd Lots Podcast: Why Value Investing Has Been Doing Terribly (LINK)

The Product Science Podcast: Tim O’Reilly Hypothesis: Build a Market by Building an Ecosystem (LINK)

The Tim Ferriss Show: #384: David Allen — The Art of Getting Things Done (GTD) (LINK)

a16z Podcast: Making Culture, Making Influence — Dapper Dan! (LINK)

Tweet of the day, via @MebFaber, which is also probably why my watch list is filled with UK and other European names:

Over the past 10 years the UK stock market has underperformed the US by about 200 percentage points. 0% return last 12 years...ouch! The good news? UK stocks trade at half the valuation of US stocks across every long term valuation metric.

Book of the day (released next week): The Price We Pay: What Broke American Health Care--and How to Fix It

Links

"Inflation destroys value, but it destroys it very unequally. The best business to have during inflation is one that retains its earning power in real dollars without commensurate investment to, in effect, fund the inflation-produced nominal growth. The worst kind of business is where you have to keep putting more and more money into a lousy business. In effect, the airlines have been hurt by inflation over the last 40 years, because now they have to put a whole lot of money in a lousy investment, which is a plane, compared to 30 or 40 years ago. And they have to stay in the game. They have to keep buying new planes. And the new planes cost far more now, and the returns continue to be inadequate. So the best protection is a very good business that does not require big capital investment...  Inflation is always a factor in calculating the kind of investment, the kind of business, that we want to buy. But it isn’t like it crowds out all other factors. I mean, it’s always been with us. We’ll think about it always." --Warren Buffett (2005)  [Related link: Warren Buffett’s Comments on Inflation]

Geographic Diversification Can Be a Lifesaver, Yet Most Portfolios Are Highly Geographically Concentrated [H/T @MebFaber, whose Twitter thread is worth reading as well] (LINK)

Ray Dalio at Stanford (video) (LINK)

Value Investing with Legends (a new podcast): Mario Gabelli (LINK)

Invest Like the Best Podcast: Josh Wolfe – The Tech Imperative (LINK)

Against the Rules with Michael Lewis (podcast): The Hand of Leonardo (LINK)

Decrypted Podcast: As Amazon Gets Bigger, Sellers Feel the Squeeze (LINK)

WorkLife with Adam Grant (podcast): When Strength Becomes Weakness (LINK)

Lifesaving Forecasts Start Here: Inside the Storm Prediction Center [H/T @pcordway] (LINK)

Links

"The best investment you can have, for most people, is in your own abilities." --Warren Buffett

Some presentation slides are available from the Ben Graham Centre's 2019 Value Investing Conference [H/T @chriswmayer] (LINK)

Prediction is Difficult, Especially About the Future (LINK)

When You’ll Believe Anything - by Morgan Housel (LINK)

Hard Truths for the Inflation Truthers - by Cullen Roche (LINK)

Secrecy, Self-Dealing, and Greed at the N.R.A. (LINK)

Exponent Podcast: Family-Friendly Disney (LINK)

Longform Podcast: Michael Lewis (LINK)

Freakonomics Radio: The Most Interesting Fruit in the World (LINK)

Radiolab Podcast: Americanish (LINK)

Scientists Partly Restore Activity in Dead-Pig Brains - by Ed Yong (LINK)

The Predator That Makes Great White Sharks Flee in Fear - by Ed Yong (LINK)

TED Talk: Inside the black hole image that made history | Sheperd Doeleman (LINK)

Links

"Most people are going to get a very small real return from investment after considering inflation and taxes. I think that’s an iron law of the world and if, for a brief period, some of us do better than that, we ought to be very thankful. One of the great defenses to being worried about inflation is not having a lot of silly needs in your life. In other words, if you haven’t created a lot of artificial demand to drown in consumer goods, why, you have a considerable defense against the vicissitudes of life." --Charlie Munger (2004)

Martin Capital Management 2018 Annual Report (LINK)

Investors Get Burned After Betting on Electric-Car Metals (LINK)

Markets like stocks and oil have rebounded this year, but cobalt and lithium continue to fall

What Happens When Techno-Utopians Actually Run a Country [H/T @patrickc] (LINK)

The Tim Ferriss Show: Jim Collins — A Rare Interview with a Reclusive Polymath (LINK)

Grant’s Current Yield Podcast: Take 5 (LINK)

Barry Diller on the Recode Decode Podcast (LINK)

a16z Podcast: Who’s Down with CPG, DTC? (And Micro-Brands Too?) (LINK)

Healthy Eating and Intermittent Fasting - by Jana Vembunarayanan (LINK)

Opportunity lost... but more will arise - by Phil Plait (LINK)

On June 10, 2018, the people of Earth received their last transmission from the Opportunity rover of Mars. 

Now, 248 days later, scientists and engineers at NASA's Jet Propulsion Lab have had to make a hard decision: They have declared the rover dead. The mission is over.

Links

"Inflation is always a latent danger to an economy. I mean I always think of inflation as being in remission at all times, because it’s something that has a cause that will recur, in terms of human behavior, from time to time, I think, in terms of how legislatures behave and governments behave. So, I think that the probability of high inflation at some point during the next, say, 20 or 30 years is — it’s not a low probability." --Warren Buffett (2003)

The syllabi of Michael Mauboussin's class at Columbia (HERE) and Jerry Neumann’s class at Columbia (HERE) have some great reading recommendations.

Oaktree Capital's Howard Marks speak from the Context Summit – Jan. 30, 2019 (video) (LINK)

Howard Marks on CNBC (LINK)

Origins of Greed and Fear - by Morgan Housel (LINK)

New Details on Amazon, Berkshire Hathaway, JPMorgan Health Venture Emerge in Court Battle ($) (LINK)

Making sense of insider buys/sells - by Chris Mayer (LINK)

MMT: The Good, the Bad and the Ugly - by Cullen Roche (LINK)

The Absolute Return Letter - February 2019: Another Zimbabwe In the Offing? (LINK)

Fire in Venezuela, Part III of, um, II - by Peter Zeihan (LINK)

Exponent Podcast: 161 — Vigilante Justice (LINK)

American Innovations Podcast: Rubber | Things Heat Up | 2 (LINK)

TED Talk: An astronaut's story of curiosity, perspective and change | Leland Melvin (LINK) [Melvin was also one of the astronauts featured in the excellent National Geographic series "One Strange Rock."]

Astronomers accidentally discover a nearby galaxy in a Hubble image! - by Phil Plait (LINK)

Ancient-human species mingled in Siberia’s hottest property for 300,000 years (LINK)

The Special Sleep That Kicks In During a Sickness - by Ed Yong (LINK)

The Wild Experiment That Showed Evolution in Real Time - by Ed Yong (LINK)

Links

"Inflation is the one thing that, over a long period of time, can turn investors’ results, in aggregate, into a negative figure. And it’s the investors’ enemy." --Warren Buffett  [2003, in response to a question about inflation and his article "How Inflation Swindles the Equity Investor"]

Jimmy Pattison Is Serendated Into Canada’s Walk of Fame (video) [H/T Michael ] (LINK)

Paul Anka surprises inductee Jimmy Pattison with a new rendition of “My Way” with special guest singer, Warren Buffett.

Deal-Master Debbane: Meet The Secretive Lebanese Immigrant Behind Oprah’s Weight Watchers Windfall [H/T @NeckarValue] (LINK)

Dirty dealing in the $175 billion Amazon Marketplace (LINK)

Think Electric Vehicles Are Great Now? Just Wait... [H/T @AlexRubalcava] (LINK)

High Insulin Prices Drive Diabetics to Take Extreme Measures (video) (LINK)

Mutual Fund Observer, January 2019 (LINK)

Steve Romick talks with Meb Faber (podcast) (LINK)

IQ is largely a pseudoscientific swindle - by Nassim Nicholas Taleb (LINK)

How Not To Be Stupid (LINK)

Edge #524: Childhood's End by George Dyson - The 2019 Edge New Year's Essay (LINK)

The digital revolution isn’t over but has turned into something else

This weekend, China embarks on a historic mission to land on the far side of the Moon (LINK)

Scientists Have Been Studying Cancers in a Very Strange Way for Decades - by Ed Yong (LINK)

Books.... There are some great Kindle deals currently available for those interested:

Autonomy: The Quest to Build the Driverless Car—And How It Will Reshape Our World ($2.99)

Barbarians at the Gate: The Fall of RJR Nabisco ($2.99)

Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism ($2.99)

A Mind at Play: How Claude Shannon Invented the Information Age ($3.99)

Genius: The Life and Science of Richard Feynman ($1.99)

The Evolution of Everything: How New Ideas Emerge ($2.99)

The best businesses during inflation...

From the 2015 Berkshire Hathaway Annual Meeting: 

WARREN BUFFETT: Well, the best businesses during inflation are usually the best — they’re the businesses that you buy once and then you don’t have to keep making capital investments subsequently.  

So...you do not face the problem of continuous reinvestment involving greater and greater dollars because of inflation.  

That’s one reason real estate, in general, is good during inflation. If you built your own house 55 years ago like Charlie did, or bought one 55 years ago like I did, it’s a one-time outlay and...you get an inflationary expansion in replacement capital without having to replace [it] yourself.  

And if you’ve got something that’s useful to someone else, it tends to be priced in terms of replacement value over time, and so you really get the inflationary kick.  

Now, if you’re in a business such as the utility business or the railroad business, it just keeps eating up more and more money, and your depreciation charges are inadequate and you’re kidding yourself as to your real economic profits.  

So, any business with heavy capital investment tends to be a poor business to be in in inflation and often it’s a poor business to be in generally.

And the business where you buy something once — a brand is a wonderful thing to own during inflation.

You know, See’s Candy built their brand many years ago. Now, we’ve had to nourish it as we’ve gone along, but the value of that brand increases during inflation, just as the value of, really, any strongly branded goods.

But as Munger points out, extremely high inflation is not something one should hope for:

CHARLIE MUNGER: Well, yeah, but if the inflation ever goes completely out of control, you have no idea how it’s going to end up.  

If it weren’t for the Weimar inflation, we might never have had Adolf Hitler. It was the twosome of the great German inflation followed by the Great Depression that brought us Hitler. And think of the price that the world paid for that one.  

We don’t want inflation because it’s good for See’s Candy. (Laughter) 

....................

Related previous post: Warren Buffett’s Comments on Inflation

Links

"Our outlook for inflation is always the same. We feel there's a big bias toward inflation - both in the U.S. and around the world. But our objective is not to profit from it as much as it is to avoid disaster. Our outlook leads to our buying businesses with the same characteristics that are good in low inflation - namely pricing flexibility, high returns on capital, profits received in cash and so forth." - Warren Buffett, 1988 Berkshire Hathaway Annual Meeting [via OID] [Related link: Warren Buffett’s Comments on Inflation]

Investing is Hard - by Ian Cassel (LINK)

On Social Media and Its Discontents - by Cal Newport (LINK)

Ryan Holiday speaks with James Altucher about his latest book, Peter Thiel, Hulk Hogan, Gawker, and the Anatomy of Intrigue (podcast) (LINK)

What’s Next for Humanity: Automation, New Morality and a ‘Global Useless Class’ (LINK)

The Death of the Last Male Northern White Rhino Won’t Change the Species' Fate - by Ed Yong (LINK)

Links

The Aggregator Paradox - by Ben Thompson (LINK)

Trump Administration Looking at Bankruptcy Options for Student Debt ($) (LINK)

After Decades of Growth, Colleges Find It’s Survival of the Fittest ($) [H/T Matt] (LINK)

Will Quantitative Tightening (QT), which is deflationary in theory, be inflationary in practice? (LINK)

Why Decentralization Matters - by Chris Dixon (LINK)

Twenty Questions with Steven Pinker (LINK)

Related book: Enlightenment Now

Michelle Leder talks to Meb Faber (podcast) (LINK)

Related book: Financial Fine Print: Uncovering a Company's True Value

EconTalk Podcast: Jordan Peterson on 12 Rules for Life (LINK)

Related book: 12 Rules for Life: An Antidote to Chaos

Niall Ferguson talks to Sam Harris (podcast) (LINK)

Related book: The Square and the Tower

A Biohacker Regrets Publicly Injecting Himself With CRISPR (LINK)

Links

Inside Wall Street's $8 Billion VIX Time Bomb (LINK)

The MacroVoices Podcast‏ discussion between Erik Townsend and Chris Cole that was released on January 25th (and related article and presentation) is a great overview of some of the things that have happened over the last few days (and the risks still inherent as a result of short-volatility trades) (Audio and Show Notes, Transcript)

Erik: There’s a lot of people that are very concerned just about the explicit part of this. The people that are essentially profiting from the contango and the VIX term structure by either the XIV ETF or similar strategy implemented by rolling forward short futures contracts. 

And a lot of people are very worried about the blowup of that trade. You know, I think the statistic is if the VIX doubles overnight that could completely wipe out the XIV ETF, or something like that. 

You’re saying that, really, that’s the least of our problems. So, aside from the Target manager who’s made a bunch of money by shorting the VIX, what is the full scope of what could go wrong here? And how would it likely go wrong? 

Would it start with, say, a change where the share buybacks dry up because the interest rates no longer support them? Or what do you think the catalyst might be? And what could the potential blowback be if this were to start to unwind in the other direction? 

Chris: There’s a lot to talk about on that topic. First of all, on the short VIX trade, I think it’s interesting, because now it’s become very popular to talk about that. I think if you go back and read Artemis’s research, dating back as far as 2014, we talked about how, really, just a 65% move in the VIX could be all that it would take to wipe out those products. We actually presented our numbers years ago on that. I think it’s become a very popular thing to talk about today. 

I think these short-vol products, these ETMs – you know, Artemis runs a hedge fund – the regulators are going to require you to be an accredited investor and pass all these tests to invest in a hedge fund that trades volatility in a risk-controlled and smart manner, and it’s largely going long-vol in an intelligent way. 

Meanwhile, anyone on the street can go out and buy a double-levered VIX ETN or a short-biased VIX ETN. So there’s a great irony to this. And I think that these products are a class-action lawsuit waiting to happen. It’s not a matter of “if” – it’s a matter of “when.”  

But, are they a systemic risk to the system? Not so much, compared to the larger short-volatility trade.

.....

...Well, what common knowledge today will be proven wrong in the future? We only need to look into the past actually, empirically, to understand what that is going to be. It’s going to be the fact that stocks and bonds are anti-correlated with one another. 

In my entire life and trading career, and the trading career of almost anyone who is managing money today, stocks and bonds have experienced incredible anti-correlation. And when stocks  sell off, central banks ease and bonds perform. And risk parity funds have found ways to short that correlation in order to generate excess returns.

That’s all a risk parity strategy really is. A dispersion trading desk coupled with data exposure to the underlyings. It’s not that complex. The excess Alpha comes from a short correlation bet.

Well, the problem – and that has been a very good return in an environment where interest rates have dropped and dropped and dropped and dropped.

But what’s interesting is that, if you look at financial history – and I have a graph in “The Volatility and the Allegory of the Prisoner’s Dilemma,” which is a paper from 2015 and we talk about this at length – and also in the latest paper, “Volatility and the Alchemy of Risk” – if you look at the relationship between stocks and bonds over the past 120 years, they’ve actually spent more time correlative with one another than they’ve spent anti-correlative with one another.

What’s terrifying about this is that the entire modern asset management business is built on the short correlation trade of stocks and bonds. 

***

Inflation Is About to Appear ‘With a Vengeance,’ Paul Tudor Jones Says (LINK)

Beware When Studying Greatness - by Sean Iddings (LINK)

Masters of Scale Podcast: How To Build Your Company To Last — with Fiat's John Elkann (LINK)

A nice, short tribute video to SpaceX's maiden Falcon Heavy Launch (LINK)

Here’s what’s next for SpaceX after Falcon Heavy’s first flight (LINK)

This Mutant Crayfish Clones Itself, and It’s Taking Over Europe [H/T David] (LINK)

How to Survive Being Swallowed by Another Animal - by Ed Yong (LINK)

Links

Money and trust: lessons from the 1620s for money in the digital age (LINK)

An Inventor of the VIX: 'I Don't Know Why These Products Exist' [H/T Linc] (LINK)

Not Wages. Not Inflation. Volatility. ETFs. - by Rick Bookstaber (LINK)

Interactive Brokers CEO Peterffy says the 'short volatility' trade is akin to what caused the '87 crash [H/T Matt] (LINK)

This bit from Monday's "Almost Daily Grant's" is worth highlighting, which excerpts some things from a May 2017 issue relevant to recent market moves [Related presentation HERE]:

In light of the veritable explosion in options volatility as measured by the VIX Index, we return to the May 5, 2017 issue of Grant’s (“Portfolio insurance of the 21st Century”) and its examination of strategies which were designed to capitalize on the historically pleasant market conditions of 2017. 

“There is a fair bit of capital. We don’t exactly know how much, but we think it is on the order of a couple of hundred of billion dollars of capital that is invested [in volatility targeting],” says Frank Brosens, co-founder of Taconic Capital. Which is to say: Get invested and keep investing as volatility falls or flattens; scale back as volatility spikes. As volatility has functionally vanished from the market, our hypothetical seller of variable annuities might be emboldened to raise its equity exposure to as much as 140%, say, of normal allocation. 

“We look at this,” Brosens goes on, “and say, ‘Let’s say it’s $200 billion that is invested this way, and it was 140% invested, and if [the market] starts to trade down dramatically, it could go to being 60% invested.’” It could mean that $160 billion comes on the market for sale, not necessarily all at once, as in the week or so leading up to Oct. 19, 1987, but persistently enough to count.

Brosens goes on to compare the 2017 vol-selling regime with portfolio insurance, the infamous pseudo-hedging technique that played a contributing role in “Black Monday.”

I don’t think that we are quite at the point of portfolio insurance, but there is so much capital out there that just seems to be selling vol because it has worked, buying the market because it has worked, feeling confident that they can be invested in the market having done no work because they have these various mechanisms that will protect them if it starts to go down. Collectively, all of these strategies strike us as not so dissimilar to what we saw in ’87.” 

Invest Like the Best Podcast: Emerging Market Opportunities, with Harvey Sawikin (LINK)

How to Think About Culture - by Daniel Coyle (LINK)

Related book: The Culture Code

Dan Pink chats with Steven Johnson (LINK)

Related book: When: The Scientific Secrets of Perfect Timing

Book of the day (recommended by Annie Duke in her chat with Ted Seides): Kluge: The Haphazard Evolution of the Human Mind

Links

"It’s all in how you perceive it. You’re in control. You can dispense with misperception at will, like rounding the point. Serenity, total calm, safe anchorage." - Marcus Aurelius (Meditations)

Berkshire Aims for Fast Regulatory Action on Oncor Deal [H/T Linc] ($) (LINK)

Berkshire Hathaway Energy Co. is racing to get Texas regulators to sign off on its takeover of Oncor in an effort to outpace Elliott Management Corp., a hedge fund with its own designs on the energy-grid business. 

Warren Buffett uses this simple psychological trick to be persuasive and so can you, says influence expert [H/T Daniel] (LINK)

Bob Cialdini dissects what the "Oracle of Omaha" does that makes us want to believe in him.

Herb Allen’s Sun Valley Retreat: General Lori Robinson Gets Five Stars From Attendees [H/T Linc] (LINK)

The other session that had people talking was this morning’s session where well-known hedge fund manager Stanley Druckenmiller and Baupost Group’s Seth Klarman (also a hedge fund manager) told the executives that many people confuse the performance of the stock market with the health of our economy, but that is not necessarily a great indicator.

Bank for International Settlements: 87th Annual Report [H/T Barry Ritholtz] (LINK)

Related video: Claudio Borio: How much do we really know about inflation?

The Dark Side of Globalization: An Update on Country Risk! - Aswath Damodaran (LINK)

Publishers and the Pursuit of the Past - by Ben Thompson (LINK)

A Man in a Hurry: Claude Shannon’s New York Years [H/T The Browser] (LINK)

By day, Claude Shannon labored on top-secret war projects at Bell Labs. By night, he worked out the details of information theory

A Conversation with Malcolm Gladwell: Revisiting Brown v. Board [H/T The Browser] (LINK)

Revisionist History podcast: The Prime Minister and the Prof (LINK)

How does friendship influence political power? The story of Winston Churchill’s close friend and confidant — an eccentric scientist named Frederick Lindemann — whose connection to Churchill altered the course of British policy in World War II. And not in a good way.

Ravens Can Plan for the Future - by Ed Yong (LINK)

Links

National Archives Opens Financial Crisis Inquiry Commission Records [H/T Linc] (LINK)

Prem Watsa's 2015 letter to shareholders [H/T ValueWalk] (LINK)

Chuck Feeney, Bill Gates' and Warren Buffett’s hero, honored by Ireland Fund [H/T Linc] (LINK)

Berkshire's Disintermediation: Buffett's New Managerial Model  - by Lawrence A. Cunningham [Paper from last year] (LINK)

Related book: Berkshire Beyond Buffett: The Enduring Value of Values

Jack Bogle on the Masters in Business podcast (LINK)

The Incredible Rise and Final Hours of Fracking King Aubrey McClendon (LINK)

Sergio Marchionne Has Seen the Auto Industry’s Future: He’s Not Interested [H/T @GSpier] (LINK)

The Economist: Greece’s biggest banks may appear to be out of danger, but they are not (LINK)

The Second Smartphone Revolution (LINK)

Marissa Mayer on Charlie Rose (video) (LINK)

The Epic Story of Dropbox’s Exodus From the Amazon Cloud Empire (LINK)

Hussman Weekly Market Comment: Bearishness Is Strictly For Informed Optimists (LINK)

Beyond those general rules of thumb, what drives inflation? While many economists seem satisfied with having memorized a line from Milton Friedman about inflation being “always and everywhere a monetary phenomenon,” economic models of inflation turn out to be nearly useless for any practical purpose. It’s not difficult to explain inflation, using inflation itself as the main explanatory variable, and information on the output gap is also useful even if unemployment is not. But it’s very difficult to explain most episodes of inflation using monetary variables. 

Yes, hyperinflation is always associated with monetary expansion, but monetary expansion isn’t actually enough. Examine major hyperinflations, and you’ll always find a government that has racked up huge external obligations to other countries, and has lost fiscal control by running massive deficits - effectively printing money to fund them. Hyperinflation involves a loss of both fiscal and monetary control, often coupled with a supply shock of some sort, and revulsion toward holding money itself because the willingness of the next person to accept it comes into question. 

The long-term value of paper money relies on the confidence that someone else in the future will accept it in exchange for value, and ultimately, that’s a matter of varying confidence in the ability of the government to meet its long-term obligations. Early U.S. money such as confederate currency went to zero because that confidence was absent. Greenbacks held their value because of the expectation (validated in 1879) that convertibility with gold would ultimately be honored. Gold convertibility isn’t necessary, nor are balanced budgets required in the short-run, but confidence in long-run fiscal discipline is essential.

Where the Soldiers Are Scarier Than the Crocodiles (LINK)

Links

 Morningstar talks to Jeremy Grantham (video) [H/T ValueWalk] (LINK)

Another 5%-10% appreciation would put the market in bubble territory, but that doesn't mean it will pop right away, says the GMO chief investment strategist.

Latticework of Mental Models: Critical Mass (LINK)

Chris Mayer with some great thoughts on inflation (LINK)

A World Without Work (LINK)

Mark Sisson: 7 Ways to Use Stoic Philosophy to Improve Your Health and Happiness (LINK)

TEDx Talk - Dr. Bruce Damer - In the Beginning: The Origin & Purpose of Life (video) [H/T @nickgogerty] (LINK)

This was an interesting documentary (video): Deng Xiaoping - The Making of a Leader

I had added that documentary to my watch list because of the following answer from Lee Kuan Yew, when asked about what leaders he admired:

De Gaulle, because he had tremendous guts; Deng, because he changed China from a broken-backed state, which would have imploded like the Soviet Union, into what it is today; and Churchill, because any other person would have given up.

If you find that documentary interesting, Evan Osnos' piece on Xi Jinping may also be of interest if you haven't read it yet: Born Red. A couple of Charlie Rose interviews, with Osnos and Kevin Rudd, may be of interest as well.

Book of the day, which was recommended by Robert Shiller at his visit to the LSE: The New Division of Labor: How Computers Are Creating the Next Job Market

Links

Today's Audible Daily Deal is well worth the $0.99 you pay for the audiobook (available until 11:59PM ET): The Little Book of Talent: 52 Tips for Improving Your Skills

Drivers of ROE in the Context of Portfolio Management (LINK)

Chris Mayer: How Inflation Affects Stocks (LINK)

Related previous post: Warren Buffett’s Comments on Inflation

The Brooklyn Investor: In Search of Value (LINK)

The Brooklyn Investor: Quick Update on SuperPortfolios (LINK)

Would You Rather Own The Unicorns, or Facebook? (LINK)

NY Times article from 2010: Depression’s Upside [H/T @crowdturtle] (LINK)

For Darwin, depression was a clarifying force, focusing the mind on its most essential problems. In his autobiography, he speculated on the purpose of such misery; his evolutionary theory was shadowed by his own life story. “Pain or suffering of any kind,” he wrote, “if long continued, causes depression and lessens the power of action, yet it is well adapted to make a creature guard itself against any great or sudden evil.” And so sorrow was explained away, because pleasure was not enough. Sometimes, Darwin wrote, it is the sadness that informs as it “leads an animal to pursue that course of action which is most beneficial.” The darkness was a kind of light.

Scientists Film White Blood Cells Dying for the First Time Ever [H/T Chris] (LINK)

How Dinosaurs Shrank and Became Birds (LINK)

Book of the day (1980): The Myths of Inflation and Investing

The truly exceptional business...

From The Small-Cap Advantage: How Top Endowments and Foundations Turn Small Stocks into Big Returns:

The truly exceptional business can operate with little capital. When U.S. securities markets function normally, most healthy businesses have no trouble securing needed capital. This means that great business opportunities whose only competitive hurdle is access to capital are likely to be exploited, and the economic profitability of industry participants inevitably suffer as a result. Exceptional businesses enjoy competitive positions that are more nuanced. Their competitive protections enable pricing power over their customers and control over their input costs from suppliers. This means that they can maintain and increase profitability without having to spend excessively to protect their turf. 

Companies that have sound competitive positions but operate in industries where expensive machinery is needed for production expose themselves to inflationary pressures. Current capital outlays that are needed to maintain equipment may end up costing a fraction of what is spent on similar outlays in the future. Analysts should be aware of this hidden cost when entering periods of anticipated high inflation. 

An analyst can become adept at qualitatively assessing the capital needs of a business and the follow-on effects that inflation would have on future capital outlays by studying the growth patterns of similar businesses. It is often the case that businesses require little capital to grow while maintaining their competitive position because the industry itself allows it. In industries like information services, software, and precision instruments, companies stake out competitive territory with products that may become universally adopted. Other companies in the industry often cede this territory willingly rather than spend enormous amounts of capital in a futile attempt to gain meaningful market share. The winners are left with the enviable position of dictating pricing terms to their customers without fear of a competitive response. 

A company that has a unique competitive position that allows high returns on investment and has plenty of opportunity to reinvest back within the business at similarly high rates is especially compelling for the buy-and-hold investor. The internal growth prospects create a natural allocation mechanism for capital within the business, and management’s task is relegated to protecting and expanding the company’s competitive turf. These situations are the ones qualitative analysts seek.

Warren Buffett quote

From his 1961 Letter to Partners:

You will not be right simply because a large number of people momentarily agree with you. You will not be right simply because important people agree with you. In many quarters the simultaneous occurrence of the two above factors is enough to make a course of action meet the test of conservatism. 

You will be right, over the course of many transactions, if your hypotheses are correct, your facts are correct, and your reasoning is correct. True conservatism is only possible through knowledge and reason.

Links

FT interview with Google co-founder and CEO Larry Page (LINK)

Related books: How Google Works, In The Plex

Henry Blodget sits down with Clay Christensen (LINK)

Related books: HERE

Hussman Weekly Market Comment: Losing Velocity: QE and the Massive Speculative Carry Trade (LINK)

What central banks around the world seem to overlook is that by changing the mix of government liabilities that the public is forced to hold, away from bonds and toward currency and bank reserves, the only material outcome of QE is the distortion of financial markets, turning the global economy into one massive speculative carry trade. The monetary base, interest rates, and velocity are jointly determined, and absent some exogenous shock to velocity or interest rates, creating more base money simply results in that base money being turned over at a slower rate.

Economic growth and inflation do not arise from changing the mix of these government liabilities. Growth arises primarily from a) the channeling of scarce saving to productive investment that b) generates useful goods and services that c) can be purchased because the income paid to factors of production can – in a circular flow – be used to pay for that output. QE does nothing to aid this dynamic unless scarce bank liquidity is a binding constraint on productive investment or spending, which it presently is not. QE does not spur new demand in an environment where productive investment opportunities are satiated by the existing availability of loanable funds. It just provides cheap finance for speculative carry trades in the financial markets.

Meanwhile, inflation and hyperinflation typically do not arise from simply from changing the mix of government liabilities toward more currency. Inflation emerges primarily from supply constraints or an exogenous shock that reduces supply, coupled with fiscal policy where large government deficits are being used to finance consumption and transfer payments. In that environment, the marginal value of goods surges relative to the marginal value of a currency unit, and the mix of government liabilities held by the public doesn’t particularly matter. Financing the deficits with debt instead of money still results in exogenous upward pressure on interest rates and monetary velocity. Hyperinflation results when there is a complete loss in the confidence of currency to hold its value, leading to frantic attempts to spend it before that value is wiped out. I expect we’ll observe significant inflationary pressures late in this decade, but present conditions aren’t conducive to rapid inflation without some shock to global supply.

With regard to the recent move by the Bank of Japan, seeking to offset deflation by expanding the creation of base money, the move has the earmarks of a panic, which is counterproductive. The likely response of investors to panic is to seek safe, zero-interest money rather than being revolted by it. The result will be a plunge in monetary velocity and a tendency to strengthen rather than reduce deflationary pressures in Japan. In our view, the yen has already experienced a dramatic Dornbusch-type overshoot, and on the basis of joint purchasing power and interest parity relationships (see Valuing Foreign Currencies), we estimate that rather than the widely-discussed target of 120 yen/dollar, value is wholly in the other direction, and closer to 85 yen/dollar (the current exchange rate is just over 112). The Japanese people have demonstrated decades of tolerance for near-zero interest rates and the accumulation of domestic securities without any material inclination to spend them based on the form in which those securities are held. Rather than provoking strength in the Japanese economy, the move by the BOJ threatens to destroy confidence in the ability of monetary authorities to offset economic weakness – in some sense revealing a truth that should be largely self-evident already.