What We’re Reading (Week Ending 26 July 2020) - 26 Jul 2020
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” Jeremy and myself read widely across a range of topics, including investing, business, technology, and the world in general. We want to regularly share the best articles we’ve come across recently. Here they are (for the week ending 26 July 2020):
1. I Gave a Talk to a Federal Credit Union – Nathan Tankus
First we have the idea of a legal system. It may seem obvious that money starts with law, but that isn’t necessarily obvious to most academics. It’s certainly not where a traditional money and banking textbook would start. MMT emphasizes that money is inherently legally designed and grounds money in the functioning of the legal system which authorizes its existence and enforces legal obligations denominated in money. We’ll return to this crucial point in a bit.
Second there is the idea of physical resources. These are raw materials, physical land, machinery, factories etc. which are necessary to produce goods and services that the government needs to accomplish its goals. Production is the combination of these physical resources with labor and technology to produce useful goods and services. The most obvious example of this is of course war time. Governments need to produce tanks, guns, rations, uniforms etc. to fight wars and they need their domestic populations to produce those resources. Modern Monetary Theory may have “monetary” in the name, but the ultimate object of MMT academics in the policy sphere is to use our monetary system in order to mobilize physical resources. Thus, the availability and usability of physical resources is important to Modern Monetary Theorists.
The final part of the definition is the most important part. In my experience, this is the idea at the foundation of MMT that people learning about it tend to have the most difficult time grasping. It’s also a point that is consistently overlooked and underemphasized by mainstream journalists who try to produce “explainers” about MMT. This is the idea that specific financial instruments have value, in fact that they are monetized, because those instruments can be used to pay legally enforceable obligations. The most obvious and important obligation that money can settle is one’s tax bill, but all sorts of legal obligations can be settled with money. Lawsuits, child support, damages, fines, fees and all sorts of other court ordered monetary payments can be settled with specific financial instruments which legal systems treat as money. I can’t emphasize enough that money is money because it can be used to settle legal obligations within a specific jurisdiction.
2. Hacked Printers. Fake Emails. QuestionableFriends. Fahmi Quadir Was Up 24% Last Year, But It Came at a Price – Michelle Celarier
In response, she believes, the company initiated “cybersurveillance, including numerous hacking attempts with aggressive measures to obtain sensitive information about us and our personal lives,” she wrote to investors in August.
“We are not fearful,” she bragged in that letter. “When companies resort to such intrusive and illegal tactics against a small fry, perhaps we are not as small as they think we are and more importantly, perhaps it’s the company that’s shaking in its boots,” she added.
Quadir declined to tell Institutional Investor the name of the company, but said she’d received emails falsely purporting to be a journalist she knew, leading her to believe it was an attempted hacking.
That wasn’t all.
“We’ve received documents from lawyers, but it’s not actually from those lawyers. And there was a time in my home — I have a basically defunct printer at my home — when suddenly, in the middle of the night, I think it was like 2:00 a.m., the printer just turns on and starts printing emails from whistleblowers. In the middle of the night!”
Quadir has since brought on cybersecurity experts “to clean everything,” she says. “I’m not concerned for my safety; I think this just comes with the territory. Did we expect it to all happen in the first year of launching? No. But it’s just the lengths these companies go to intimidate.”
3. How the U.S. Consumer Became the Most Resilient Force in the Economy – Ben Carlson
To pay for all of this stuff the Roaring Twenties also introduced installment payment plans. The phrase “buy now, pay later” became part of the popular nomenclature during this time.
Robert Gordon estimates by the end of the 1920s consumer credit financed 80-90% of furniture sales, 75% of washing machines, 65% of vacuums, 25% of jewelry and 75% of radios.
Previous generations attached a social stigma to borrowing. The 1920s chipped away at this idea as people purchased products that didn’t exist for those generations.
And while the country as a whole achieved a level of prosperity from 1923-1929 like never before, farmers were decimated. The depression of 1920-1921 cut the price of farm products in half and they regained just a fraction of those losses by the end of the decade. Incomes for farmers fell more than 60%.
The end of agriculture as the dominant career choice in the early part of the 20th century led to an urbanization boom. The first Sears store opened in Chicago in 1925. By the time the expansion was coming to an end in 1929 they were up to 300 stores, mainly in big cities.
4. Quarterly Investment & Market Update, Summer 2020 Q2 – Ensemble Capital
One mistake we think some investors have made during this unprecedented period is substituting a forecast of the virus for a forecast about the economy or financial market performance.
While clearly, the pandemic is a huge negative impact on the economy, they are not the same thing. And stocks are not a direct reflection of the US economy.
The market doesn’t care about the economy today, it cares about corporate cash flows over time.
So while today it seems that the stock market and the economy are totally disconnected, in reality stock prices are reflecting a view that while the economy is very bad now, it will recover in the years ahead. And in fact, you don’t even need to believe the entire US economy will recover to understand the rebound in the market.
While the S&P 500 is often referred to as “the market” and is the benchmark by which we evaluate our strategy, it represents what are essentially the 500 largest, most well capitalized companies in the country. These are the companies best positioned to manage through a period of very severe economic conditions. Meanwhile, the S & P 600, an index of smaller companies shown by the dotted orange line on the chart, is still down 20% this year.
5. The Nine Essential Conditions to Commit Massive Fraud – Josh Brown
When it comes to the massive frauds – the kind that wipe out tens of billions of dollars and result in career-ending, corporation-killing infernos, there are some necessary conditions that seem to appear with great regularity accompanying them. These are the conditions that allow the seed of a fraud to take root and germinate, they provide the fertile ground and atmosphere letting the sprout become something larger, thornier and more interconnected with the flora around it.
Ivar Krueger aka The Match King was one of the most notorious purveyors of investment fraud who ever lived. His story is relatively unknown in modern times despite the fact that the global scale of what he did was ten times more intricate and ultimately destructive than anything Madoff attempted. When you read about the details of the Krueger saga, you realize that everything that’s happened since (and will happen hence) is merely an echo of an old story.
6. Repetition Economics: The Story of the Hunter, the Mammoth, and The Wolves – Breaking The Market
You decide to throw the wolves a bone, literally, and give up the deer to them. As hoped, they leave you alone and start to eat the deer. Oh well, there is still some food at home. Hopefully you don’t see them again.
But the next day you catch another deer and on your way back the wolves show up again. It was pretty clear the way they devoured the deer last time they can be vicious animals so you don’t really want to mess with them. You lose the deer to the wolves again and leave. There’s not as much food at home, but there is still some.
Same thing happens again the next day, losing the deer to the wolves.
And then on the 4th day, when the wolves show up to the hunt again, you’ve had enough. The food has run out at home. It’s pretty clear if you keep losing your kills to the wolves you’re going to starve. You can’t keep repeating this process. And so on day 4 you decide to roll the dice and fight them off.
7. A Golden Oldie: The Best Investor You’ve Never Heard Of – Jason Zweig
That was the same year that another Grinnell trustee, Robert Noyce, called Rosenfield to tell him about a new company he was starting. Noyce had been kicked out of Grinnell in his junior year for stealing a 25-pound pig from a nearby farm and roasting it at a campus luau; his physics professor, who felt Noyce was his best student ever, got the expulsion reduced to a one-semester suspension. Noyce had never forgotten the favor, which was why he was offering the college a stake in his start-up, NM Electronics.
Was Rosenfield interested? “The college wants to buy all the stock that you’re willing to let us have,” he told Noyce instantly.
Grinnell’s endowment put up $100,000, while Rosenfield and another trustee each kicked in $100,000 more, enabling the school to supply 10% of the $3 million in venture capital that Noyce and his sidekicks, Gordon Moore and Andrew Grove, raised for the company that they soon renamed Intel.
By 1974, three years after Intel went public, Grinnell’s endowment had more than doubled to $27 million — even as the stock market lost 40% of its value.
Meanwhile, Rosenfield was keeping his eyes, and his mind, wide open. In 1976, Rosenfield heard from Buffett that a TV station, WDTN of Dayton, was for sale. Endowments rarely control private companies, but Rosenfield thinks like a businessman, not a bureaucrat. He grabbed WDTN for Grinnell at just $12.9 million, or a mere 2 1/2 times revenues at a time when TV stations were selling for three to four times revenues.
