Monday, May 20, 2019

I'm Beginning To Doubt the Efficient Market Hypothesis: Rare Earths Edition

Okay, truth be told we are waaay past "beginning".

On  this morning's news that China's President Xi went to visit a rare earth producer the VanEck Vectors Rare Earth/Strategic Metals ETF is up 7.29% on tremendous (for that ETF) volume:

http://ibankcoin.com/flyblog/files/2019/05/Screen-Shot-2019-05-20-at-12.13.25-PM.png

Volume 2,888,035 Avg. Volume 73,52

Unfortunately for today's buyers the top holdings of the fund are:

Top 10 Holdings (74.42% of Total Assets)

NameSymbol% Assets
Tronox Holdings PLCTROX10.63%
Iluka Resources LtdILU.AX9.30%
Lynas Corp LtdLYC.AX8.38%
Assore LtdASR.JO7.80%
Eramet SAERA.PA7.68%
Advanced Metallurgical Group NVAMG6.83%
Toho Titanium Co Ltd57276.36%
Orocobre LtdORE.AX6.23%
OSAKA Titanium technologies Co Ltd57265.64%
Pilbara Minerals LtdPLS.AX5.57%


Tronox is a verically integrated titanium producer
Iluka mines rutile ie titanium
Lynas Corp our little buddy (see below)
Assore Ltd. base metals iron, manganese and chrome
Eramet SA manganese and nickel alloys
Advanced Metallurgical Group NV  "aluminum master alloys and powders, ferrovanadium, natural graphite, chromium metal, antimony, lithium, tantalum, niobium and silicon metal"

If you wish you can check the last four, I'm giggling (a manly giggle) too hard.

Or see our earlier "Xi Jinping visits China rare earth plant amid talk of use as trade war weapon ".

Chips: "Xilinx refines AI chips strategy: It’s not just the neural network"

The author of this piece, , used to run Barron's 'Tech Trader' and 'Tech Trader Daily' columns. When he assumed those chores after Eric Savitz left we greeted him and wished him well: "Barron's and Journo Tiernan Ray are Class Acts " but he had some gargantuan shoes to fill and I wasn't sure Barron's would remain one of our sources for tech.

And then someone pointed out that Mr. Ray was getting answers out of NVIDIA's Jenson Huang that were head and shoulders above anything the NVDA CEO would tell anyone else and I started watching for it and son-of-a-gun it was like being a fly on the wall. Tiernan knows this stuff and the tech guys recognize it.

Here he is at ZD Net, May 15, 2019 
Xilinx hopes to take a big chunk of the market for semiconductors that process machine learning inference tasks by convincing developers it's not only about the neural network performance. It's about the entire application. 
Chip maker Xilinx on Tuesday held its annual "analyst day" event in New York, where it told Wall Street's bean counters what to expect from the stock. During the event the company fleshed out a little more how it will go after a vibrant market for data center chips, especially those for machine learning.

That market is expected to rise to $6.1 billion by 2024 from $1.8 billion in 2020. 
The focus for Xilinx is a raft of new platform products that take its capabilities beyond the so-called field-programmable gate arrays, or FPGAs, that it has sold for decades. That requires selling developers of AI applications on the notion there's more than just the neural network itself that needs to be sped up in computers.

Data center is a small part of Xilinx's overall revenue, at $232 million in the fiscal year ended in March, out of a total of $3.1 billion in company revenue. However, it is the fastest-growing part of the company, rising 46% last year. The company yesterday said data center revenue growth is expected to accelerate, rising in a range of 55% to 65% this fiscal year, versus the compounded annual growth of 42% in the period 2017 through 2019.  
https://zdnet1.cbsistatic.com/hub/i/2019/05/15/b0611a1f-32ea-4ef8-ac94-d98039155756/ee02c3b2e4cbb12e918ff0a984831960/xilinx-versal-ai-engine-tile.png
Xilinx expects to gain ground in machine learning inference by virtue of "tiles," compute blocks that connect to one 
another over a high-speed memory bus, inside the "AI Engines" portion of its "Versal" programmable chips.
To do so, Xilinx is moving past its heritage in FPGAs, to something more complex. FPGAs contain a kind of vast field of logic gates that can be re-arranged, so they have the prospect of being tuned to a task and therefore being of higher performance and greater energy efficiency.
...MUCH MORE

Also by Mr. Ray, commentary on the AI company co-founded by Eon Musk:
OpenAI has an inane text bot, and I still have a writing job

"Xi Jinping visits China rare earth plant amid talk of use as trade war weapon "

We have some experience with the rare earth equities.

"...Words like "uranium", "rare earths", etc. seem to be magic to
 those unsuspecting who are often fleeced..."
Gerald M. Loeb
The Battle for Investment Survival
Simon & Schuster, 1935

Back in May 2009 when, for the wider public the group of elements were just industrial curiosities we posted:
China tightens grip on rare earths

and:
With a Name Like Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co., it has to be good
( 600111:Shanghai)

Regarding the only U.S. producer we had three triples here on the blog, live, in real time, short and long.
From the July 2010 IPO:
"Rare Earth Metals: Molycorp IPO Very Weak (MCP)"

To June 2015's
Rare Earth: Largest U.S. Producer, Molycorp Has Filed For Bankruptcy Protection (MCPIQ)
Oh we had fun with this one.
We posted on it pretty much from Tombstone to tombstone.*
There are a lot of lessons for commodity investors wrapped up in this tale.
And for equity investors as well. The stock went from being part of Goldman Sach's odds & sods ends bin to "UPDATED-Rare Earth: "Molycorp Looks Like One Of The Greatest Private Equity Deals Ever" (MCP)
And along the way looked at other...ahhh....opportunities:
Luxembourg-based Rare Earth Company Hoping to Mine in South Africa by 2014 Does Oversubscribed IPO in Toronto (FRO.tsx)
Alrighty then....

So yes, some experience.

From the South China Morning Post:
42 minutes ago
  • China produces 90 per cent of the world’s rare earth minerals, used in hi-tech production such as electric vehicles
  • Rare earth minerals one of the few goods not hit by incoming US tariffs on US$300 billion of Chinese goods as trade war escalates
Chinese President Xi Jinping visited one of the country’s major rare earth mining and processing facilities on Monday, in his first domestic tour since the recent escalation of the US-China trade war.
Xi’s visit, reported by the official Xinhua news agency, comes amid growing discussion in China that Beijing could consider banning the export of such minerals as a weapon in the trade war with the United States.
Rare earth minerals were among the few items excluded from the latest US government plans to implement tariffs on almost all of China’s remaining exports to the United States, highlighting their strategic importance. These tariffs, which are set to be levied on Chinese goods worth an estimated US$300 billion, could go into effect as early as July, according to the Office of the US Trade Representative.
The state media report, which includes one sentence of text and two pictures, made no mention of the trade war, but speculation is mounting that rare earth minerals could form a key part of China’s retaliation.

China is the world’s largest producer and exporter of rare earth minerals, which contain at least one of the 17 rare earth elements, many of which are vital to a number of low-carbon technologies, such as high-performance magnets and electronics.
It accounts for 90 per cent of global production, however the government has been carefully managing mining levels and it was reported last year that amid production quotas, the country became a net importer of rare earth minerals last year.

Jin Canrong, a professor of international relations at Renmin University in Beijing, wrote an article last week suggesting that China could ban rare earth exports to the US as a way to punish the US for
imposing additional tariffs
. China does not import enough goods from the US to retaliate in pure tariff terms.
The Chinese government has weaponised the trade of rare earth exports before, slashing the export quota by 40 per cent in 2010. The US, Japan and the European Union filed a compliant against the Chinese quota at the World Trade Organisation in 2012, with the WTO ruling against China. Beijing dropped its export restrictions in 2015.
According to the report, Xi visited JL Mag Rare Earth Co, a major rare earth processing company based in Ganzhou, Jiangxi province and “studied” the local rare earth industry. Ganzhou is the heartland of China’s rare earth mining and processing industry....MORE
The last time China withheld production prices exploded, the issue went to the World Trade Organization, the WTO ruled in March 2014 that China's actions were blatantly in violation of the terms of trade China agreed to upon accession to the WTO in 2001, China acquiesced, began flooding the market with product, prices crashed and the prophecy of December 28, 2010 was  fulfilled:
...My short side radar is starting to glow. The perfect play for the Chinese would be to maintain a very tight supply to Japan and the West until MCP, Lynas and REE go into production and then crash the market.
There is currently no way to figure discounted cash flow values for these mines so folks are taking proven, probable and even possible reserve numbers, multiplying by their favorite integer and then forgetting to discount back. That spells opportunity to those panthers sharp enough to wait patiently in the tree until the moment comes to pounce....
Today there are two western miners that are producing, one of them is in trouble and I can't help thinking about a joke from the 1986 oil price collapse, when WTI dropped below $9.85 from $23.30 six months earlier and $35 in 1981: 
Investor: I'm getting nervous, I'm hearing bankruptcy rumors about everybody in the patch, how slow is it? 

 Oil CEO: Well, we're down to two hookers, and one of them's a virgin. 

 Investor: Oh. 
The one that isn't in trouble (except for the Chinese leaning on Malaysia to shut 'em down) is Lynas, a trade we've been thinking about for almost a year but just waiting, like the panther, for the moment to pounce, biding our time, like the panther waiting....just a little bit closer and....
Okay, maybe not really waiting to pounce, maybe waiting for something to land within a few inches.
So I don't over-exert myself:

https://i.pinimg.com/474x/34/24/1c/34241cbfb17471f37e64243ae75c0983--lazy-days-days-in.jpg

LYC.AX 1.9750-0.0250 (-1.25%)
Risky as hell and overpriced because Wesfarmers made a rejected takeover bid and the punters have hope but still the only Western source worth looking at right now.

"Stock futures drop on concerns over spiraling fallout of Huawei crackdown"

Some of the names directly affected by the Huawei blacklisting (looking at you Xilinx) are starting to have temptingly yummy prices but it's all the trade (and security) headline stuff that is front and center.
From Reuters:
U.S. stock index futures fell on Monday, as fears over the impact on major technology companies from Washington’s crackdown on China’s Huawei Technologies added to concerns over worsening trade dispute between the world’s two biggest economies.

Apple Inc’s shares were down 2.4% premarket, while U.S. suppliers of Huawei including Qualcomm, Micron Technology and Broadcom Inc fell about 3%.

An HSBC warning that higher prices for Apple’s products following the increases in China tariffs could have “dire consequences” on demand also pressured the iPhone maker’s stock.
Huawei was officially added to a trade blacklist by the Trump administration on Thursday, escalating the already bitter trade war between the two parties, while China on Monday accused the United States of harboring “extravagant expectations” for a trade deal.

Alphabet Inc’s Google has suspended some business with Huawei that requires the transfer of hardware, software and technical services, Reuters reported over the weekend.

Chipmakers including Intel Corp, Qualcomm, Xilinx Inc and Broadcom have told their employees they will not supply Huawei until further notice, Bloomberg reported on Sunday.
Shares of Alphabet, Facebook Inc and Microsoft Corp were all down 1.1%.

At 7:23 a.m. ET, Dow e-minis were down 121 points, or 0.47%. S&P 500 e-minis were down 16.25 points, or 0.57% and Nasdaq 100 e-minis were down 90.5 points, or 1.2%....
...MORE

Capital Markets: "Politics Overshadows Economics Today, but Japan's Economy Unexpectedly Expanded in Q1"

From Marc to Market:
Overview: Encouraged by the election results, investors bid up Indian and Australian currencies and equities. Japan offered a pleasant surprise by reporting the world's third-largest economy expanded in Q1. Most other equity markets in Asia fell, and European stocks have the week with small losses. The US decision to isolate Huawei sent ripples through the suppliers and customers. OPEC+ indicated supplies may remain tight and oil prices opened firmer and are seeing early gains of 1% pared. Global benchmark 10-year yields are higher. Core yields are around two basis points firmer, while the periphery is lagging, and Italian bonds are bucking the move. The US dollar is trading heavily against most of the major and emerging market currencies. The yuan posted small gains. Sterling is trying to end its record-long 10-day slide against the euro.

Asia Pacific
Polls showed a tight race in Australia, and when the dust settled, the governing Liberal-National coalition won re-election
, securing a majority in parliament. The campaign pushed back against the progressive agenda of Labor that had focused on the environment and higher taxes on the wealthy. Prime Minister Morrison intends on pushing through tax cuts quickly. The Australian stock market, already at record highs, surged nearly 1.8%. It was the fourth day of advances, and the gain was almost as large as the previous three sessions put together.

There had been nearly universal agreement that the Japanese economy shrank in Q1. Instead, the government reported that the economy grew 0.5% and 2.1% at an annualized. The surprise seemed to stem from the fact the business investment did not contract nearly as much as had been expected. Business investment fell 0.3%. Economists had expected the decline was closer to 2%. Consumption fell 0.1%. The net export function also contributed to growth, not because exports were strong, but because imports were weak. Although the capital expenditures are subject to revision, the positive growth, even if of weak quality, may be sufficient to silence the talk of a delay in the sales tax. Note that there continues to be speculation that Abe will dissolve the lower chamber and plan for joint elections in July.

What began off a security breach for Huawe
i (breaking the US embargo against Iran) and one that President Trump was at one point willing to wrap up into a trade agreement, now has turned into an existential exercise. The US will ban most sales to and purchases from Huawei. This includes semiconductor chips, software updates (Android), and the app stores. Reports indicate that some non-US chip makers will participate. Huawei is thought to have been preparing for this eventuality and has stockpiled chips. We anticipate two strategic responses. First, China will seek to rapidly develop its own semiconductor production capacity. Second, there had been reports suggesting that Huawei has developed its own mobile operating system. Currently, the US had a duopoly between Android and OIS....
....MORE

This is not the BNP Paribas Holographic Banker Video

We left Saturday's Where In the World Is David Keohane? "BNP Paribas rolls out hologram projection technology" with the note:
"There is supposedly a video to go with the p.r. but I didn't see it on the press release or at L’Atelier BNP Paribas."
Then yesterday Tim Knight at Slope of Hope posted "Life After Google" which had this vignette from "Silicon Valley":


Close but no cigar. I will keep an eye out for the BNP Paribas vid and will link if it appears.

And somehow related to all this, on Thursday Virtual Reality purveyor Magic Leap acquired Belgium's Mimesys which is the company that makes the hologram platform BNP Paribas is adopting.
Terms were not disclosed in this short note at TechCruch so I do not know if they paid "twenty million fucking dollars," although TechCrunch did say:
"The team is joining Magic Leap but will continue to service their enterprise clients, including BNP Paribas and Orange, according to their website. The startup first showed off their video conferencing tech at CES this year, which allows someone in a Magic Leap One headset to visualize a 3D representation of a person during a “video” call.
Volumetric video can be fairly fickle..."
And not being familiar with Mimesys  I pronounced it Mime-sys, which triggered a recollection of 2018's "'Smart Condom' Tracks Thrust Speed and Velocity and Lets you Share the Data" and my use of an obscure word for a psychological state:
i.Con? Is that one of them psychomimes? (not to be confused with a Psycho Mime—the silent killer)
which is a long way for a short yuck.
Watch the video if you have time, it is much funnier.

"The Slow Return of Eurosclerosis"

If current forecasts for 2% Q2 growth in the U.S. prove correct it is hard to see how European GDP growth can remain in the black.

From Camelot Portfolios, May 10:
With protests by yellow vests in France approaching their six month anniversary and the European economy showing signs of not a temporary dip, but prolonged weakening, it is a good moment to take a step back and analyze the current situation as well as its implications for the medium to long-term outlook for Europe.As we see it, European economies have been weakening significantly, and even worse, Germany, the European Union’s largest economy comprising almost 21% of the area’s GDP in 2018[i], is on the verge of recession. With Germany the economic locomotive of the euro area, there may not be much reason to be optimistic. The country’s economic problems appear to be structural, due to high taxes, excessive government spending, failed energy policies and other regulatory constraints. Thinking about the years ahead, we aren’t optimistic that the policy response from the German government -- as well as other European governments such as in France, Italy and Greece -- will be strong enough to avoid a prolonged economic malaise for the continent. As a result, we believe that the global economy will suffer from Eurosclerosis in the coming years.
https://images.squarespace-cdn.com/content/v1/55e8a811e4b0f29afd2631a6/1557515505201-57ULUVQEL4JNA1Q11MZN/ke17ZwdGBToddI8pDm48kFwAIqx7mdeojk2HQrbdUEVZw-zPPgdn4jUwVcJE1ZvWEtT5uBSRWt4vQZAgTJucoTqqXjS3CfNDSuuf31e0tVFHG3DA5j8XReDpLc-RZpN8jFNy_2TZaWAO_V7w-ygx_zqWIIaSPh2v08GbKqpiV54/Screen+Shot+2019-05-10+at+3.09.34+PM.png?format=500w
Figure 1: GDP of EU Member States and Share of Total. Source: Statistics Times.
Struggling European Economies
According to the OICA, automobile production in Germany fell 9.3% in 2018[ii], year-over-year. In our view, the prospects for Europe’s leading economy are ominous given that the auto industry is linked to almost 8%% of German GDP.[iii] Business sentiment in Germany appears to have recently turned from euphoria to gloom: as of April 2019, IFO business sentiment has declined 2.8%[iv] while the Markit/BME purchasing managers index has crashed from 58.1 to 44.5 year-over-year[v].  
https://images.squarespace-cdn.com/content/v1/55e8a811e4b0f29afd2631a6/1557515851719-MGOJO3B9RSPICWPM3AWK/ke17ZwdGBToddI8pDm48kLVJkNOLiK-JpPpp0WqN7npZw-zPPgdn4jUwVcJE1ZvWQUxwkmyExglNqGp0IvTJZamWLI2zvYWH8K3-s_4yszcp2ryTI0HqTOaaUohrI8PIhGMi8OcWaNDPSQNpAqhOlrw46057Vsj6KBLHUZtsFqc/Screen+Shot+2019-05-10+at+3.17.15+PM.png?format=750w
Figure 2: German Automotive Car Production. 
Source: International Organization of Motor Vehicle Manufacturers
Optimists could point to low unemployment in Germany, which hovers near 5%, according to the OECD[vi]. But low unemployment data could be misleading because German companies can be reluctant to lay off workers, not only because restrictive labor laws make layoffs difficult and expensive, but also because hiring talent can be a lengthy drawn-out process should the economy recover quickly. Many firms experienced that problem during the last decade of relative economic strength when qualified labor was hard to come by and growth for some firms remained below potential due to labor shortages. While this helps to sustain economic statistics, it can destroy corporate profitability and eventually end up costing investors.

According to Eurostat, real GDP growth in Germany is waning, growing only 0.6% in Q4 2018, from 2.8% in Q4 2017[vii]. We are worried about the specter that when Europe’s economic locomotive sneezes, the rest of the continent catches a cold.

Unfortunately, the situation in most of Europe is just as gloomy. According to Eurostat, Italy experienced 0% growth in real GDP year-over-year in Q4 2018 (compared to 1.7% in Q4 2017), while France’s real GDP grew 1.0% in Q 2018 (compared to 2.8% in Q4 2017)[viii]. While Italy seems hard pressed to enact aggressive pro-growth stimulus due to European Union budgetary rules, there doesn’t seem to be much appetite by President Macron to catalyze the French economy by increasing business-friendly incentives. Furthermore, the ongoing protests by the yellow vests inside France, which underscore the economic frustration among many French people, should hamper the growth picture further. And across the Channel, the UK may or may not struggle with Brexit, and while the eventual outcome could be positive, strains during any transition are likely.

The sluggish GDP data in Europe is supported by poor industrial production, which has been declining in Italy, the UK, France and Germany since late 2017. In sum, the four leading European economies appear to be simultaneously entering a state of economic distress.....
....MUCH MORE

Enough footnotes to make Bloomberg's Matt Levine envious.

Sunday, May 19, 2019

"Moscow to Weave AI Face Recognition into Its Urban Surveillance Net"

London wannabe.
From Defense One:

City authorities say the planned system will have access to all 160,000 existing cameras.
This year, Moscow will join a growing number of global cities whose populations are monitored by AI-enabled facial recognition programs.

More than 160,000 cameras already watch the capital city’s 12 million people on the streets and in its sprawling subway system, one of the world’s largest. Now Russia’s artificial-intelligence development companies will vie for the chance to have their programs run the show. This points to the growing sophistication of the country’s AI developers and the confidence the government has in implementing such technologies across the country.

Among the top contenders for the job is NtechLab, an AI startup whose FindFace face recognition technology won IARPA’s Face Recognition Challenge Prize in 2017. The following year, it was deployed for the World Cup, and supposedly uncovered property theft and prevented other crimes. In a recent interview with the Russia daily RiaNovosti, CEO Artem Kuharenko said FindFace operates as part of pilot surveillance programs in various Russian cities; in the Tartarstan region alone, he said, nearly 2,000 crimes were solved last year with the help of video surveillance.

Another contender is IVA Cognitive, which develops the IVA CV video analytics system. In the RiaNovosti interview, IVA’s CEO Alexey Tsessarsky speculated that “perhaps the city will choose one company or organize something like a consortium of several companies. The officials will divide the cameras between companies to see how each copes with the task. Thus, the competition will continue, and the technology will continue to develop.”

Tsessarsky said Moscow authorities want the facial-recognition system primarily to prevent and solve crimes. “The video stream from all connected cameras is analyzed, faces are recognized and saved for some time in the database,” he said. “Then a photo of a person from the wanted list is loaded into the system and a search is performed among the accumulated history. The program shows which cameras and when they saw this person. You can restore his travel route, determine where and when he was last, download a video from there and see what he did there.”...
...MORE

Also at Defense One:
Surveillance Cameras Will Soon Divine Your Personality from Eye Movements
DEA and ICE are Hiding Surveillance Cameras in Streetlights

"New crop-destroying pest enters China amid devastating swine fever epidemic"

From United Press International (also on blogroll at right):
May 16 (UPI) -- A new pest that threatens key agricultural commodities is spreading through China as the nation is reeling from an African swine fever epidemic that may wipe out hundreds of millions of hogs.

The new pest is called the fall armyworm, a moth native to Central America that feeds voraciously on many commodity crops while in its caterpillar phase.

The pest "has no natural predators in China and its presence may result in lower production and crop quality," the U.S. Department of Agriculture's Foreign Agricultural Service said in an advisory. "Experts report that there is a high probability that the pest will spread across all of China's grain production area within the next 12 months."

The moth has arrived as China is losing a large percentage of its food supply to the rapid spread of African swine fever, which has spread to hogs throughout the country.

At the same time, a trade war with the United States limits China's ability to import food to fill the gap. And China had planned to increase production of the very commodities the fall armyworm feeds on.

Impact uncertain
The combined impact of all these factors is difficult to predict, experts say.
"Certainly, the simultaneous occurrence of these two elements are very unfortunate," said Keith Cressman, a forecasting officer with the United Nations Food and Agricultural Organization.

Unchecked, the pest has been shown to reduce corn yields elsewhere in the world up to 20 percent. It is unclear how China's yields will be affected....MUCH MORE

"Is Softbank’s Vision Fund… Out of Ideas?"

From Institutional Investor, May 14:
Providing capital to another capital provider is all part of the grand strategy, argues one analyst.
Softbank’s $100 billion Vision Fund surprised some industry watchers this week, when news broke of its $800 million investment in Greensill Capital.

Vastly large checks are the venture capital fund’s norm; writing them to another investment outfit is not.

Greensill Capital is a London-based nonbank provider of working capital, and announced the deal Monday. Vision Fund, raised by Japanese telecommunications company Softbank, had previously focused its capital on the biotechnology and internet sectors, typically in late-stage growth companies. 

Rather than indicating a pivot, one analyst argues that the Greensill play aligns with established strategy. The way he sees it, Vision Fund is taking advantage of a growing gap in the financial services market by investing in a tech-focused lender serving small and mid-size companies.  
“I would look at the Greensill investment as a tech investment,” EquityZen analyst Adam Augusiak-Boro told Institutional Investor in an interview Monday. “I wouldn’t think of it as a path to investing in a traditional financial firm.” ...MORE

"Death by Derivatives"

From Damn Interesting:

The opening of a canal in 1848 led to the birth of modern financial derivatives, and the early demise of some of the men who traded them
In April of 1873, an unhappy man walked along Clark Street in downtown Chicago. His name was Aymar de Belloy. There was a gun in his pocket, and a nickel – enough for one final glass of beer.
He entered Kirchoff’s tavern and sat at a table, then changed his mind about the beer. He drew his gun, pointed it at his forehead, and pulled the trigger.
The bullet careened along the inside of his skull like a speed skater on a banked turn. It stopped at the left temple, sparing his brain. Belloy rose and staggered to the bar, shaking hands with the horrified men he passed along the way. Upon reaching the bartender, he apologized in all sincerity for the inconvenience he had just caused. Then he collapsed.
Belloy was a speculator, or “plunger” as they were then known, at the Chicago Board of Trade, where traders negotiated contracts for the future sale of wheat and other such goods. The value of these contracts was based on, or derived from, the current price of wheat. Hence they would one day take the name we use today: derivatives.
In the 1870s, with few rules in place, a man could make a fortune plunging wheat. He could also lose a fortune, and with it the will to live. Indeed, the string of early derivative traders taking their own lives grew long enough that one writer gave it a name: the “crimson thread of suicide.”
The scale of today’s derivatives market is almost too vast to comprehend. It’s measured in trillions of dollars. Traders, aided by the most sophisticated software money can buy, place bets — billions per second — on the future prices of every manner of stuff. The market hardly exists in any tangible physical sense; most trading takes place across a network of countless devices at data centers around the world.
But in 1873, the global derivatives market was centered in one building on LaSalle Street in Chicago. And it would not have existed at all were it not for the digging of a very long ditch some 25 years earlier.
In 1848, an army of Irish immigrants finished digging the Illinois and Michigan Canal. It was ninety-six miles long and surprisingly shallow—a tall man could stand on the bottom and not dampen his bowler. The canal connected the Chicago River with the Illinois River, which in turn fed the mighty Mississippi, opening an inland waterway from New Orleans to New York. 1848 was also the year Chicago saw its first railway, and stockyard. Its first telegraph and steam-powered grain elevator? Same year.

Indeed, a city’s annus mirabilis (“wonderful year”) doesn’t get much more mirabilis than Chicago’s 1848. These advances would soon turn the city into, well, Chicago, simply by making it so much easier for stuff to move between east and west.

And boy oh boy did stuff thus move: grain, lumber, salt, sugar, pigs, and cattle began floating or rolling into this town on the southern tip of Lake Michigan like never before. There it was unloaded, weighed, graded, sold, stored, and reloaded onto boats or trains heading the other way.

In March of 1848, a dozen or so businessmen gathered to form an alliance of business interests, or what we would today call a trade association. It was a brilliant idea whose only problem was the apparent lack of anything for these fellows to actually do. 
Founders of the Chicago Board of Trade were determined to find something, but interest soon began to wane. To persuade members to show up for meetings, the founders began offering a free lunch of crackers, cheese and ale. Lines soon formed at the door, filled with men from all walks of life who were only too happy to attend meetings in exchange for free booze—or what we would today call, well, a trade association. The Chicago Board of Trade hired a bouncer to keep the freeloaders at bay, but this still left the nascent organization with very little to do. That would soon change.

Before 1848, farmers carted sacks of wheat into the city, behind horses on unpaved roads, and then sold it directly to buyers. When the canal and railroads lowered shipping costs, far more of the golden grain poured into the city, where it was loaded into grain elevators in exchange for a receipt.
With wheat no longer associated with an individual farmer, it became an exchangeable common good, or commodity, with one bushel of a given grade as good as any other. This at last gave the Chicago Board of Trade something to do: It provided an exchange, a place where buyers and sellers could gather in pits and shout out prices at which they were willing to trade.

It didn’t take long for traders to innovate in this new space. In addition to trading wheat already in an elevator, known as physical wheat, they made deals for so-called future wheat not yet in an elevator but expected to arrive at some later date. Such “to-arrive” contracts would eventually take the name used today: futures. Anyone planning to buy or sell future wheat could lock in a price days, weeks, or months in advance. This, of course, required someone to be on the other side of the trade. Sometimes a miller could find a farmer willing to sell, or vice versa, but not always. Enter the plungers.

These fellows had no interest in actually buying or selling grain. They wanted only to profit on price changes, caring not a whit about wheat. They would buy an elevator receipt simply on a hunch that prices would rise, at which time they could sell it at a profit. Or, if the trader foresaw a price decline, he could borrow someone’s receipt, sell it for cash, and later buy it back at a lower price in order to return it to its lender, keeping the difference as a profit. (This is known as shorting a market and is precisely how short selling of stock works today.)

One such plunger was Aymar de Belloy. A French nobleman, scion of one of the oldest and most prominent families in France, Belloy started adulthood with an inheritance of $300,000 ($9 million in today’s dollars)—most of which he immediately proceeded to squander. In 1868, he brought the remnants of his fortune to Chicago to speculate on wheat. He managed to stay afloat long enough to marry and father a number of children, then his luck ran out. And so did the last of his money....MORE

Saturday, May 18, 2019

Papal Indulgences: "The story of the Avignon papacy and an acclaimed Rhône wine"

From Lapham's Quarterly:

Papal Indulgences

Sur le Pont d’Avignon
On y danse, On y danse
(On the bridge of Avignon, there we dance, there we dance)
—Fifteenth-century song and children’s rhyme
Beautifully sited on the Rhône River, about fifty miles inland from the Mediterranean Sea, the town of Avignon is undoubtedly one of the most alluring locales in Provence. Underneath the towering Gothic heights of the fourteenth-century papal palace, its charming streets and squares are lined with small boutiques and cafés thrown open to the sun. Les Halles, the central food market, brims with olives, fresh herbs and spices, oysters, and an enormous variety of local cheeses, meats, and breads. In the surrounding countryside, the Côtes du Rhône wine region produces some of the finest varieties in France.
The indisputable sovereign of the southern Rhône wines is Châteauneuf-du-Pape, a strong, earthy red that was among the first French wines to receive an AOC (appellation d’origine contrôlée) after the invention of the classification scheme in the early twentieth century. Its distinctive terroir is centered around the village that bears the same name, which translates to New Castle of the Pope. It thus serves as a viticultural legacy of a brief yet pivotal era in the history of France and the Catholic Church, known forevermore as the “Avignon papacy.” It’s a tale replete with fantastic castles, poisonous plots, and antipopes—legends that have endured for far longer than the complicated politics that brought them into being.

If we return to the days of Philip the Fair, in the early 1300s, we may remember it was a newly elected French pope, Clement V, who allowed Philip to suppress the Knights Templar. Clement had been elected on the strength of his skills as a diplomat, at a time when relations between France and the papacy were severely strained. As one of his main tasks was to enact some sort of reconciliation with the French king, he decided to take up residence in Avignon. Its location on the Rhône, not far from the Mediterranean and Italian shores, made it a convenient location for traveling around Europe. A large tract of territory next to Avignon was actually owned by the papacy. And Rome was a dangerous place at that time, torn apart by power struggles among its leading families, leaving the pope extremely vulnerable. In fact, so volatile was the capital that it was not unusual then for the popes to reside outside of Rome. Clement broke new ground, however, in deciding to reside outside of Italy entirely, and in leaving a long line of popes after him in the same location. This era, in which seven consecutive French popes remained ensconced in the pleasurable idyll of Provence, is known as the Avignon papacy.
Pope Clement V receiving a deputation of lawyers and monks, from “Clementis Quinti Constitutiones,” 1511. © The Trustees of the British Museum.

Pope Clement V receiving a deputation of lawyers and monks, from “Clementis Quinti Constitutiones,” 1511. © The Trustees of the British Museum.
The Italians, needless to say, were not pleased by this papal abandonment. Critics referred to the Avignon papacy as the “Babylonian captivity,” arguing that the papacy had been subordinated to the French kings and the spiritual integrity of the Church had been compromised. In Dante’s Inferno, Clement V is depicted in the eighth circle of hell.

Yet this terrible sinner left a rather heavenly legacy here in the earthly realm: Château Pape Clément, produced near Bordeaux. Before becoming pope, Clement had been archbishop of Bordeaux, and there he received a vineyard in donation. He cultivated it carefully and extended its size. When he became pope, the vineyard became known as Vigne du Pape-Clément. The vineyard still has a very good reputation today, producing mainly rich and fruity wines. It can arguably claim to be one of the oldest wine-producing establishments in the Bordeaux wine region.

After Pope Clement died near Avignon in 1314, rival factions in the Sacred College of Cardinals were incapable of agreeing on a new pope. After two years, the French king essentially forced them to a vote, and they elected a frail, seventy-two-year-old French cardinal who became John XXII. Their hope was that he would have a short reign, during which each faction could strengthen its position for the next election. But their hopes were dashed, as John XXII went on to reign for eighteen years (some say his apparent ill-health had all been an act). He had previously been the bishop of Avignon and was happy to stay in place, given the continuing turmoil in Rome. His longevity was often attributed to one of his strange eating habits: he preferred to eat mainly white food products, such as milk, egg whites, white fish, chicken, and cheese. A gastronomic specialty of Avignon known as papeton d’aubergines, a sort of flan made with the (white) flesh of eggplants and originally shaped like the papal hat, is sometimes said to have originated during his reign.
The greatest gastronomic legacy of John XXII was not to be eggplants, however. In an effort to periodically escape the intrigues of Avignon, he established a summer residence in a small place now called Châteauneuf-du-Pape, in the Rhône Valley north of the city....
....MUCH MORE

"The Raisin Situation"

From the New York Times, April 27, 2019:

One man wanted to change the raisin industry for the better. He got more than he bargained for.
FRESNO, Calif. — Millennials just weren’t eating raisins. So Sun-Maid, the century-old company with the iconic little red raisin boxes, hired someone to convince them that they should.
At 38, Harry Overly was decades younger than the tenured raisin man he replaced as the chief executive of Sun-Maid. But he had experience — as the North American head of the company that makes Bertolli olive oil, and in marketing roles at Wrigley and other food companies. He seemed suited to the job.

When he came west, though, he was taken aback by the level of animosity he encountered in the U.S. raisin industry, the entirety of which is crammed into a few hundred square miles in California’s Central Valley. 

Three months into his tenure, which began on Halloween of 2017, Mr. Overly attended a meeting of some raisin industry players in the back room of a restaurant in Fresno, Calif. This introduction left him shaken. “I’m not saying this lightly, because — you can read about this in different spots — people kind of think there’s this raisin mafia out there and that kind of stuff,” Mr. Overly said. 

He said that he asked the group how they thought they could work together. “And the answer I got back was nothing short of collusion,” he said. While no one was proposing they take action, the anti-competitive tactics discussed in that back room, he said, were “completely illegal.”

As he tried to make changes in the raisin industry and at his own company, Mr. Overly said he faced intimidation, harassing phone calls and multiple death threats. With his spouse in the last trimester of a pregnancy, Mr. Overly found a note shoved into a crack of his front door that warned: “you can’t run.”

Mr. Overly installed a security system at his house in Fresno. At Sun-Maid headquarters, he and other executives discussed the necessity of active shooter trainings. As rumors about Mr. Overly’s motives swirled among raisin farmers, raisin packers and raisin bureaucrats, he became increasingly concerned about the safety of the raisins themselves. He feared that the current crop, drying from grapes to a wrinkly, shrunken state in bins on the Sun-Maid campus, would be set ablaze. It was their destruction by “fire, specifically,” that worried him, he said.

“What I figured out fast was that this was not an industry which was interested in figuring out how you grow the size of the pie,” he said. “It is one where they figure out how they just steal different slices of the pie from each other.”
https://static01.nyt.com/images/2019/04/28/style/27RAISINS-exterior/27RAISINS-exterior-superJumbo.jpg?quality=90&auto=webp
The world's largest raisin box at the Sun-Maid headquarters in Kingsburg, Calif.
Credit Christie Hemm Klok for The New York Times 
The Dancing of the Raisins
It makes sense that Sun-Maid and its competitors in the raisin sector, all working and living in the same water-hungry valley, might not be the best of friends. But the American raisin industry, which is estimated to be worth about $500 million, is particularly fractious. Other groups of farmers also band together to set prices; while raisin growers do that, they do not tend to cooperate on much else. That includes a reluctance to work together on raisin advertising, which is especially strange given that the raisin industry commissioned and paid for one of the world’s most recognizable advertising campaigns.

The first California Dancing Raisins commercial debuted on television in the fall of 1986. You may recall the ad with their version of Marvin Gaye’s “I Heard It Through the Grapevine.” These anthropomorphic raisins, conceived as an R&B group in the Motown mold, were some of the first animated characters created with Claymation. 

Seth Werner, the copywriter at the San Francisco agency Foote, Cone & Belding who created the concept, knew the spots were outrageously popular. He got a call from Paul McCartney’s assistant, asking for a taped copy of the ad so the Beatle could watch it on repeat. Nancy Reagan invited the raisins to the White House in 1988 for Christmas. Michael Jackson requested that he personally be raisinified by the inventor of Claymation, Will Vinton, for a raisin commercial that appeared in movie theaters. (“It was really quite a problem getting the character of the Michael Jackson raisin to be good enough for Michael to approve,” Mr. Werner said. He remembered that Mr. Vinton told him “‘Finally I put Janet’s nose on him and he loved it,’” referring to Mr. Jackson’s sister.)

Raisin sales spiked. But success bred discontent. Even as Sun-Maid benefited disproportionately from the ads as the biggest brand in town, Barry Kriebel, then the company’s president, worked to limit his competitors from profiting in the same manner. He was dead set on restricting the way that the dancing raisin was displayed on the packaging of other brands — and Sun-Maid, which now represents about 40 percent of the industry, was big enough to put the pressure on.

Barry Kriebel “and I fought like cats and dogs,” said Kalem Barserian, 81, the leader of the Raisin Bargaining Association, which represents raisin farmers as they negotiate prices with raisin processors, including Sun-Maid. (Mr. Barserian has known five different Sun-Maid chiefs — and has a long tenure as one of the most formidable men in Fresno.)....

Next week, Big Tuna 

Where In the World Is David Keohane? "BNP Paribas rolls out hologram projection technology"

Mr. Keohane is a correspondent for the Financial Times formerly Mumbai, currently Paris.
It was from his Twitter feed we got the Pamela Anderson tweet at the bottom of last night's "FT Alphaville: Now With More Pamela Anderson":
The Keohane tweet looks legit, short, punchy, slightly bemused. I think it is Mr. K. tweeting.
On the other hand, after disappearing from the pages of the FT for a month we see ten stories since May 12 on his FT stream page. And oddly enough the first of these, "Nissan’s parable of shoddy governance" is actually bylined 'Leo Lewis in Tokyo' and although Mr. Keohane has become a prime source for the Renault end of the Ghosn débâcle he also covers the big French banks.
And it is very unlike him to pass on the opportunity to report on holographic French bankers.
So what's up? Is Mr. Keohane back or not?

Here's the press release, May 17:

BNP Paribas rolls out world premiere teleportation meetings with Magic Leap & Mimesys
  • BNP Paribas is unveiling the teleportation meeting as it is convinced that immersive technologies (Augmented Reality, Virtual Reality or Mixed Reality) offer a unique experience for clients
  • This innovation enables the remodeling of interactions between people, whether employees or customers, in different locations. It also reduces their environmental impact and invents a new customer journey as well as new working methods
BNP Paribas, through three of its business lines - Real Estate, Corporate and Institutional Banking, and Wealth Management – is launching the possibility to hold teleportation meetings in five locations: Hong Kong, Dubai, London, Frankfurt and Paris. Each business will be equipped with Magic Leap Ones, a lightweight, wearable spatial computer, to conduct collaborative meetings remotely.

In collaboration with Magic Leap, the pioneer of spatial computing technologies, and Mimesys, a French and Belgian startup that develops leading spatial co-presence platform, BNP Paribas Real Estate will implement this innovative solution which was tested over a one-year period.

As a first step, the technology will allow various types of clients of the bank, particularly those of Corporate and Institutional Banking and Wealth Management, to be offered real-estate investment opportunities via a hologram with the BNP Paribas Real Estate teams. For example, a client in Hong Kong or Dubai could be in contact, via a teleportation meeting, with an expert consultant in London, Paris or Frankfurt and interact with virtual objects. The marketing of real estate anywhere in Europe will thus be facilitated by being both faster and more cost-effective, and the environmental impact of travelling will be limited....
...MORE

There is supposedly a video to go with the p.r. but I didn't see it on the press release or at L’Atelier BNP Paribas.

Some Alternative Thinking On Uber

Although this thread starts off on the wrong foot with "never" (see after the jump) the tweeter raises a couple interesting points.
Thread

Regarding the "underwater investors", as early as June 2015 we were posting:
This and the rabbit post below are an attempt to distract Uber's late investors, the currently-being-raised series F and February's series E Uber investors, from the earlier news out of California.
The series A guys, First Round, Benchmark et al. should still be okay.
(they ponied up $11 million at a $60 million valuation)
And combining the autonomous schtick with concern for tardy investors here's our intro to an April 2017 post "Uber isn't sure if it can 'remain a viable business' without building self-driving cars"
If I were a late round Uber investor this would be a bit concerning.
We've posted on Kalanick and his "existential" quote, which is one thing, but this is a statement to a Federal Court....
A look at Uber's evolving explanations-for-being show that Uber's top management knew from the very beginning that the predatory pricing they were using to drive out competition was not sustainable in a war of attrition vs. the incumbent taxi operators. Here is a near-genius encapsulation of that evolution. The creator, Tom Slee made his bones in the data world with a deep dive into what Airbnb was up to. This post is also from 2017, February this time, so prior to Travis Kalanick's forced resignation in June of that momentous (for Uber) year.

"A Lone Data Whiz Is Fighting Airbnb — and Winning"
We don't have any prior posts on Mr. Cox. 
Re: Mr. Slee, on February 1st we followed a hat tip and referral chain back to one of the funniest (because it's true) descriptions of Uber you're likely to find: 
It sounds like Ben Thompson is falling for the Uber bait and switch. Stages of which:
Uber has a nice business as a status product (Uber Black Car ~ 2010)
Uber Black may not be profitable, but Uber will displace taxis and be hugely profitable because of technology-driven efficiencies (UberX: 2014-2015)
UberX may not be profitable, but UberPool will lead to new efficiencies in mass transit (2015-2016)
UberX may not be profitable, but Uber is a logistics company and will rewrite the rules of delivery (UberEats, various speculative stories, 2013-2015)
UberPool may not be profitable, but when Uber displaces car ownership the scale of the market will make it profitable (2016)
Uber with drivers may not be profitable, but driverless cars will make Uber profitable (2014-)
Driverless cars may not be profitable, but Uber is looking into flying vehicles (2016)
See also:
September 2018
Uber's Long Road To Profitability: eBikes, That's The Ticket !!
Can't Stop Laughing."....

The whole thing was what we call a Create-a-Corp fraud, where you take in investor's money on a false premise/promise and cast about for a viable business while still making the pitch you know isn't true.
Again from February 2017:
Jalopnik: "Uber Is Doomed"
Readers who have followed the Uber story over the last few years, especially if you read Izabella Kaminska at FT Alphaville, know that despite posting on the lurid details from time to time (us more than she) our (and her) focus has been on the business/finance/econ aspects of Uber, although the political economy and other social science stuff can't help appearing, because what Kalanick built was in his own image....

...So yeah, although the focus has been on the quantifiable, the soft science stuff is there as well and may be the thing that takes Uber down. At least that's the charitable interpretation, that Kalanick, blinded by hubris didn't see the flaws in the business plan.

The less favorable interpretation is that he knew all along and kept pushing in the hope that magic would happen.
That would be a fraud.
 So yeah, knowing the low fares/higher driver pay model wouldn't work, but being unable to say that without cutting off the absolutely essential flow of new investment we got stuff like this out of the CEO:
"We're at the very beginning stages of becoming a robotics company," Uber CEO Travis Kalanick said at the Vanity Fair Summit in San Francisco in October. "As we move toward the future, autonomy is a pretty critical thing for us. It's existential."
-via c|net, Dec. 2016
I think he chose his words carefully, an existential threat literally threatens the existence of a firm and he has known since at least 2014 that without major breakthroughs in autonomous vehicles Uber could never be worth what they had convinced investors to pay:
"When there's no other dude in the car, the cost of taking an Uber anywhere becomes cheaper than owning a vehicle. So the magic there is, you basically bring the cost below the cost of ownership for everybody, and then car ownership goes away."
-Uber CEO Travis Kalanick, May 28, 2014

And just so you know, we were on top of the flying vehicles:

October 27, 2016
Uber to Challenge Airbus in the Autonomous Electric Flying Taxi Business
As the only analysts covering the nascent as-yet-theoretical autonomous electric flying taxi market we intend to be the the go-to source for all things autonomous electric flying taxi and/or theoretical....

Frank Pasquale: "Tech Platforms and the Knowledge Problem"

First posted May 28, 2018.

From American Affairs Journal, :

About the Author
Frank Pasquale is professor of law at the University of Maryland and an affiliate fellow at Yale Law School’s Information Society Project. He also served as a member of the Council for Big Data, Ethics, and Society. 
 
In an era of artificial intelligence and mass surveillance, however, the possibility of central planning has reemerged—this time in the form of massive firms. Having logged and analyzed billions of transactions, Amazon knows intimate details about all its customers and suppliers. It can carefully calibrate screen displays to herd buyers toward certain products or shopping practices, or to copy sellers with its own, cheaper, in-house offerings. Mark Zuckerberg aspires to omniscience of consumer desires, by profiling nearly everyone on Facebook, Instagram, and WhatsApp, and then leveraging that data trove to track users across the web and into the real world (via mobile usage and device fingerprinting). You don’t even have to use any of those apps to end up in Facebook/Instagram/WhatsApp files—profiles can be assigned to you. Google’s “database of intentions” is legendary, and antitrust authorities around the world have looked with increasing alarm at its ability to squeeze out rivals from search results once it gains an interest in their lines of business. Google knows not merely what consumers are searching for, but also what other businesses are searching, buying, emailing, planning—a truly unparalleled matching of data-processing capacity to raw communication flows.

Nor is this logic limited to the online context. Concentration is paying dividends for the largest banks (widely assumed to be too big to fail), and major health insurers (now squeezing and expanding the medical supply chain like an accordion). Like the digital giants, these finance and insurance firms not only act as middlemen, taking a cut of transactions, but also aspire to capitalize on the knowledge they have gained from monitoring customers and providers in order to supplant them and directly provide services and investment. If it succeeds, the CVS-Aetna merger betokens intense corporate consolidations that will see more vertical integration of insurers, providers, and a baroque series of middlemen (from pharmaceutical benefit managers to group purchasing organizations) into gargantuan health providers. A CVS doctor may eventually refer a patient to a CVS hospital for a CVS surgery, to be followed up by home health care workers employed by CVS who bring CVS pharmaceuticals—all covered by a CVS/Aetna insurance plan, which might penalize the patient for using any providers outside the CVS network. While such a panoptic firm may sound dystopian, it is a logical outgrowth of health services researchers’ enthusiasm for “integrated delivery systems,” which are supposed to provide “care coordination” and “wraparound services” more efficiently than America’s current, fragmented health care system.

The rise of powerful intermediaries like search engines and insurers may seem like the next logical step in the development of capitalism. But a growing chorus of critics questions the size and scope of leading firms in these fields. The Institute for Local Self-Reliance highlights Amazon’s manipulation of both law and contracts to accumulate unfair advantages. International antitrust authorities have taken Google down a peg, questioning the company’s aggressive use of its search engine and Android operating system to promote its own services (and demote rivals). They also question why Google and Facebook have for years been acquiring companies at a pace of more than two per month. Consumer advocates complain about manipulative advertising. Finance scholars lambaste megabanks for taking advantage of the implicit subsidies that too-big-to-fail status confers.

Can these diverse strands of protest and critique coalesce into something more durable and consistent? In what follows, I explore two channels for the social and economic discontent likely to intensify over the next few decades. I start by giving an account of where we are: a hierarchical, centralized regime, in which corporate power is immense, and in which large national apparatuses of regulation seem to be the only entities capable of reining it in. Against this economic reality, I can at present discern two vital lines of politico-economic critique.

Populist localizers want a new era of antitrust enforcement to break up giant firms. These Jeffersonian critics of big tech firms, megabanks, and health care behemoths are decentralizers. They believe that power is and ought to be distributed in a just society. They promote strong local authorities to counterbalance the centripetal accumulation of wealth and power in multinational firms.
Others have promoted gigantism as inevitable or desirable, and argue that we simply need better rules to cabin abuses of corporate power. Today’s Hamiltonians argue that massive stores of data are critical to the future of artificial intelligence—and thus to the productive dynamism of the economy. They focus on improving the regulation of  leading firms rather than on breaking them up.
Jeffersonians and Hamiltonians express very different views on what an optimal economy looks like. In the long run, their visions are probably irreconcilable. In the short run, however, both sets of reformers offer important lessons for policymakers grappling with the power of massive tech, finance, and health care firms. This essay explores these lessons, specifying where each vision has comparative advantage.
The Jeffersonian/Hamiltonian Divide
The tech policy landscape is often bleak. Corporate-funded think tanks strive to keep reform options within a relatively narrow window of tweaks and minor changes to existing law. The curse of overspecialization in the academy also keeps many law and policy professors on a short leash. Nevertheless, there are pockets of vision, scholars and researchers who offer big-picture approaches. Clashes among centralizers and decentralists can be particularly illuminating.

The Jeffersonian school has coalesced around the problem of lax antitrust enforcement in the United States, and competition promotion more generally. The Open Markets Institute (OMI), kicked out of the New America foundation for being too hostile to Google, has led the charge. Leaders at OMI, like Matt Stoller and Barry Lynn, argue that the Federal Trade Commission (FTC) should break up Facebook and establish Instagram and WhatsApp as competing social networks. Lina Khan, also at OMI, has written an exhaustive critique of Amazon’s gigantism that is already one of the Yale Law Journal’s most downloaded articles. The emphasis on subsidiarity in Catholic Social Thought is also a font of decentralist theory, often invoked by conservatives to protect the autonomy of local authorities and civil society institutions.

The Hamiltonians include traditional centrists (like Rob Atkinson, who recently coauthored Big Is Beautiful with Michael Lind), as well as voices on both ends of the political spectrum. Recapitulating Schumpeter’s praise of monopoly as a spur to growth, Peter Thiel’s Zero to One is a paean to monopoly power, justifying its perquisites as the just and necessary reward for dramatic innovation. On the left, Evgeny Morozov does not want to see the data stores of the likes of Google and Facebook scattered to a dozen different versions of these services. Rather, he argues, they are natural monopolies: they get better and better at each task they take on when they have access to more and more pooled data from all the tasks they perform. The ultimate Left logic here is toward fully automated luxury communism, in which massive firms use machine learning and 3-d printing to solve hunger, save the environment, and end the problem of scarcity. Left centralizers also argue that problems as massive as climate change can only be solved by a Hamiltonian approach.

The Jeffersonian and Hamiltonian visions lead to very different policy recommendations in the tech space. Jeffersonians want to end Google’s acquisition spree, full stop. They believe the firm has simply gotten too powerful. But even some progressive regulators might wave through Google’s purchase of Waze (the traffic monitoring app), however much it strengthens Google’s power over the mapping space, in hopes that the driving data may accelerate its development of self-driving cars. The price of faster progress may be the further concentration of power in Silicon Valley. To Jeffersonians, though, it is that very concentration (of power, patents, and profits) in megafirms that deters small businesses from taking risks to develop breakthrough technologies.

Facebook’s dominance in social networking raises similar concerns. Privacy regulators in the United States and Europe are investigating whether Facebook did enough to protect user data from third-party apps, like the ones that Cambridge Analytica and its allies used to harvest data on tens of millions of unsuspecting Facebook users. Note that Facebook itself clamped down on third-party access to data it gathered in 2013, in part thanks to its worries that other firms were able to construct lesser, but still powerful, versions of its famous “social graph”—the database of intentions and connections that makes the social network so valuable to advertisers.

For Jeffersonians, the Facebook crackdown on data flows to outside developers is suspicious. It looks like the social network is trying to monopolize a data hoard that could provide essential raw materials for future start-ups. From a Hamiltonian perspective, however, securing the data trove in one massive firm looks like the responsible thing to do (as long as the firm is well regulated). Once the data is permanently transferred from Facebook to other companies, it may be very hard to ensure that it is not misused. Competitors (or “frenemies,” in Ariel Ezrachi and Maurice Stucke’s terms) cannot access data that is secure in Facebook’s servers—but neither can hackers, blackmailers, or shadowy data brokers who are specialists in military-grade psyops. To stop “runaway data” from creating a full-disclosure dystopia for all of us, “security feudalism” seems necessary.

Policy conflict between Jeffersonians and Hamiltonians, “small-isbeautiful” democratizers and centralist bureaucratizers, will heat up in coming years. To understand the role of each tendency in the digital sphere, it is helpful to consider their approaches in more detail.
The Jeffersonian Critique of Absentee Ownership
The largest, most successful firms of digital capitalism tend to serve as platforms, ranking and rating other entities rather than directly providing goods and services. This strategy enables the platform to outsource risk to vendors and consumers, while it reliably collects a cut from each transaction. Just as a financial intermediary profits from transaction fees, regardless of whether particular investments soar or sour, the platform pockets revenues on the front end, regardless of the quality of the relationships it brokers.

This intermediary role creates numerous opportunities for platforms. For example, they police transactions and adjudicate disputes—actions that used to be the preserve of governments. I call this powerful new role of platforms “functional sovereignty,” to denote the level of power a private firm reaches when it is no longer one of many market participants, but instead the main supervisor and organizer of actual market participants. Platforms like Amazon and Google are functionally sovereign over more and more markets, playing a quasi-governmental role as they adjudicate conflicts between consumers, marketers, content providers, and an expanding array of third and fourth parties.

Personalization is a mantra for the platforms’ digital strategists, who tend to assume it is a “win-win” proposition. For example, tailored search results both guard Google’s users against distraction and tend to connect them to products they want. Yet online markets premised on ever-greater knowledge of our desires, “pain points,” income level, and wealth can easily tip toward exploitation. Platforms have an interest in intensively monitoring and shaping certain digital spheres in order to maximize their profits (and, secondarily, to maintain their own reputations). In their ceaseless quest to annex ever more sectors into their own ecosystems, however, they all too often bite off more than they can chew. They tend to overestimate automation’s ability to process all the demands that modern marketplaces generate.

This tendency has led to another problem, familiar from the history of monopolistic enterprise: absentee ownership. When a massive firm buys a store thousands of miles away from its headquarters, it owns the store and will seek profit from it, but it usually only assesses its performance in crude terms, with little interest in the community in which the store is embedded. Once under new ownership, the store may neglect traditional functions it had previously served, in order to maximize revenue in accordance with its absentee owner’s demands. In contrast, a present owner, resident in the community, is more likely to run the store in a way that comports with community interests and values, since the present owner will himself experience any improvement or deterioration in the community....MORE