Wednesday, May 23, 2018

Carreyou: "A New Look Inside Theranos’ Dysfunctional Corporate Culture"

Over the years I've mentioned "we like business journalists, we've gotten some of our best ideas from them."
It's not just a Kindergarten-style "ooh great idea, let's trade this" (although we've quite a bit of that).
On a higher level of abstraction, following a good journo is akin to machine-learning: exposing your brain to examples of behaviors, corporate and individual, to train the brain and create pattern-recognition templates.

The advantage in reading such examples is the ability to absorb many more variations than your personal experience could ever give you. This is one of the reasons we spend so much time on non-publicly traded situations. If you follow a company such as Uber for a few years you will see many different manifestations of dysfunction that may stand you in good stead should you come across something similar in the market.

Ditto for Theranos which was showing signs of being a fraud before Mr. Carreyou ripped the bandage off to expose the suppurating pustule that was Ms. Holmes' creation. See our 2015 "Theranos: She's Young, She's Rich, Is She A Marketing Huckster?" if interested. And apologies for the pustule line, I was channeling another fraudster we've highlighted, more after the jump.

Here's the headline story:
about the author
John Carreyrou is a two-time Pulitzer Prize-winning investigative reporter at The Wall Street Journal. For his extensive coverage of Theranos, Carreyrou was awarded the George Polk Award for Financial Reporting, the Gerald Loeb Award for Distinguished Business and Financial Journalism in the category of beat reporting, and the Barlett & Steele Silver Award for Investigative Business Journalism.
From Wired, May 21:


When a chemist raised concerns about the blood testing machines' high error rates, she was ignored. So she resigned.
Alan Beam was sitting in his office reviewing lab reports when Theranos CEO and founder Elizabeth Holmes poked her head in and asked him to follow her. She wanted to show him something. They stepped outside the lab into an area of open office space where other employees had gathered. At her signal, a technician pricked a volunteer’s finger, then applied a transparent plastic implement shaped like a miniature rocket to the blood oozing from it. This was the Theranos sample collection device. Its tip collected the blood and transferred it to two little engines at the rocket’s base. The engines weren’t really engines: They were nanotainers. To complete the transfer, you pushed the nanotainers into the belly of the plastic rocket like a plunger. The movement created a vacuum that sucked the blood into them.

Or at least that was the idea. But in this instance, things didn’t go quite as planned. When the technician pushed the tiny twin tubes into the device, there was a loud pop and blood splattered everywhere. One of the nanotainers had just exploded.
Holmes looked unfazed. “OK, let’s try that again,” she said calmly.

Beam1 wasn’t sure what to make of the scene. He’d only been working at Theranos, the Silicon Valley company that promised to offer fast, cheap blood tests from a single drop of blood, for a few weeks and was still trying to get his bearings.

He knew the nanotainer was part of the company’s proprietary blood-testing system, but he’d never seen one in action before. He hoped this was just a small mishap that didn’t portend bigger problems.
The lanky pathologist’s circuitous route to Silicon Valley had started in South Africa, where he grew up. After majoring in English at the University of the Witwatersrand in Johannesburg (“Wits” to South Africans), he’d moved to the United States to take premed classes at Columbia University in New York City. The choice was guided by his conservative Jewish parents, who considered only a few professions acceptable for their son: law, business, and medicine.

Beam had stayed in New York for medical school, enrolling at the Mount Sinai School of Medicine on Manhattan’s Upper East Side, but he quickly realized that some aspects of being a doctor didn’t suit his temperament. Put off by the crazy hours and the sights and smells of the hospital ward, he gravitated toward the more sedate specialty of laboratory science, which led to postdoctoral studies in virology and a residency in clinical pathology at Brigham and Women’s Hospital in Boston.

In the summer of 2012, Beam was running the lab of a children’s hospital in Pittsburgh when he noticed a job posting on LinkedIn that dovetailed perfectly with his budding fascination with Silicon Valley: laboratory director at a Palo Alto biotech firm. He had just finished reading Walter Isaacson’s biography of Steve Jobs. The book, which he’d found hugely inspiring, had cemented his desire to move out to the San Francisco Bay Area.

After he applied for the job, Beam was asked to fly out for an interview scheduled for 6 pm on a Friday. The timing seemed odd but he was happy to oblige. He met with COO Sunny Balwani first and then with Holmes. There was something about Balwani that he found vaguely creepy, but that impression was more than offset by Holmes, who came off as very earnest in her determination to transform health care. Like many people who met her for the first time, Beam was taken aback by her deep voice. It was unlike anything he’d heard before.

At the time, Theranos was on the cusp of becoming a tech darling. Founded by the charismatic Stanford dropout in 2003, its promises to revolutionize blood-testing—and by extension, the vast industry of medical diagnostics—would be swallowed whole by most of the technology press, which would lavish Holmes with glowing coverage. (WIRED was not exempt). Only later—in October 2015—would the truth come out: Theranos was a fraud built on secrecy, deliberate fabrication, and hype. After I revealed that fraud, the company would begin an implosion that continues to this day....MUCH MORE
From last year's "Faraday Future issues bombastic statement accusing former CFO of ‘malfeasance and dereliction of duty’":

...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 release?
Scallywags is a nice touch as well.

"The US military is funding an effort to catch deepfakes and other AI trickery"

But, but...I saw it on the internet.
From MIT's Technology Review:

But DARPA’s technologists admit that it might be a losing battle.
Think that AI will help put a stop to fake news? The US military isn’t so sure.
The Department of Defense is funding a project that will try to determine whether the increasingly real-looking fake video and audio generated by artificial intelligence might soon be impossible to distinguish from the real thing—even for another AI system.
This summer, under a project funded by the Defense Advanced Research Projects Agency (DARPA), the world’s leading digital forensics experts will gather for an AI fakery contest. They will compete to generate the most convincing AI-generated fake video, imagery, and audio—and they will also try to develop tools that can catch these counterfeits automatically.
The contest will include so-called “deepfakes,” videos in which one person’s face is stitched onto another person’s body. Rather predictably, the technology has already been used to generate a number of counterfeit celebrity porn videos. But the method could also be used to create a clip of a politician saying or doing something outrageous.
DARPA’s technologists are especially concerned about a relatively new AI technique that could make AI fakery almost impossible to spot automatically. Using what are known as generative adversarial networks, or GANs, it is possible to generate stunningly realistic artificial imagery.

“Theoretically, if you gave a GAN all the techniques we know to detect it, it could pass all of those techniques,” says David Gunning, the DARPA program manager in charge of the project. “We don’t know if there’s a limit. It’s unclear.”

 A GAN consists of two components. The first, known as the “actor,” tries to learn the statistical patterns in a data set, such as a set of images or videos, and then generate convincing synthetic pieces of data. The second, called the “critic,” tries to distinguish between real and fake examples. Feedback from the critic enables the actor to produce ever-more-realistic examples. And because GANs are designed to outwit an AI system already, it is unclear if any automated system could catch them....MUCH MORE
Related (and because all news is local), from the Columbia Journalism Review:
Reporting in a Machine Reality: Deepfakes, misinformation, and what journalists can do about them
That's not local in the geographical sense but rather intellectual provincialism:
...In yesterday's "Questions America Wants Answered: How Will Brexit Affect The Art Market?" I amused myself with the provincialism of the headline question, somewhat akin to the old joke about the small Italian town that sent its most esteemed resident, a tailor by trade, to represent said villaggio at an audience with the Pope. Upon his return from Rome the citizens crowded around and asked "What kind of man is Il Papa?

Their emissary replied, "About a 42 regular"....
We all see the world through our own self-created lenses. And on a related provincialism point, easily the most terrifying news of the last couple years:

"Equity Analysts Join the Gig Economy"
and
"The automation of creativity: scary but inevitable"
First they came for the journalists and I did not speak out-
Because I was not a journalist.

Then they came for the ad agency creatives and I did not speak out-
Because I was not an ad agency creative. (see below)

Then they came for the financial analysts and I
said 'hang on one effin minute'....

Just Like China!: London-Based Startup Uses Machine Vision To Judge Your Emotional State

From TechCrunch, May 22:

Realeyes, which uses AI and a front-facing camera to read viewers’ emotions, raises $16.2M
One of the more interesting applications of AI to the world of advertising and marketing has been in how it’s being used to help measure and ultimately shape campaigns. Now, a company providing the technology to do that has raised a round both to expand its business in adtech as well as to tackle new applications in healthcare and education.

Realeyes, a London-based startup that uses computer vision to read a person’s emotional responses when they are watching a video as short as six seconds long, and then using predictive analytics to help map that reading to the video to provide feedback on its effectiveness, has raised $16.2 million in funding, money that it plans to use to expand in engineering and business development.

The rise of “smart” and connected hardware that picks up data as much as produces it is the opportunity that Realeyes is tapping. “We are surrounded by devices with cameras and microphones in them,” CEO and founder Mihkel Jäätma said in an interview.

The Series A round comes after a strong run of growth at the company. It says that revenues have shot up 932 percent in the last four years, and it has added customers like Coca Cola, Mars, Publicis, Turner and Oath (which also owns TechCrunch) to its books.

Realeyes is not wasting time in bringing on extra talent to support the expansion. Barry Coleman, formerly at LootCrate, is coming on as COO. And Maja Pantic, a professor of affective and behavioural computing at Imperial College London who had been on the Realeyes Advisory Board, is getting “a more hands-on role.” Both will report to Jäätma, who started the company while still a student at Oxford....MUCH MORE
Meanwhile, via ForexNews, May 22:

Facing the future: China installs facial recognition technology in schools
China continues to lead the way in embedding facial recognition software into daily life. Biometric information is already widely used for payments (Alibaba’s Alipay ‘Smile and Pay’ function launched late last year) and controversially in crime detection and prevention. Now the cameras and coding have been trained onto the freshest faces around – the nation’s students.

A high school in Hangzhou has introduced facial recognition technology into its classrooms. Its more prosaic functions include automatically recording attendance, organising payment in the canteen and tracking library use. So far, so typical for a country that’s embraced widespread smart CCTV surveillance.

But it also scans students’ faces twice a minute when they’re in lessons and classifies them into different emotional states, including happy, scared, angry, upset, confused and neutral. Teachers are given real-time updates about their pupils’ perceived attentiveness and can take immediate corrective action if minds are wandering.

The ‘intelligent classroom behaviour management system’ also records movement to provide feedback to teachers about individual pupils’ engagement during class. Certain actions, like reading, writing, raising your hand, standing, listening attentively and slumping at your desk are also logged and analysed to improve lesson and learning quality.

Zhang Guanchao, Vice Principal of Hangzhou Number 11 High School, waved off concerns about privacy, explaining that the metrics are stored on a local (rather than a cloud) server and that no actual images are stored – only the resultant analysis. He also emphasised that the intention is to assess the mood and actions of the class as a whole, rather than zero in on specific students.

The cameras have been watching for a month now, and reports reveal that behaviour has improved. It seems that the students have adapted to learning and working under the ceaseless gaze of the classroom cameras....MORE

Bank of England on Risk: "US Hurricane Clustering: A New Reality?"

More accurately the BoE's Bank Underground blog, May 22:
The 2017 Atlantic hurricane season was the fifth most active in 168 years.  It was also one of only six seasons to see multiple Cat 5 hurricanes (Irma & Maria).  These two hurricanes, followed similar tracks and, together with Hurricane Harvey, occurred close together.  This situation can hinder relief efforts.  For insurers it may also lead to resource strain, disputes and unhedged risks, if insurers do not have enough ‘sideways’ reinsurance cover.  Our post asks whether three major hurricanes occurring in the US in close succession really was exceptional or, as our analysis of recent data suggests, it might happen more often in future.  Is the insurance industry underestimating the likely ‘clustering’ of major hurricanes?

Introduction
Natural weather events such as hurricanes can cause significant loss of life, disruption to homes and communities, property damage and other economic losses.  In addition, many insurance companies are heavily exposed to these events as they will insure property and other risks within areas commonly affected.  The US Eastern Coast is one area where hurricanes are relatively common and where insured values are particularly high.  As a result, it is important for insurers to consider the potential occurrence of hurricanes in this region, and the damage they might cause.

The estimation of hurricane losses depend on several uncertain parameters including their frequency, size and intensity, the likelihood of making landfall, the accuracy of data on insurers’ exposures and historical meteorological records, property values in the affected areas, and the amount of rain and flooding.  We focus in this paper on the observed frequencies of major Atlantic hurricanes.
Our analysis suggests the frequency of the most intense Atlantic hurricanes with significant insurance implications could double in the future if recent observed changes in hurricane frequency persist. We estimate a 15% (a 1-in-7) chance of three or more major hurricanes making US landfall every year and a 0.6% (a 1-in-180) chance that these all impact the US East Coast (leading to potentially very high insurance losses). Insurance solvency regimes typically expect insurers to be able to withstand a 1-in-200 year shock.  So a season with three or more hurricanes is within the spectrum of possibilities that insurers should consider.

Hurricanes can be classified into different groups
Kossin et al (2010) identified four distinct regional groups of Atlantic hurricanes. Their paper analysed all storms included in the National Hurricane Centre’s HURDAT database from 1950-2007. We have extended their analysis to include all storms up to 2017, using updated data provided by Suzana Camargo of Columbia University.  The four groups, that pack together hurricanes with similar tracks, are shown in Figure 1.
Figure 1: Major hurricane tracks from 1950-2017 separated by regional group
The groups reflect different genesis locations, mechanisms and varying impacts of the main climatological indices (e.g. El Nino-Southern Oscillation – ENSO):
  • Group 1 storms form further north, over typically less warm water, and usually curve northwards over the Atlantic, thus have minimal impact on the US.
  • Group 2 storms form mainly in the Gulf of Mexico. Although these often make landfall, they typically have limited time to develop into major hurricanes. Despite that, Group 2 includes hurricanes that led to significant insurance losses such as Katrina (2005), Sandy (2012) and Harvey (2017).
  • Group 3 storms are the classic Cape Verde, high intensity deep-tropical storms. These develop over warm tropical waters off the coast of West Africa and have time to gather energy to develop into major hurricanes. A significant proportion curve to the north and miss the US. However, Group 3 spawns some of the most powerful hurricanes with the potential of severely impact the US East Coast. Examples include Gloria (1985), Hugo (1989) and Fran (1996).
  • Group 4 storms are like Group 3, but originate further west and tend to maintain a westerly track, through the Gulf. Recent destructive examples include Andrew (1992), Ike (2008), Irma (2017) and Maria (2017).
The table below summarises the split of major hurricanes between the different groups from 1950-2017 (the ‘analysis period’). It also includes the number of Continental US landfalls, where the largest insurance losses typically occur....MORE
Of course if our old pal, the Atlantic Multidecadal Oscillation, is rolling over, the 2017 season may prove to have been the high point for the giant heat engines, for this cycle at any rate, and the re/insurers pricing off last year will have windfall loss ratios.

http://www.climate4you.com/images/AMO%20DetrendedGlobalAnnualIndexSince1856%20With11yearRunningAverage.gif

Sweden Probably Won't Be Invading Russia

From ZeroHedge: 

Attacking Russia Would Become "Military Nightmare", Swedish Paper Warns
The Swedish daily newspaper Svenska Dagbladet (SvD), recently examined the most difficult countries in the world to invade, which includes Russia, Switzerland, and New Zealand. The paper said an invasion of Russia would become a “military nightmare” for foreign armed forces. While SvD did not define who precisely that enemy would be, our suspicions point to the countries intertwined with the North Atlantic Treaty Organization (NATO).

The topography of the region, distance, and military power are some of the critical components that determine the country’s defensive capabilities, explained the paper.
  
Topography Map of Russia 
Based on these benchmarks, the Swedish paper said, “whoever thinks the idea of invading Russia must be prepared to handle all kinds of terrain.”...
...MORE

WTH? 

Tuesday, May 22, 2018

"How Politicians Intensify Financial Cycles: 300 Years of Pro-Cyclical Regulation"

Be careful with this piece. I didn't have time to check all the details the writer musters to his argument but am pretty sure there are a couple errors in this bit:
...A Short Narrative of Three Centuries of Regulatory Cycles
Roll back the clock to 1725, when the South Sea Bubble was riding high in England. It was one of the earliest well documented stock market bubbles. Political elites cheered for the stock market mania until it crashed. The political backlash was substantial, and many members of parliament were thrown in jail. England inherited from the South Sea Bubble backlash the ‘Bubble Act,’ an oppressive law that placed a tremendous hurdle on companies going public. The Act remained in place for a full century. It was then repealed at the peak of the next big bubble, in 1825. The repeal is well documented as being the result of lobbying and influence peddling. The response to the ensuing crash and banking crisis transformed and modernized financial markets in England....
Putting on the academic hat: The bubble had run its course by July 1721 (all time high one year earlier, July 1720), it was not "riding high" in 1725:

https://d577c622-a-62cb3a1a-s-sites.googlegroups.com/site/davesmant/monetary-economics/famous-first-bubbles/south-sea-bubble/ssbprice.jpg?attachauth=ANoY7coDTV1eA_4NzjvyBZiZFvEbbIFB-G9NAJWQeaW3LDXdO6vIaK66PiuBIlkAZMCybB1esVYzNTi4QE0KgY3kkmPIzW8hUzF4kWJQRPZVJKfdG_qdLCgA7c2wPBCAAnQFaqnnWarQhi_aVj0QxLSTggw0SFalPCaJ5_MeiZU7aWEWXEsgtLZ6BW2AH3tWP0RSMC54vlPMeXwZR1chILfgU5_cIdQdV5nrjHc2-yO_C1cVEh_zhqWUICl8wfbqyvvkpi9E2VNUNbGu-qnqLIQWwMqOddXc_6dI4KGQPA_JB2i5IE7o6_I%3D&attredirects=0

Secondly, the Bubble Act was passed during the mania, June 11, 1720, just before the third subscription and the ultimate top-tick in the forward market (because the transfer books were closed there was no spot price).
The Bubble Act forced any new companies to apply for a Royal Charter and was actually enacted as an impediment to new joint-stock companies that might compete for capital the South Sea directors thought should rightfully go to their venture.
The Act did not stop the formation of companies, you just had to be connected enough with the royals or the court denizens to get the official okey-dokey.

The author of this piece is probably confusing the Bubble Act with Barnard's Act, more on that after the jump.

From The University of Chicago's ProMarket blog:
[Note: The post below was first published at VoxEU.org with the title “Regulatory Cycles: Revisiting the Political Economy of Financial Crises.”]

Back in early 2017, while the stock market was breaking records, the new administration in the US made promises to significantly roll back the recently implemented regulations under the Dodd-Frank Act. We have seen the move toward deregulation take shape on various fronts. By most accounts, new regulatory appointees have signaled a shift toward a softer approach to financial regulation.  On the legislative front, after a failed attempt by the House of Representatives to erase core financial regulations under the DFA, the Senate has voted last week on a bill that would offer regulatory relief to small and mid-sized banks.

Over the last two decades, the US has gone through a regulatory cycle. The financial sector was deregulated during the boom spanning the late-1990s to mid-2000s, and then re-regulated following the 2008 crash (e.g. Goldstein 2009). Currently, it appears that the regulatory pendulum is swinging the other way. In a recent paper, I examine the political economy of financial policy during ten of the most infamous financial booms and busts since the 18th century (Dagher 2018). I rely on a wealth of scholarship on each episode to show that procyclical regulations are a recurring feature since the early days of finance and across countries. Financial boomsand risk-taking during these episodeswere often amplified by political regulatory stimuli, credit subsidies, and an increasing light-touch approach to financial supervision. Financial crises led to a massive regulatory backlash, which sometimes suffocated finance. The regulatory response can be best understood in the context of the political ramifications of such crises.

The large literature on the 2008 Global Crisis tends to focus on identifying the regulatory failures that led to the crash. I argue that it is equally important to understand the roots of these regulatory failures, and that politics is usually at the heart of the story.

A Short Narrative of Three Centuries of Regulatory Cycles
Roll back the clock to 1725, when the South Sea Bubble was riding high in England. It was one of the earliest well documented stock market bubbles. Political elites cheered for the stock market mania until it crashed. The political backlash was substantial, and many members of parliament were thrown in jail. England inherited from the South Sea Bubble backlash the ‘Bubble Act,’ an oppressive law that placed a tremendous hurdle on companies going public. The Act remained in place for a full century. It was then repealed at the peak of the next big bubble, in 1825. The repeal is well documented as being the result of lobbying and influence peddling. The response to the ensuing crash and banking crisis transformed and modernized financial markets in England.

To those familiar with the financial history of the US this might ring a bell or two. The market euphoria in the late 1920s came at the heels of a period of deregulation, inaction by regulatory agencies, and rising subsidies to the housing sector. President Hoover at the time took a dim view of federal regulations and supervision, and appointed regulators that shared this view. The 1929 crash and the ensuing Great Depression led to a major rethinking of the role of government, resulting in an impressive comeback by the Democrats in Congress.  The New Deal reshaped the financial landscape in the US and imposed stricter regulations and supervision. The Glass-Steagall Act of 1933 separated commercial and investment banking in order to protect depositors. The Act remained in effect for much of the remaining 20th century, but was then repealed in 1999 at the height of a stupendous stock market boom. During the 1990s, securities laws were also eased by Congress, but they were then tightened under the Sarbanes-Oxley law a few years later, after the Dot-Com crash – a short-lived regulatory cycle confined to the securities market. But deregulation and a light touch approach in the banking sector continued and intensified in the midst of a tremendous housing boom. The credit boom benefited from government subsidies and sponsorship under both the Clinton and Bush administrations. Two years after its crash in 2008, President Obama signed into law the Dodd-Frank Act, the most significant regulatory overhaul since the New Deal.

Stylized Facts
These regulatory cycles can be observed across time and countries....MUCH MORE
Back to the Bubble, been down this road before. Here's 2009's "Murphy A. (2009) The smartest boys in the alley, early derivatives on the London stock market":
On Thursday I was pulling some links together on the British experience regulating derivatives after the South Sea Bubble of 1720. Lo and behold what pops up this morning but a link via Alphaville to the Economic History blog. Just one quibble, Dr. Murphy states that Barnard's Act* was dated 1737, I'd swear that my memory puts it earlier.
[just how old are you? -ed]
From the Economic History blog:
Murphy, Anne L. (2009) Trading options before Black-Scholes: a study of the market in late seventeenth-century London. Economic History Review, 62/1: 8-30.
The ledger of the financial broker Charles Blunt contains the details of some 1,500 transactions realized between 1692 and 1695, about a third of which regard the then novel trade in equity options (p.9). The technique had arisen in the 1620s in the commodity market and was proving very useful in the decade following the Glorious Revolution, when some 100 joint-stock companies were floated in London (p.10). During the boom of the early 1690s, it is likely that “several thousand derivatives were transacted each year”.
Various strategies
Four out of five options traded were calls (i.e. the right to pursue a share at any time during a given period, usually 6 months) and at-the-money (i.e. for the price of the share at the time of the agreement). “It is likely that they were transacted to take advantage of an anticipated price move associated with a specific future event” (p.12). Most of Charles Bunt’s clients were not professionals, for them using a broker was the only way to find a buyer. However many of these amateurs did in fact engage in option trading....MORE
HT: FT Alphaville

*Barnard's Act, which outlawed the use of options and forwards to purchase stock, was enacted in 1734 and due to sunset in 1737. Instead it was made perpetual and not repealed until 1860.
If interested see also "Prop Trading the South Sea Bubble: Hoare's Bank 1720":

*From deep in the link-vault comes a tiny treasure, an analysis of Hoare's trading during the South Sea bubble (62 page PDF):

Riding the South Sea Bubble
By PETER TEMIN AND HANS-JOACHIM VOTH
This paper presents a case study of a well-informed investor in the South Sea bubble. We argue that Hoare’s Bank, a fledgling West End London bank, knew that a bubble was in progress and nonetheless invested in the stock: it was profitable to “ride the bubble.” Using a unique dataset on daily trades, we show that this sophisticated investor was not constrained by such institutional factors as restrictions on short sales or agency problems....MORE

"Smart Containers Ready to Disrupt the Seafood Industry"

From BuzzOnEarth:

https://buzzonearth.com/wp-content/uploads/2018/05/DNVGL_SEAtrue_shot4_v3-Large-1024x576-560x416.jpg/

The seafood industry must comply with increasingly strict demands from consumers on sustainable seafood production. For that reason, a group of graduates has spent their summer at DNV GL developing smart “robot containers” with cooling systems that can sail to ports without any human interaction.
The UN Food and Agriculture Organisation (FAO) predicts that food production must increase by 70% to feed the world population in 2050. A sustainable increase in food production, especially proteins, is a necessity to maintain global development in line with United Nation’s Sustainable Development Goals (SDGs). Land-based agriculture is already pushing the limits of sustainability and requires a more sustainable approach to feed new generations, whereas the oceans hold a great deal of unused potential.

Seafood undoubtedly has some of the greatest potentials in terms of protein sources. Due to biological constraints and the sustainability of wild catch, the growth within wild captures will be minimal in the years to come. This implies that growth in the seafood sector must originate from the aquaculture industry. The production and transportation of seafood must seek innovative sustainable solutions to meet these growth ambitions.

Technological advances offer us unprecedented opportunities for efficient seafood production. Enhanced cooling systems for extended shelf life, autonomous vessels and big data can reduce costs, ensure higher product quality and better-informed consumers.

Introducing SEAtrue: a Smart Seafood Solution

SEAtrue is a supply chain for offshore distribution of aquaculture products. The consumer application TraceEat sends information about consumer preferences and enables the best possible use of resources. The seafood is transported in autonomous, smart “robot containers” which employ sophisticated cooling techniques to extend shelf life. SEAtrue is a cutting-edge supply chain system that allows for optimal distribution and lower emissions. Moreover, it adjusts production to meet demand and thereby enhances a sustainable aquaculture industry.

The self-propelled containers are released from the processing vessel, and either position themselves for pick-up by a designated container ship or sail directly to a nearby port. That way, transportation by sea becomes more effective and efficient and uses data from an autonomous fleet of container ships to determine the optimal routing to reach the consumer....MORE
FT Alphaville's May 22 Further Reading post which went with the "Seafood and disrupt it" construction because, apparently, the puns are irresistible when dealing with food stories.

Previously:
The Cattle Are Lowing
What's Mooving: Ag Stocks (CF; MOS; MON; MOO)

It was all explained in 2014's "Ironically, Milk Futures Are Not Very Liquid":
We don't have many posts* on the dairy business, every couple years or so I break out the "What's Mooving" headline but the business, at least the way (whey?) it's structured in the U.S. is tough to trade from a portfolio perspective. In addition it seems to foment (ferment?) some simply awful puns in folks who write about it.

The futures are currently in backwardation, not that anyone cares....
...Back in 2010 we had a post, "CME Group expands dairy complex with cheese futures" which I intro'd with:
Years ago I heard of a Chicago company that made a whey-based artificial cheese.

Apparently the operation was headed by a mad scientist type who had come up with the formula but had no marketing ability.

He was producing the stuff and not selling any, converting all the investors cash into this "analog" goop and storing it in Chicago area warehouses.

Then the Chernobyl reactor blew, the price of whey skyrocketed, I've no idea what the connection was, the company went broke and the receivers opened the warehouses to find tons of this 'cheeze', semi-molten in the summer heat.

That's what I thought of when I saw this story, tons of the stuff oozing out of bonded warehouses. No connection of course, just a visual....

"ACLU asks Amazon to stop selling facial recognition tech to local governments" (AMZN)

Let's hope that, at minimum, it works better than this from a couple weeks ago:
UK police say 92% false positive facial recognition is no big deal
About which the Cardiff force said:
South Wales Police: "No facial recognition system is 100% accurate under all conditions."
From GeekWire:
Concerned about the use of facial recognition technology to detect and identify Americans walking down the street, the American Civil Liberties Union sent a letter to Amazon CEO Jeff Bezos Tuesday asking the company to place limits on how its Amazon Rekognition image-detection technology can be used by law enforcement.
The letter, which was signed by several other civil rights organizations including the Electronic Frontier Foundation and the Seattle Japanese American Citizens League, highlights work Amazon Web Services has done with police departments in Orlando, Fla., and suburban Portland’s Washington County, Ore. Amazon Rekognition is a image-recognition service first introduced by AWS in 2016 and enhanced to handle video recognition last year at AWS re:Invent 2017.

AWS has not exactly tried to hide its work with Washington County, publishing a case study last year describing how Rekognition is used to identify “persons of interest” in the county. In one example, Washington County used Rekognition to identify a shoplifter by uploading a photo of him from the store’s checkout line to a dataset of mugshots from people arrested in the county dating back to 2001, tracking down the suspect on Facebook after the department got four image results with greater than 80 percent similarity.

“Amazon Rekognition has become a powerful tool for identifying suspects for my agency,” wrote Chris Adzmia, senior information systems analyst for Washington County, in the case study.
That’s pretty much exactly what the ACLU is worried about, especially given the ease at which anyone can be potentially identified as a “suspect” in this day and age....
...MORE

"Intel’s Mobileye wants to dominate driverless cars—but there’s a problem" (INTC; GOOG)

A deep dive into Waymo vs. Intel.
The current iteration of LIDAR (Waymo) will be around for at least five years before something replaces it.
However, if Intel (cameras) can figure out how to get the Nervana chip technology working in autonomous vehicles, pull your bets back fast.

From Ars Technica:
Why we're skeptical of Mobileye's plan for validating self-driving car safety.

Mobileye, the Israeli self-driving technology company Intel acquired last year, announced on Thursday that it would begin testing up to 100 cars on the roads of Jerusalem. But in a demonstration with Israeli television journalists, the company's demonstration car blew through a red light.

Mobileye is a global leader in selling driver-assistance technology to automakers. With this week's announcement, Mobileye hoped to signal that it wasn't going to be left behind as the world shifts to fully self-driving vehicles. But the red-light blunder suggests that the company's technology may be significantly behind industry leaders like Waymo.

While most companies working on full self-driving technology have made heavy use of lidar sensors, Mobileye is testing cars that rely exclusively on cameras for navigation. Mobileye isn't necessarily planning to ship self-driving technology that works that way. Instead, testing a camera-only system is part of the company's unorthodox approach for verifying the safety of its technology stack. That strategy was first outlined in an October white paper, and Mobileye CTO Amnon Shashua elaborated on that strategy in a Thursday blog post.

"We target a vehicle that gets from point A to point B faster, smoother, and less-expensively than a human-driven vehicle; can operate in any geography; and achieves a verifiable, transparent 1,000-times safety improvement over a human-driven vehicle without the need for billions of miles of validation testing on public roads," Shashua wrote on Thursday.

It's a bold claim. We're skeptical it's actually true.

Mobileye hopes to prove safety with formal models


Intel's new test vehicles use only cameras.
Enlarge / Intel's new test vehicles use only cameras.
Intel/Mobileye

The industry leader, Waymo, has focused on racking up more than six million miles of on-road testing, supplemented by billions of miles of simulation based on data collected in those real-world tests. But Mobileye argues that this approach is simultaneously wasteful and unlikely to deliver sufficient evidence of safety.

Instead, Mobileye advocates a more formalistic approach to demonstrating that its cars are safe. Mobileye envisions dividing its self-driving system into two parts—perception and policy—and then testing and validating them separately.

The perception system takes raw sensor inputs and translates them into labeled objects with exact three-dimensional coordinates. Then the policy system takes this labeled three-dimensional world and plans how to navigate through it....MORE

"How North Korean hackers became the world’s greatest bank robbers"

From Global Post Investigations, May 16:
The Reconnaissance General Bureau, North Korea’s equivalent to the CIA, has trained up the world’s greatest bank-robbing crews. In just the past few years, RGB hackers have struck more than 100 banks and cryptocurrency exchanges around the world, pilfering more than $650 million. That we know of.

It was among the greatest heists against a United States bank in history and the thieves never even set foot on American soil.

Nor did they target some ordinary bank. They struck an account managed by the Federal Reserve Bank of New York, an institution renowned for its security.

In vaults 80 feet below the streets of Manhattan, the bank holds the world’s largest repository of gold. Many of these gold bars belong to foreign governments, which feel safer storing their gold inside well-defended bunkers in America than at home.

By the same token, overseas governments also store cash with the Fed. But this is cash in the 21st-century sense: all ones and zeroes, not smudgy bills. The bank holds vast foreign wealth on humming servers wired up to the internet.
That’s what the thieves went after in February 2016: nearly $1 billion, sitting in a Fed-run account. This particular account happened to belong to Bangladesh. Having already hacked into the servers of the Bangladesh Central Bank, the criminals waited until a Friday — a day off in many Muslim-majority nations, Bangladesh included.
Then they started draining the account.

Posing as Bangladesh Central Bank staff, the hackers sent a flurry of phony transfer requests to the Fed totaling nearly $1 billion. The Fed started zapping cash into accounts managed by the thieves overseas, most of them in the Philippines. Much of the money was quickly pulled out as cash or laundered through casinos.
From there, the trail goes cold.

The hackers didn’t get the full billion they desired. Most of the bogus requests were caught and canceled by suspicious personnel. But they did end up with an amazing score: $81 million.
The culprits of this heist are loyal to one of the most impressive organized crime syndicates in the world. They don’t work for the Triads, nor the Sinaloa Cartel, nor Sicily’s Cosa Nostra. They are agents of the Reconnaissance General Bureau (or RGB), which is headquartered in Pyongyang. This is North Korea’s equivalent to the CIA.

Like the CIA, North Korea’s RGB is steeped in clandestine overseas plots: assassinations, abductions and lots of spying. But it is perhaps better understood as a mash-up between the CIA, the KGB and the Yakuza.

What distinguishes the bureau is its entrepreneurial streak — one with a distinctly criminal bent.
For decades, North Korea has been beleaguered by Western sanctions and barred from global markets. This has prodded the regime to seek revenue in darker realms that are beyond the law. These black-market enterprises have included heroin production, printing bogus $100 bills and counterfeiting name-brand cigarettes.

But all of those rackets have now been totally eclipsed by hacking. The bureau has trained up the world’s greatest bank-robbing crews, a constellation of hacking units that pull massive online heists.
These thieves also have one distinct advantage over other syndicates: They are absolutely confident that they’ll never be charged. So it goes when your own country sponsors your criminal mischief.
This is a new phenomenon, according to US intelligence officials. “A nation state robbing banks … that’s a big deal. This is different,” says Richard Ledgett. He was, until his recent retirement, the deputy director of the National Security Agency.

In recent years, North Korea has launched hacks against more than 100 banks and online exchanges in a total of 30 countries. The RGB appears to have successfully pilfered $650 million. That we know of.

And yet they are chronically overlooked — at least in the American media, where talk of online subterfuge is dominated by Russian political hacks. If you weren’t aware that North Korea pulled a heist on the Federal Reserve, note that the caper went down in February 2016, when the media spotlight was fixed on the US presidential race at the expense of, well, almost everything else.
Now that gaze has swung toward North Korea — and for good reason.

Not so long ago, North Korea spoke of smiting the US with its “treasured nuclear sword of justice.” Now it offers grand gestures of warmth. Kim Jong-un has released American prisoners. He has giddily stepped into South Korea — if only for a moment — and he is now readying peace talks with President Donald Trump, a man who has threatened the young autocrat’s life via Twitter. (This could all change in an instant, of course. The North Korean leader suspended talks with South Korea on Wednesday over joint US-Korea military exercises and threatened to cancel his summit with Trump.)...

Natural Gas: "Never Too Late? Bulgarian President Resurrects Idea of South Stream"

From Sputnik:
The South Stream project was suspended in 2014, after Bulgaria halted work on the project twice during the summer of the same year. The Russian government has accused the European Commission and Sofia of obstructing the project. South Stream later transformed into Turkish Stream.
Bulgarian President Rumen Radev has expressed his views in an interview with the Russian newspaper Kommersant that Bulgaria needs direct shipments of Russian gas via a pipeline through the Black Sea. He noted that such aspirations are no different from those of Germany with Nord Stream 2 and that such a project would benefit both Sofia and the EU in general.

"Let's call it Bulgarian Stream. Such an approach is dictated by common sense and the need for energy security and efficiency, not only in Bulgaria, but also in the EU in general," Radev said.
He added that Bulgaria hopes to strengthen its positions as a regional gas hub. At the same time, Radev expressed hope that if Russia decides to participate in such a project, it will adhere to the requirements of EU legislation, namely the Third Energy Package.

The comment by the Bulgarian president comes amid his visit to Moscow, where he is due to meet Russian Prime Minister Dmitry Medvedev on May 21. He is also planning to meet with Russian President Vladimir Putin in Sochi the following day...MORE

So, What's New In Silicon Valley?

From the San Francisco Chroicle, May 19:
Huh, same 'ol, same 'ol.

From Trading Titan to Penny Stock: Noble Group Faces Crunch as Creditors, Investors Circle

From gCaptain:
Just seven years ago, Noble Group was a $11 billion-plus Asian commodity powerhouse, trading everything from soybeans to oil. As it readies its latest earnings report, it’s worth barely $80 million, rooted among Singapore’s penny stocks.

Due later on Tuesday, Noble’s first-quarter results will shed light on whether it can stem huge losses provoked by a lack of trade financing and market calls that went sour – while whittling down a debt mountain. They also precede shareholder meetings and legal rulings that will decide whether it survives.

Amid accusations of false accounting levelled in 2015, and a legal spat this year, a long slide in investor confidence has seen most of Noble’s market value wiped out. Noble has defended its accounting and is now trying to clinch a last-ditch deal with creditors and shareholders from which – if it succeeds – it will emerge a transformed company.

Noble is seeking approval to halve its $3.4 billion debt in return for handing over 70 percent of equity to senior creditors, mostly a group of hedge funds which calls itself the “Ad Hoc Group”. Under that plan, its headquarters will be in London, not Asia, no longer controlled by founder Richard Elman.
“Noble’s restructuring…remains critical to averting bankruptcy,” Singapore’s KGI Securities said ahead of the Noble results.

The deal would leave existing shareholders with just 15 percent equity in a company that has seen its share price fall from a peak of S$17.6 Singapore dollar ($13.18) in 2011 to below S$0.1.
Despite its woes, Noble has so far defied talk of its demise. But to keep going, Noble needs a majority of its shareholders to approve the restructuring – a vote on the proposal is expected in June.

GOLDILOCKS, BEARS
Scared by the prospect of total loss and lack of any alternate plan, the proposal could get enough support, company sources say.
Founder Elman, still Noble’s biggest shareholder with a stake of nearly 18 percent, would be given a board seat in the new firm.

Noble chairman Paul Brough, a restructuring and liquidation expert, has urged shareholders to support the deal, threatening a failure would result in insolvency and bankruptcy.
But leading the resistance is Abu Dhabi-based Goldilocks Investment Co. Ltd, which holds 8.1 percent in Noble. Goldilocks has filed complaints and lawsuits against the restructuring plans, arguing they protect creditors at the expense of shareholders.

Goldilocks is Noble’s third-biggest shareholder after Elman and China Investment Corp, which has a 9.5 percent stake....MORE

Capital Markets: "Is Turnaround Tuesday Nearly Over Already?"

From Marc to Market:
Corrective forces that took hold in the foreign exchange market yesterday extended their hold today. However, a cent bounce from yesterday's lows has seen new sales of euro and sterling emerge, and the greenback found bids below JPY111.00. There is a $600 mln option struck there that will be cut in NY today. There is a 1.1 bln euro option at $1.1850 that also expires today.

Corrective forces are also seen in other markets. Uncertainty spurred by Italian political developments triggered a dramatic sell-off of Italian assets over the past few sessions. They have been given a reprieve today. Italy's 10-year bond yield is off nearly nine basis points, and the premium over Spain has narrowed five basis points, and the spread against Germany is narrowing by 13 bp. Italian shares are also recovering. The 0.5% gain near midday in Milan is among the region's best performers today. The Dow Jones Stoxx 600 is up 0.1%. The CAC and DAX are struggling to sustain meaningful momentum. Both markets have rallied for eight consecutive weeks.

Most emerging market currencies are higher today, led by the South African rand's 1.1% rise and a 0.6% rise in the Russian ruble. The Turkish lira is moving a bit of its record low (~+0.25%), and the Malaysian ringgit is moved higher for the first time since May 3 (~0.3%).

The news stream is light and it won't pick up much in the North American session. The only US report is the Richmond Fed's Manufacturing Index. It is an early reading of May activity, and it is expected to improve sharply after falling dramatically into negative territory (-3) for the first time in 2 1/2 years. Still, it does not move markets in the best of times. No Fed officials are slated to speak. Canada reports wholesale trade, also typically with limited market impact.

South Korea President Moon is in Washington. Given how quick North Korea was to threaten to cancel next month's summit with the US, some suspect that Moon may have over-promised. However, the angle that may be more relevant for investors runs through China. Reports suggest that the US Administration sees China's hand behind North Korea's threats. Some link the US volte-face on trade with the desire to reach an agreement with North Korea.

The suspension of US sanctions on China and China dropping its investigation into US sorghum imports have signaled a de-escalation of tensions. After the mid-June summit, the US trade stance could harden again. In the meantime, a workaround for ZTE looks to be near. Some trade measures that China is taking, like reducing the import duty on autos to 6% from 25% will help non-US producers as well as Americans, one would think. The other point to note is how the de-escalation of trade tensions with China has spurred criticism from Trump's right (like Bannon), but also notably the left (like Schumer).

In Italy, the President Mattarella is being embraced as a check on the populist-nationalist government that is being formed. Reports indicate that he "expressed concerns" about the fiscal plans. Investors appear concerned over motivations as much as plans. A modification of the fiscal plans may appease Mattarella, but it may require more to ease investors concerns, where a Greek-like crisis is feared, and worse given the size of Italy's economy and market. Despite the recovery in Italian bonds, indicative prices for the five-year credit-default swap is trading firmer....
...MORE

Monday, May 21, 2018

"Meet the Quantum Blockchain that Works like a Time Machine"

From TechCrunch:
A new — and theoretical — system for blockchain-based data storage could ensure that hackers will not be able to crack cryptocurrencies once the quantum era starts. The idea, proposed by researchers at the Victoria University of Wellington in New Zealand, would secure cryptocurrency futures for decades using a blockchain technology that is like a time machine.
You can check out their findings here.

To understand what’s going on here we have to define some terms. A blockchain stores every transaction in a system on what amounts to an immutable record of events. The work necessary for maintaining and confirming this immutable record is what is commonly known as mining. But this technology — which the paper’s co-author Del Rajan claims will make up “10 percent of global GDP… by 2027” — will become insecure in an era of quantum computers.

Therefore the solution to store a blockchain in a quantum era requires a quantum blockchain using a series of entangled photons. Further, Spectrum writes: “Essentially, current records in a quantum blockchain are not merely linked to a record of the past, but rather a record in the past, one that does not exist anymore.”
Yeah, it’s weird.

From the paper intro:
Our method involves encoding the blockchain into a temporal GHZ (Greenberger–Horne–Zeilinger) state of photons that do not simultaneously coexist. It is shown that the entanglement in time, as opposed to an entanglement in space, provides the crucial quantum advantage. All the subcomponents of this system have already been shown to be experimentally realized. Perhaps more shockingly, our encoding procedure can be interpreted as non-classically influencing the past; hence this decentralized quantum blockchain can be viewed as a quantum networked time machine.
In short, the quantum blockchain is immutable because the photons that it contains do not exist at the current time but are still extant and readable. This means the entire blockchain is visible but cannot be “touched” and the only entry you would be able to try to tamper with is the most recent one. In fact, the researchers write, “In this spatial entanglement case, if an attacker tries to tamper with any photon, the full blockchain would be invalidated immediately.”...MORE

"The backlash that never happened: New data shows people actually increased their Facebook usage after the Cambridge Analytica scandal" (FB)

Here's the BI piece I was going for when the post immediately below popped up.

From Business Insider:
  • Facebook weathered the worst of the Cambridge Analytica data storm and actually increased usage, according to figures cited by Goldman Sachs.
  • Deutsche Bank also found that Facebook's purge of 583 million fake accounts had "little to no impact on audience reach."
  • It seems the #deleteFacebook backlash never really arrived.
  • The data will give CEO Mark Zuckerberg confidence as he prepares for a crunch week, in which he will be grilled by top EU lawmakers.
The Cambridge Analytica data debacle was billed as Facebook's biggest crisis, but it looks like it didn't even leave a scratch on the company.

Facebook weathered the worst of the storm and usage actually increased, according to a client note from Goldman Sachs, citing ComScore figures. In other words, the #deleteFacebook backlash never really arrived.

Goldman Sachs said Facebook's US unique users on mobile rose 7% year-on-year to 188.6 million in April, when the scandal was biting hard. Time spent on Facebook also went up. The graph below says it all. 
https://amp.businessinsider.com/images/5afecf831ae66219008b475a-960-663.png 
And there's more good news for Facebook. Deutsche Bank said its advertising system checks had shown that the purge of 583 million fake accounts following Russian interference in the US election has had "little to no impact on audience reach." It produced a graph revealing that ad targeting across all demos has actually grown....MORE

"Journalists drink too much, are bad at managing emotions, and operate at a lower level than average, according to a new study"

The "new study" is dated May 2017.

From Business Insider, May 19:
Journalists' brains show a lower-than-average level of executive functioning, according to a new study, which means they have a below-average ability to regulate their emotions, suppress biases, solve complex problems, switch between tasks, and show creative and flexible thinking.

The study, led by Tara Swart, a neuroscientist and leadership coach, analysed 40 journalists from newspapers, magazines, broadcast, and online platforms over seven months. The participants took part in tests related to their lifestyle, health, and behaviour.

It was launched in association with the London Press Club, and the objective was to determine how journalists can thrive under stress. It is not yet peer reviewed, and the sample size is small, so the results should not be taken necessarily as fact.

Each subject completed a blood test, wore a heart-rate monitor for three days, kept a food and drink diary for a week, and completed a brain profile questionnaire.

The results showed that journalists' brains were operating at a lower level than the average population, particularly because of dehydration and the tendency of journalists to self-medicate with alcohol, caffeine, and high-sugar foods.

Forty-one percent of the subjects said they drank 18 or more units of alcohol a week, which is four units above the recommended weekly allowance. Less than 5% drank the recommended amount of water.

However, in interviews conducted in conjunction with the brain profile results, the participants indicated they felt their jobs had a lot of meaning and purpose, and they showed high mental resilience. Swart suggested this gave them an advantage over people in other professions in dealing with the work pressure of tight deadlines.

Journalists scored pretty high on:...MORE
Here's "STUDY INTO THE MENTAL RESILIENCE OF JOURNALISTS" (12 page PDF)

I asked the Google Box if  'Study into...' was a usage I should adopt and StackExchange returned:
",,,.the verb study casts its field or topic as a direct object—we studied the effect of X on aquatic birds. When transitive verbs are nominalized, their direct objects are most often cast as preposition phrases headed by of:"...

... Often the nominal derivative will license the same prepositions as its mother verb. But this doesn't usually run backwards, from the noun to the verb....
So there you go, don't use "Study Into" and watch out for the self-medicating if you've chosen the Journo lifestyle.

"Beauty Contests and The Term Structure"

And since we're on about bonds.*
From VoxEU, May 10:
The bond premium puzzle arises because the excess yield that investors require to hold a long-term bond is too small in quantitative macroeconomic models. Drawing on the beauty contest literature, this column argues that realistic term premia can be generated by differentiating between private and public information and by introducing strategic complementarities in the formation of expectations. It shows that a significant proportion of US term premia is driven by a beauty contest in forecasting, which rewards investors for being accurate andclose to the average forecast of others.
The famous Keynesian beauty contest literature emphasises the strategic complementarity in forecasting the forecasts of others. Keynes (1936) suggested that such a mechanism could be at work in stock markets, with share prices determined not just by fundamentals but also according to how investors think that other investors value particular shares. We believe that a beauty contest mechanism may operate in bond markets too, in which case the term structure of interest rates depends not only on the compensation an investor demands for holding bonds of different maturities, but also on what compensation the investor thinks that other investors will demand for holding the bonds.
The six winners in the beauty contest of the Sunday Times. The Washington Times, 5 May 1907. 
National Digital Newspaper Program, Library of Congress.
We are far from the first to write about the drivers of term structure. A search for journal articles with the phrase “term structure of interest rates” in the title gives 879 hits in EconLit and 186 hits in JSTOR. Despite this voluminous literature, quantitative macroeconomic models of the type developed by Christiano et al. (2005) and Smets and Wouters (2003, 2007) still struggle to generate risk premia anything like those seen in financial markets. For example, Rudebusch and Swanson (2012) find an average term premium of about one basis point on nominal 10-year bonds in a medium-scale dynamic stochastic general equilibrium (DSGE) model with nominal rigidities and a reasonable coefficient of relative risk aversion. Estimates from Adrian et al. (2013) suggest that the term premium on 10-year US Treasuries between 1999 and 2017 was two orders of magnitude higher at over 100 basis points.

Rudebusch and Swanson (2008) refer to the disconnect between financial market data and models of the term structure as the bond premium puzzle, to mirror the well-known equity premium puzzleof Mehra and Prescott (1985). Mechanisms proposed to explain the latter include recursive preferences (Epstein and Zin 1989), long-run risk (Bansal and Yaron 2004), rare disasters (Barro 2006) and habit formation (Abel 1999). However, models which include one or more of the above mechanisms typically explain data on risk premia only at the expense of implausibility remaining at some other margin. This continues to be the case when these mechanisms are used to explain the bond premium puzzle. Rudebusch and Swanson (2012) ask whether a medium-scale DSGE model with recursive preferences and a plausible degree of long-term risk can match the term premium on a nominal 10-year bond. The answer is yes, but only in a specification where the coefficient of relative risk aversion is 110....MUCH MORE
*Yesterday's Follow-up: "US companies begin to reduce bond holdings after tax overhaul"

Cooley Law: "Venture Financing Report – Q1 2018 – Valuations Continue to Rise in the New Year "

Our Cooley boilerplate:
Cooley is one of the big dogs of the VC legal eagle biz. Something like a third of the unicorns on the WSJ's Billion Dollar Startup Club list have used Cooley for one purpose or another.
Additionally, 20 or 21 of the companies on the "Technology Review's 50 Smartest Companies 2017" list have been represented or counseled by the firm. As I said, one of the biggies.
From Cooley, May 9, 2018:
In the first quarter of 2018, both deal volumes and aggregate dollars raised remained robust, though slowing from the torrid final quarters of 2017. In Q1 2018, Cooley handled 205 disclosable deals representing more than $4.9 billion of invested capital.

During Q1, median pre-money valuations continued to rise to record levels. We witnessed an increase in median pre-money valuations across all deal stages, with the exception of Series C transactions. Valuations for Series A deals hit levels not seen in 14 years of reporting. Up rounds remained at high levels, as 83% of transactions were up rounds during the quarter. We also saw a decrease in transactions structured in tranches across all industries.
Download the full PDF.

And from CooleyGO:
In conjunction with our Q1 Venture Financing Report, I sat down with Matthew Howard from Norwest Venture Partners to get his take on the state of venture capital investing.

A few highlights from Matthew Howard
 
On his market outlook: Overall, I am extremely bullish as technology continues to be a major contributor to the US economy, and I do think disruptive technology and business models will continue to change many aspects of healthcare, consumer and enterprise opportunities.

On valuations: With so much capital deployed over the past several years, valuations seem to have cooled for some companies needing more time to get aligned with the “rule of 40” metrics.

On sector trends: There continues to be a demand for breakout enterprise security opportunities, multitenant cloud-based applications, artificial intelligence augmentation and robotics. We also see a huge white space in solving real-world consumer problems like urban mobility, living spaces and the future of work. We’re also tracking innovative technologies that will make healthcare more personalized, efficient and cost effective.

On exit routes: I expect, based on 2016 and 2017 data, that more often than not, companies will go the M&A route.

On M&A: Q1 2018 saw a huge increase in the tech M&A market from non-tech buyers. Transactions led by non-tech buyers nearly tripled from Q4 2017.

As far as VC deal terms, is the pendulum favoring companies or investors?
It really depends on the company. At Norwest, we like to take a long-term view and relatively patient approach. Regarding Q1, we are not seeing any material trend changes from Q4 2017 to Q1 2018.

Will this continue through 2018?At this moment, we expect mid- to late-stage venture investing to track the macro US economy as we gauge how the Federal Reserve manages interest rates.

Are there noticeable trends that differ for early stage deals compared to later?In general, we continue to see very straightforward and “clean” terms for seed to classic Series A investing. From time to time, we do see structured deal terms in pre-IPO rounds. As mentioned, we have not noticed any material changes quarter over quarter.

Any current trends standing out to you in Q1 that are changes from 2017?
Yes, we’re starting to see IPOs pick up steam after a slow 2016/2017, and M&A activity is continuing to grow. M&A deal volume was strong in Q1 2018, but average deal values remain flat. Interesting to note is that Q1 2018 saw a huge increase in the tech M&A market from non-tech buyers. Transactions led by non-tech buyers nearly tripled from Q4 2017.

Deal pace is trending upwards in Q1 2018, but average deal size remained relatively flat. Q1 2018 showed increases in both deal pace and size on a quarter-over-quarter basis, but only because Q4 2017 was a very quiet quarter.

The software sector will continue to lead the way with regards to both deal volume and size. The most notable software transaction of Q1 2018, and the largest, would be Salesforce’s $6.5 billion acquisition of Mulesoft.

Additionally, there are always situations where there are material, unrealistic valuation expectations among investors and entrepreneurs. However, there continues to be massive demand for high-quality opportunities that drive up valuations in an accelerated manner. It’s important to be judicious about the valuations while keeping a close eye on public market expectations and comparables....MUCH MORE

"60 Minutes reports on the power of Google" (GOOG)

From CBS News, May 20:
This past week the Federal Trade Commission was asked to investigate the data collected by Google on its Android operating system, which powers most of the world's smartphones. It was a tiny blip in the news cycle but another sign of Washington's and Europe's growing concerns about the enormous, largely unchecked power accumulated by tech giants like Facebook, Amazon and Google over the last two decades. Of the three, Google, which is part of a holding company called Alphabet is the most powerful, intriguing, and omnipresent in our lives. This is how it came to be.

Most people love Google. It's changed our world, insinuated itself in our lives, made itself indispensable. You probably don't even have to type Google.com into your computer, it's often the default setting, a competitive advantage Google paid billions of dollars for. No worry. Google is worth more than three-quarters of a trillion dollars right now and you don't get that big by accident.

Since going public in 2004, Google has acquired more than 200 companies, expanding its reach across the internet. It bought YouTube, the biggest video platform. It bought Android, the operating system that runs 80% of the world's smartphones and it bought DoubleClick, which distributes much of the world's digital advertising, all of this barely raising an eyebrow with regulators in Washington.

Steve Kroft: Were any of those acquisitions questioned by the antitrust division of the Justice Department?
Gary Reback: Some were investigated, but only superficially, the government just really isn't enforcing our antitrust laws. And that's what's happened. None of these acquisitions have been challenged.
Gary Reback is one of the most prominent antitrust lawyers in the country widely credited with persuading the Justice Department to sue Microsoft back in the 90s, the last major antitrust case against big tech. Now he is battling Google.

Steve Kroft: You think Google's a monopoly? 
Gary Reback: Oh, yes, of course Google's a monopoly. In fact they're a monopoly in several markets. They're a monopoly in search. They're a monopoly in search advertising.
Those technologies are less than 25 years old, and may seem small compared to the industrial monopolies like railroads and standard oil a century ago but Reback says there's nothing small about Google.

"People tell their search engine things they wouldn't even tell their wives... And that gives the company that controls it a mind-boggling degree of control over our entire society."

Gary Reback: Google makes the internet work. The internet would not be accessible to us without a search engine

Steve Kroft: And they control it.
Gary Reback: They control access to it. That's the important part. Google is the gatekeeper for-- for the World Wide Web, for the internet as we know it. It is every bit as important today as petroleum was when John D. Rockefeller was monopolizing that.

Last year, Google conducted 90% of the world's internet searches. When billions of people asked trillions of questions it was Google that provided the answers using computer algorithms known only to Google.

Jonathan Taplin: They have this phrase they use, "competition is just a click away." They have no competition. Bing, their competition, has 2% of the market. They have 90%.

Jonathan Taplin is a digital media expert and director emeritus of the Annenberg Innovation Lab at the University of Southern California.  He says Google's expertise may be technology, but its business is advertising. And its most valuable commodity is highly specialized information about us. It's helped Google control roughly 60% of worldwide advertising revenue on the internet. Taplin says traditional companies can't compete because they don't have the data.

Jonathan Taplin: They know who you are, where you are, what you just bought, what you might wanna buy. And so if I'm an advertiser and I say, "I want 24-year-old women in Nashville, Tennessee who drive trucks and drink bourbon," I can do that on Google....MUCH MORE, including video