Wednesday, December 13, 2017

"Justice Department confirms criminal probe in Uber case"

First up.
A recent letter from the U.S. Attorney's office confirms the Justice Department has opened a criminal investigation connected to allegations that a former Uber executive stole self-driving car technology from a Google spin-off to help the ride-hailing service build robotic vehicles.

The letter unsealed Wednesday by a federal judge marks the Justice Department's first acknowledgement of the probe....MORE
And from's The Recorder:

Unsealed Now: Letter from Federal Prosecutors in Waymo v. Uber
Read the letter the U.S. attorney’s office sent alerting Judge William Alsup to an explosive allegations a former Uber employee had passed to an in-house Uber attorney. The letter was unsealed and posted publicly Wednesday in the Waymo v. Uber docket.

U.S. District Judge William Alsup, who is overseeing Waymo’s autonomous car trade secrets showdown with Uber, on Wednesday unsealed a letter the U.S. attorney’s office sent alerting the judge to explosive allegations a former Uber employee had passed to an in-house Uber attorney.... 
...MORE, including the letter.

Interpreting the Yield Curve: Counterintuitive Stimulative Effects of Rate Hikes

The writer, David Andolfatto is Vice President of the Federal Reserve Bank of St. Louis.
Views should in no way be attributed to the Federal Reserve Bank of St. Louis, or to the Federal Reserve System.
Neither should the blog be taken as an endorsement of the fashion sense of the Federal Reserve Economics Data clothing line:
The FRED Team

Posted in FRED Announcements
From Macromania, Nov. 27:

Interpreting the yield curve
There's been a lot of talk lately about the flattening of the yield curve, what's causing it, and what it portends. In this post, I describe a simple "neoclassical" theory of the yield curve and ask to what extent it serves as a useful guide for our thinking on the matter.
Let's start by defining terms. Let I(m) denote the yield (market interest rate) on (say) a U.S. treasury bond with maturity m. So, I(1) denotes the yield on a one-year bond and I(10) denotes the yield on a ten-year bond. The slope (S) of the yield curve is given by the difference in yields between long and short bonds. In this example, S = I(10) - I(1).

Here's what the yield curve looks like for the U.S. since 1961.

Normally, the slope of the yield curve is positive. But occasionally, it turns negative -- an event that is called yield curve inversion. Market analysts care about yield curve inversion because the event is frequently (though not always) followed by a recession (the shaded bars represent recessionary episodes).

The graph above plots the nominal yield curve. Economists frequently stress the importance of real (inflation adjusted) interest rates, which I will denote R. Because there is a ten-year Treasury-Inflation-Protected Securities (TIPS), we have a market-based measure of R(10). Let me compute     R(1) = I(1) - P(1), where P(1) denotes expected year-over-year inflation. Let me use the year-over-year change in core PCE inflation as my measure of P(1). That is, I am assuming that over the short-run, the market expectation of inflation is roughly last year's core (trend) inflation rate. Since TIPS data is only available since 2003, here is what we get:
The nominal and real yield curve share the same broad pattern. This is consistent with what we would expect if inflation expectations are stable. Note the slight bump up in the nominal yield curve following the November 2016 presidential election. Since then, both yield curves have been flattening--the real yield curve more so than the nominal curve. Does this mean we are heading for recession, or at least a growth slowdown? And if so, why? 
Postscript 11/27/2017 Some further thoughts. ***********************

Consider a world where real economic growth remained constant, i.e., y2/y1 = y3/y2 = y4/y3 = ...
In such a world, the yield curve would be perpetually flat. In a world where output fluctuated around a constant trend, the slope of the yield curve would be zero on average. (I am abstracting from inflation risk, etc.)

In reality, the yield curve is usually positively sloped. It seems unlikely that the explanation for this is that investors are perennially bullish (in the sense of expecting accelerated growth). There are other factors that may impinge on bond yields at different horizons and hence on the slope of the yield curve. One such factor is the liquidity premium attached to short-maturity debt. If the short bond in the model above is valued for its liquidity (and if liquidity is "scarce" in a well-defined sense that I don't have room to explain here), then the market yield of the short bond will be lower than what is dictated by "fundamentals." In other words, short bonds will seem very expensive. If this is the case, then the yield curve may be positively sloped even if the growth outlook is stable (instead of bullish).

To the extent that the Fed can influence the liquidity premium on bonds (and there is good reason to believe it can), then raising the policy rate in the present environment would serve to diminish the liquidity premium on bonds. In the model economies I know of where such a liquidity premium exists, eliminating it actually stimulates economic activity. This is because liquid bonds, to the extent they are used as exchange media, actually complement investment spending instead of crowding it out (as is the case in other models that abstract from the liquidity services that bonds provide).

The interpretation in this case is that raising the policy rate is reducing "financial repression," which is likely to offer modest stimulus. This policy action in itself will have no measurable impact on inflation and the associated flattening of the yield curve is what we would expect if growth prospects remain stable (the flattening yield curve does not necessarily portend recession).

Markets and Waterfowl: Machine Learning Is Only As Good As the Training It Receives

"When Google was training its self-driving car on the streets of Mountain View, California, the car rounded a corner and
encountered a woman in a wheelchair, waving a broom, chasing a duck. The car hadn’t encountered this before so it stopped and waited."
Hell, I'd stop too.
From Quartz:

AI does not have enough experience to handle the next market crash
Artificial intelligence is increasingly used to make decisions in financial markets. Fund managers empower AI to make trading decisions, frequently by identifying patterns in financial data. The more data that AI has, the more it learns. And with the financial world producing data at an ever-increasing rate, AI should be getting better. But what happens if the data the AI encounters isn’t normal or represents an anomaly?

Globally, around 10 times more data (pdf) was generated in 2017 than in 2010. This means that the best quality data is also highly concentrated in the recent past—a world that has been running on cheap money, supplied by central banks through purchases of safe securities, which is not a “normal” state for the market. This has had a number of effects, from causing a rise in “zombie” firms to creating generational lows in volatility to encouraging unusually large corporate buybacks (pdf).

With so much data residing in this era, AI might not know what a “normal” market actually looks like. Robert Kaplan, the president of the Federal Reserve Bank of Dallas, recently pointed out some of the market extremes that exist today. The essay included a caution that growing imbalances in the economy could increase the risk of a rapid adjustment....MUCH MORE

San Francisco Not Liking the Sidewalk Delivery Robots


From The Guardian, December 10:

San Francisco sours on rampant delivery robots: 'Not every innovation is great' 
Lawmakers pass regulations to cut down on delivery robots as pedestrians tire of sharing sidewalks with ‘aggressively entrepreneurial wet dreams’
In something of a reversal for San Francisco, a city that has served as a petri dish for disruptive innovations in recent years, lawmakers this week passed strict regulations to reduce the number of delivery robots that technology startups have introduced to the city’s sidewalks.

“Not every innovation is all that great for society,” said the San Francisco supervisor Norman Yee, who authored the legislation. “If we don’t value our society, if we don’t value getting the chance to go the store without being run over by a robot … what is happening?”

Yee believes that his legislation is the “first and most restrictive” of its kind. Robot permits will be capped at three per company, and nine total at any given time for the entire city. The robots will now only be allowed to operate within certain industrial neighborhoods, on streets with 6ft-wide sidewalks, and must be accompanied by a human chaperone at all times.

It’s a far cry from other jurisdictions, such as Washington DC, Virginia, Idaho and San Francisco’s neighboring Redwood City, where lawmakers have acted to legalize sidewalk robots.
But in San Francisco, delivery robots have quietly taken to the sidewalks of over the past year. Companies including Marble and Starship are developing “robots as a service” business models, whereby food delivery apps contract with the robot companies to perform their deliveries.

At scale, the robots could significantly cut down on delivery vehicles (and labor costs), but they also take up space on sidewalks, where bicycles, Segways, and sitting or lying humans are already banned. Since taking on the issue, Yee said that his office had become something of a repository for photographs taken by angry residents of the robots clogging the sidewalks amid baby strollers, bus stops, street vendors, and pedestrians....MORE

Lauren Loktev, Collaborative Fund Partner, On the Current State of VC Investing.

Part of  Cooley, LLP on the State Of Venture Capital In Q3 2017
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.
Q3 2017 Quarterly VC Update: Lauren Loktev on the State of Venture Capital Investing
A few highlights from Lauren:

On dealflow: This year, Collaborative has seen a continuation of healthy capital flow, a surplus of competition among VCs for what are perceived to be the best deals and, generally, an uptick in valuations across rounds.
On social impact: We truly believe that paying attention to social impact and having strong values and a message around moving the world forward is a competitive edge – both for businesses as well as for investors.
On Collaborative’s year: I’d say a typical case for us is making an investment every six weeks or so, and that has been consistent in 2017. I anticipate this trend to continue in 2018.

On shifting consumer behavior: Consumers are increasingly demanding products with great stories and ones that fundamentally align with their values.

Cooley Q3 VFR data indicates there has been a continued climb in median pre-money valuations across all deal stages. Added to the fact that this still seems to be a robust financing environment, based on yours and Collaborative’s experience, what are your thoughts on the data? Similar, different? Any particular views on the environment, especially from an early stage investor perspective?
Our experience has certainly matched what’s coming through in Cooley’s data. In Q4 of 2015 through Q1 of 2016, many people thought we might be seeing the top of the market and the start of a decline. It felt like there was a real pull back in terms of number of deals closing, valuation and, to some degree, round size. Generally, there was the feeling that people were starting to become a bit more bearish on the market and that those dynamics would continue.

Around that same time, many very large funds were raised. This was coincidentally the biggest quarter for VC fundraising (at a fund level, raising from LPs). So the market quickly corrected out of that phase, and it felt like by the time that we hit the end of 2016, we were getting back to where we had been before that slight softening.

This year, Collaborative has seen a continuation of healthy capital flow, a surplus of competition among VCs for what are perceived to be the best deals and, generally, an uptick in valuations across rounds.

One trend that may not perfectly come through the data, just from looking at the pre-money valuations, is that while valuations are certainly increasing at the seed level, at the same time, round sizes are also increasing. I think part of this trend stems from the fact that more traction is now required for a Series A. In some ways, seeds are now what might have been called Series As a number of years ago, and on and on through the capital stack. Therefore, many more seed rounds are being done at the $3 million dollar round size, which is much larger than we have previously seen. We have also noticed multiple companies for which it is in their interest to raise sufficient capital so that they can get to significant proof points before their Series A – mainly to ensure they have sufficient runway to reach that higher bar. I think, overall, companies that are successfully raising a Series A are probably farther along from a revenue and growth perspective than historical Series A companies.

How are you feeling about valuations? Any nerves?
Yes and no. I think that we’re going to see fluctuations in the market such as these, and that’s just the nature of investing cycles. It forces us to be more thoughtful and disciplined, and to hunt where others aren’t. The main thing that concerns me in this market is that having a lot of capital generally doesn’t encourage strong business fundamentals. I tend to believe that if a company has too much money, it can actually hurt them. There’s a level of feeling capital constrained that can actually push a business to be more nimble and to build that business in a smarter way....

We're Down to One Bank Clearing Treasury Trades

For some reason, reading our headline I can't help thinking of 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.

From The Conversable Economist: 

 What Financial Risks are Lurking

The Office of Financial Research, within the US Department of the Treasury, was created by the  Wall Street Reform and Consumer Protection Act of 2010 (commonly known as the Dodd-Frank act), to provide analysis and data  for the Financial Stability Oversight Council, another creation of the same law. It's Financial Stability Report 2017 discusses some "key vulnerabilities" of the financial system.

Cybersecurity Incidents. "Cybersecurity incidents rank near the top of our threat assessment because of the potential for disruption of operational and financial networks, and the damage such disruptions could cause to financial stability and to the broader economy. Cyber incidents can affect financial stability if defenses fail."

Resolution Risks at Systemically Important Financial Institutions. The term "resolution risk" refers to what process will begin if a big financial institution becomes insolvent. The regulators are still struggling to address some possible issues. "The treatment of derivatives held by a failing financial firm continues to present a conundrum for policymakers seeking to balance contagion and run risks against moral hazard concerns. Tools for orderly resolution of failing systemic nonbank financial firms remain less developed than for banks, despite the material impact of some nonbank failures in the past and the growing importance of nonbanks, particularly central counterparties (CCPs), in the financial system."
A Single Bank Deals with all Treasury Securities. The Treasury market will soon be more dependent on a single bank for the settlement of Treasury securities and related repos. A service disruption, such as an operational risk incident or even the bank’s failure, could impair the liquidity and functioning of these markets because some customers will need time to move their operations elsewhere. It could also disrupt other markets that rely on Treasuries for pricing and funding. The 2007-09 financial crisis showed the damage that can be done if activity in short-term funding markets is constrained. Dealers in Treasury securities use clearing banks to settle Treasury cash transactions. Since the 1990s, these services have been provided by two clearing banks, JPMorgan Chase & Co. and Bank of New York Mellon Corp. (BNY Mellon). With JP Morgan Chase’s announcement in July 2016 that it intends to cease provision of government securities settlement services to broker-dealer clients, this business will be concentrated in a single bank. A disruption in BNY Mellon’s Treasury settlement could have broad implications for the Treasury market. It could disrupt trading in Treasuries. If settlement services were interrupted for an extended period, risks could spread further to markets that rely on the Treasury market for hedging and pricing."...

"Ag Biotech Market Map: 245 Startups Using Biology & Chemistry to Revolutionize Agriculture"

Frpm Agfunder, November 22:
Editor’s Note: Brett Morris is a principal at Kansas-based venture development organization TechAccel. Here he lays out the nuances within 245 ag biotech startups and how TechAccel thinks about investments in this fundamental agrifood tech category. 

Ag Biotech (agriculture biotechnology)  applies to all technologies used on the farm involving biological or chemical processes. It is a broad category involving many types of technology and science, including breeding, genetics, microbiome research, and animal health and nutrition. Ag biotech is a central component of the agrifood tech investing landscape with startups raising $262 million in the first half of this year alone — 23% of farm technology fundraising figures — as noted by AgFunder

To better evaluate and visualize the ag biotech market landscape, we at TechAccel started to create market maps as an internal project. Over time, we realized it could be a valuable resource to share amongst peers and industry outsiders, given the venture community’s tendency to focus more on digital agtech companies.

There are 245 companies illustrated in the maps. According to our research, they have raised approximately $3.4 billion in total funding since they were founded: $500 million in animal biotech and $2.9 billion in plant biotech.

Below is a summary of our ag biotech category definitions and some commentary around a few areas we find the most compelling for investment.

Gene Editing
Gene Editing is an ag biotech tool used to precisely insert, edit, or delete the DNA of an organism. In agriculture and animal health, breeders could utilize one of several approaches including CRISPR-Cas9, TALENs, and Zinc Fingers to create disease-resistant genes, improve health and nutrition, or enhance performance at a fraction of the traditional time and cost [compared with genetic modification or traditional breeding]. Today, we believe there are excellent investment opportunities to utilize gene-editing in higher value-niche crops that are closer to the consumer such as fruits, vegetables, and nuts. These crops have higher margins compared to row crops and less competition from major agriculture conglomerates, yet still represent large addressable markets.

Breeding & Trait Technologies
Breeding is the science of changing plant traits to produce desired characteristics using methods such as conventional breeding, tissue culture and propagation, molecular breeding, and marker-assisted breeding. Biotech Traits transfer useful characteristics into a plant by inserting genes from another organism. There are a few startups developing innovative breeding and/or genetic technologies that avoid the regulatory burden of a genetically modified organism. Three examples are Epicrop Technologies, a startup using epigenetics to improve yield, stress tolerance, and vigor in several crops, Kaiima Bio Agritech, a company using mutagenesis and other technologies to improve crop performance, and Phytelligence, a startup using proprietary tissue culturing technology and protocols to produce cheaper, faster, and superior rootstocks....

"Greenback Quiet Ahead of Five Central Bank Meetings"

From Marc to Market:
The Federal Reserve gets the balling rolling today with the FOMC meeting, which is most likely to deliver the third hike of the year. Tomorrow, four European central banks meet: Norway, Switzerland, the UK, and the ECB.

The MSCI Asia Pacific Index rose nearly 0.3%, though Japanese and Indian shares were lower. In Europe, the Down Jones Stoxx 600 is paring yesterday's gains (-0.2%) led by utilities and telecom. Consumer discretion and financials are firmer. The MSCI Emerging Markets Index is up 0.3% taking back half of yesterday's loss.

US 10-year yields are pushing higher after finishing at 2.40% yesterday. European bonds yields are firmer, with Italy and France bearing the brunt. Oil prices are rebounding after yesterday's drop comes on the heels of the US industry report that showed another large drop in US inventory, part of which is being shifted toward gasoline and heating oil. In emerging markets, the Russian ruble and South African rand are doing best (0.3% and 0.2% respectively.)

As North American operators return to their desks, the greenback is little changed. It did slip to the low for the week against the yen, when it became clear that the Republicans were going to lose the Senate seat in Alabama. This reduced the Republican majority to one in the Senate. Owing the fissures in the party, this is putting at risk other parts of Trump's agenda, which Treasury Secretary Mnuchin acknowledged earlier this week is necessary to achieve the kind of growth levels that the tax bill assumes....MORE

Tuesday, December 12, 2017

We May Have Found An Actual " for carrying on an undertaking of great advantage, but nobody to know what it is”"

First though, some housekeeping on the famous sentence in the headline. It's probably apocryphal.

Not the sentence itself, that's in Mackay's "Extraordinary Popular Delusions and the Madness of Crowds", number 17 on the list of bubbles (companies) on page 57 of the 1852 edition (later editions have further embellishments). Rather the story itself probably isn't true.
Trust me, I encouraged smarter people than I to do their archival-researcher best looking for either an advertisement or prospectus to no avail. Zip, zilch, nada.

I made mention of this in the outro from a March 2016 post: "Dropbox May No Longer Be A Decacorn: Company Okays a Secondary Transaction At A 34% Discount To the Last Round's Valuation"
...Even the eager Uber investors going into Morgan Stanley's New Riders L.P. got a bit more than Business Insider, not that there's anything wrong with Axel Springer's newest acquisition, but still, a blind pool is a blind pool and if there was any truth to the hoary old South Sea Bubble story first promoted by Mackay in Extraordinary Delusions: "A company for carrying on an undertaking of great advantage, but nobody to know what it is." I'd trot it out right here, but alas there is no contemporaneous mention of that speculation nor any offering document ephemera so I'll have to be satisfied with a:
But this skepticism isn't unique to me. It turns out others trod the same ground before I and found no sign. Here's Jason Zweig at the Wall Street Journal in 2011:
The Extraordinary Popular Delusion of Believing What You Read
And at his personal blog:
...Readers should bear in mind that Mackay was a storyteller, and that modern researchers have been unable to confirm some of his best-known anecdotes—and have disproved others altogether.
Mackay describes what investors today would call a “blind pool,” an initial public offering, or IPO, that raises capital for undisclosed purposes:
…the most absurd and preposterous of all [stock offerings], and which [showed], more completely than any other, the utter madness of the people, was one started by an unknown adventurer, entitled, “A company for carrying on an undertaking of great advantage, but nobody to know what it is.”
Bloggers frequently cite this example when they want to declare something a bubble-in-the-making; a quick Google search turns up nearly 13,000 hits on “a company for carrying on an undertaking of great advantage.”...MUCH MORE
This has been a much longer than usual introduction to what is actually a short story. From ZeroHedge:

Not A Bubble?
Meet The Crypto Company - up almost 20,000% since inception in September..
To a market cap of over $12.6 billion...
Grant's Interest Rate Observer drew the world's attention to this 'company' yesterday...
Shares in over-the-counter name The Crypto Company, which listed in May and traded around $20 as recently as Dec 1st, have gone on a parabolic run in the last ten days - trading as high as $642.

That gives the Malibu, California-based business a market capitalization of $12.6 billion.

Valuing the Crupto Co. is somewhat difficult, as the only public filing on Edgar (the SEC website), is its securities offering document, in which it ticks the box "decline to disclose" under revenue range.

The company's website does note that it's in the business of providing "institutions and individuals direct exposure to the growth of global blockchain developments."..MORE
Ah yes, the 'ol "providing institutions and individuals direct exposure to the growth of global blockchain developments but no one to know what it is" business.

Earlier Today Internet Traffic To Apple, Facebook and Google Was Being Re-routed Through Russia

Things that make you say hmmm...
The source, BGPmon, is a network monitoring company owned by OpenDNS:
From their blog:
Early this morning (UTC) our systems detected a suspicious event where many prefixes for high profile destinations were being announced by an unused Russian Autonomous System.

Starting at 04:43 (UTC) 80 prefixes normally announced by organizations such Google, Apple, Facebook, Microsoft, Twitch, NTT Communications and Riot Games were now detected in the global BGP routing tables with an Origin AS of 39523 (DV-LINK-AS), out of Russia.

Looking at timeline we can see two event windows of about three minutes each. The first one started at 04:43 UTC and ended at around 04:46 UTC. The second event started 07:07 UTC and finished at 07:10 UTC.

Even though these events were relatively short lived, they were significant because it was picked up by a large number of peers and because of several new more specific prefixes that are not normally seen on the Internet. So let’s dig a little deeper.

One of the interesting things about this incident is the prefixes that were affected are all network prefixes for well known and high traffic internet organizations. The other odd thing is that the Origin AS 39523 (DV-LINK-AS) hasn’t been seen announcing any prefixes for many years (with one exception below), so why does it all of sudden appear and announce prefixes for networks such as Google?...MORE

"Sources and court documents shed light on Uber's massive data scraping program to monitor its competitors, spearheaded by its Marketplace Analytics team"

A major piece from Gizmodo:
For years, Uber systemically scraped data from competing ride-hailing companies all over the world, harvesting information about their technology, drivers, and executives. Uber gathered information from these firms using automated collection systems that ran constantly, amassing millions of records, and sometimes conducted physical surveillance to complement its data collection.

Uber’s scraping efforts were spearheaded by the company’s Marketplace Analytics team, while the Strategic Services Group gathered information for security purposes, Gizmodo learned from three people familiar with the operations of these teams, from court testimony, and from internal Uber documents. Until Uber’s data scraping was discontinued this September in the face of mounting litigation and multiple federal investigations, Marketplace Analytics gathered information on Uber’s overseas competitors in an attempt to advance Uber’s position in those markets. SSG’s mission was to protect employees, executives, and drivers from violence, which sometimes involved tracking protesters and other groups that were considered threatening to Uber. An Uber spokesperson declined to comment for this story.
It’s possible Uber’s data gathering did not violate any laws—much of it occurred internationally, and the data was often collected from publicly-available websites and apps—but the work of Marketplace Analytics and SSG has attracted the attention of federal investigators and the judge presiding over ongoing civil litigation against Uber for theft of trade secrets.
Marketplace Analytics and SSG’s work was dragged into the sunlight in recent weeks as part of Waymo’s lawsuit against Uber, which alleges Uber stole trade secrets from the self-driving car company for use in its own autonomous vehicles. In a pair of letters written earlier this year, Richard Jacobs, a former Uber employee, accused the company of using its competitive intelligence teams to steal trade secrets from Waymo and other companies; those letters became central in Waymo’s lawsuit after they were disclosed to Waymo in late November. 

The trial, initially scheduled to begin this month, has been postponed until February to allow Waymo to investigate the claims included in the letters—that members of the Marketplace Analytics and SSG teams used secret servers, devices that couldn’t be traced to Uber, ephemeral messaging services, and physical surveillance to extract secrets from other ride-hailing companies and keep the information hidden from the prying eyes of competitors and the courts. 

Uber’s intelligence agency
The Marketplace Analytics team traces its roots to a previous group within Uber that was known as Competitive Intelligence, or COIN. COIN also set up non-attributable servers to store information on competitors, and oversaw Hell, a program Uber used to track the location of Lyft drivers and offer them deals to switch to Uber. By scraping data from Lyft’s app, Uber was able to collect driver ID numbers and therefore track Lyft drivers’ locations. The existence of Hell, and COIN’s role in deploying it, were first reported in April by The Information....

USDA World Agricultural Supply Demand Report for Dec. 12, 2017 (WASDE)

It's a subdued bounce but a bounce it is.

Symbol Last Chg
Corn 350-6+1-6
Soybeans 982-6+0-2
Wheat 416-2+2-6

From Agrimoney:

Corn futures revive as US cuts inventory forecast, citing strong ethanol use 
Corn futures recovered, after the US made a deeper-than-expected cut to its estimate for domestic stocks, citing increased use of the grain in making ethanol.

But soybean and wheat futures fared less well, with the estimate revisions, made in the US Department of Agriculture’s much-watched Wasde crop report, bringing downgrades to expectations for US exports of both crops.

Chicago wheat futures for March, which had stood marginally higher ahead of the briefing, retreated to stand unchanged at $4.13 ½ a bushel in the aftermath, while soybean futures remained marginally in negative territory, at $9.80 a bushel.

Corn futures for March, however, rose as high as $3.52 ¾ a bushel after the briefing, a gain of 1.1% on the day.

Ethanol boom

The headway reflected a downgrade of 50m bushels to 2.44bn bushels in the USDA’s forecast for US corn inventories at the close of 2017-18.

Investors had expected a more modest downgrade, of 9m bushels.

However, the USDA raised by 50m bushels, to 5.525bn bushels, the forecast for use of corn in making bioethanol....MORE, with more to come.
Here's the complete report at the USDA WASDE page:

"Global Conflicts to Watch in 2018"

One area we keep an eye on is Democratic Republic of the Congo which (coincidentally?) Izabella Kaminska indirectly flagged earlier today by pointing out FT commodities editor Neil Hume's tweetstorm on Glencore and cobalt.
We'll be back with more on both.

From Defense One:

The U.S. is now the most unpredictable actor in the world today.
As conflicts ignite and burn and flicker out around the world, U.S. officials assess the dangers they represent back home. Not all of these conflicts directly threaten American interests, which is why the Council on Foreign Relations conducts an annual survey to help U.S. leaders prioritize threats in the year ahead. For the past decade, this survey has focused on the risks posed to America by foreign actors. Now it’s reckoning with the risks America poses to the world—and to itself.

“The U.S. is now the most unpredictable actor in the world today, and that has caused profound unease,” said Paul Stares, the director of CFR’s Center for Preventive Action, which produces the annual survey. “You used to be able to pretty much put the U.S. to one side and hold it constant, and look at the world and consider where the biggest sources of unpredictability, insecurity are. Now you have to include the U.S. in that. … No one has high confidence how we [Americans] would react in any given situation, given how people assess this president.” This president might welcome the development. “I don’t want people to know exactly what I’m doing—or thinking,” Donald Trump wrote in 2015. “It keeps them off balance.”

America’s newfound unpredictability is most evident in two scenarios that emerged as the highest-priority risks identified by this year’s report, which drew on the feedback of 436 government officials and foreign-policy experts: 1) military conflict involving the United States, North Korea, and North Korea’s neighbors, and 2) an armed confrontation between Iran and the United States or a U.S. ally over Iran’s involvement in regional conflicts and support of militant groups.

“They’re the two most volatile, brewing crises at the moment,” Stares said. “Some would say it’s a good thing that people are guessing and this is all a concerted effort to increase [America’s] bargaining leverage with North Korea or with Iran. I think most professionals would say that is not a smart strategy: It can backfire, or lead to miscalculation, misunderstanding, and so on.”
In the survey, which was conducted in the first half of November, during a temporary pause in North Korea’s nuclear and missile testing, the consensus assessment was that a conflict with North Korea would have a “high” impact on U.S. interests but was only “moderately” likely. (To say a conflict with North Korea would be high-impact is quite the understatement—most experts believe it could lead to the most ferocious fighting since World War II.) Stares noted that while last year’s poll had flagged “a severe crisis in North Korea” over its nuclear-weapons program as a first-tier risk, displacing the Syrian Civil War as the premier conflict to watch in the survey, what’s new this year are serious worries about direct military hostilities between North Korea and the United States—and implicitly about those hostilities escalating to the first exchange of nuclear weapons in history....MUCH MORE

"Hey, we've toned down the 'destroying society' shtick, Facebook insists" (FB)

Following up on yesterday's "Climateer Line of the Day: Neurotransmitters and Facebook Edition".
From The Register:

The Social Network rises to criticism from former exec
Facebook has taken the unusual step of responding to comments by former VP Chamath Palihapitiya that the social media giant was "destroying how society works".

Palihapitiya said that executives ignored cautionary instincts when creating Facebook, and he now regretted the consequences. The Sri Lanka-born investor who grew up in Canada joined Facebook in 2005 and was VP of user growth until he left in 2011.

"The short-term, dopamine-driven feedback loops that we have created are destroying how society works. No civil discourse. No cooperation. Misinformation. Mistruth. And it's not an American problem. This is not about Russian ads. This is a global problem."

He bans his children from using social media, he added. You can view his remarks here.
Facebook's first president, Sean Parker, made a similar mea culpa last month, using similar rhetoric.

Parker said Facebook grew by "exploiting a vulnerability in human psychology", the "social-validation feedback loop"...MORE

Electric Vehicles: "Inside Faraday Future’s financial house of cards"

A deep dive from The Verge:

Burn Out
When Faraday Future emerged from stealth mode in 2015, it promised to transform the car industry with an American-made luxury electric vehicle that would someday be fully autonomous, maybe even sold through a subscription service. As we learned at CES 2017, the company was taking aim at Tesla with a car — the FF91 — that was designed to dazzle, with a 0–60 time of 2.4 seconds as jaw-dropping as the proposed $180,000 price tag. 

Since then, though, Faraday Future has been more focused on survival than speed. The Verge has learned from multiple sources about the nature of the company’s financial plight. While Faraday Future posed as the newest California electric car startup that attracted top auto industry talent, 10 former employees and one person close to the company say the behavior and business practices of its chief investor have brought business to a halt. The former employees, most of whom left Faraday Future at different points within the last 15 months, requested anonymity due to nondisclosure agreements with the company. The other requested anonymity out of fear of litigation.

Their accounts support and build on previous reports, and paint a more comprehensive picture of unusual financial management by the two people most directly in charge of the company’s finances: Jia Yueting, the main investor and shareholder, and Chaoying Deng, who has held many different titles at the company, but lists herself as the company’s vice president of administration on LinkedIn.

Where the company stands financially is unclear. Four high-level former employees with knowledge of the company’s finances told The Verge as recently as early December that, barring a new cash infusion, Faraday Future only has enough funds to keep its payroll afloat through the end of the year. But Yueting, who is known as YT, is still meeting with potential investors to keep the company alive, and may have secured a new round of funding, according to one of these people. 

Either way, according to multiple sources, many remaining employees are planning their exits, or have left. Others are simply no longer showing up for work; when YT arrived at the company’s Gardena, California, headquarters on the morning of Monday, November 20th to meet a group of potential investors, he found so few employees on site that an email, which was obtained by The Verge, was sent to staff by Faraday Future’s head of go-to market strategy that reinforced the company’s work hours.

The majority of these sources say YT inflated financial promises to the company, and they believe his ambitions overmatched the company’s waning cash flow. Their accounts suggest he insisted on keeping money, intellectual property, and employees fluid between Faraday Future and the electric car effort of LeEco, a tech conglomerate he founded in China. And many sources say that he left Deng, who had little experience running the accounting of a company this large, in charge of the money. 

Reached for comment on the issues brought up in this report, a spokesperson for the company issued a singular response: “As a private company, Faraday Future will not discuss its finances, nor will we discuss the finances of our investors.”

Representatives for Faraday Future admit that YT is the main financial backer of the company, but have maintained that the company was independent from his Chinese conglomerate LeEco, which is currently mired in controversy. YT himself once said on Twitter that he is “just an investor and strategic partner of FF.”

His involvement runs deeper than that of a typical investor, according to these former employees. And his influence started at the company’s inception, when he came together with Lotus and Tesla executives Tony Nie and Nick Sampson in 2014 to help start Faraday Future, these people say. The company was incorporated in the spring as “LeTV ENV Inc.,” according to documents filed with the California secretary of state, and later that summer, the name was changed to Faraday&Future Inc.
That same year, Los Angeles County property records show, a company called Ocean View Drive, Inc. bought a six-bedroom, eight-bath mansion in the tony Los Angeles County neighborhood of Rancho Palos Verdes for $7 million. One year later, the company bought two additional homes on the same street for just over $7 million each. In documents filed with the California secretary of state in 2016, YT was listed as the CEO of Ocean View Drive, Inc. (News of Ocean View Drive, Inc. and the first mansion were first reported by Jalopnik in November.)....


"Faraday Future issues bombastic statement accusing former CFO of ‘malfeasance and dereliction of duty’"
Uh oh (see after the jump)

“Fake it till you make it”: The Dark Side of Bro Culture In Silicon Valley
"Tesla Now Faces a Billionaire-Backed Competitor Staffed by Its Former Engineers" (TSLA)
"The Future of Driving Is Now a Gold Rush" 

"Here’s How Andreessen Horowitz & Union Square Ventures Are Betting On Blockchain"

From CB Insights:
We took a closer look at these top VCs' blockchain investments, which range from private enterprise blockchains to cryptocurrency hedge funds

This year’s blockchain craze has pushed a huge amount of new money into cryptocurrencies, private blockchain projects, and companies holding initial coin offerings (ICOs). As of now, the total market capitalization of cryptocurrencies stands at more than $340B — a huge leap from where it started the year at $18B.

Two of the top early-stage tech VCs, Andreessen Horowitz and Union Square Ventures, have placed bets on blockchain technology since 2013. Below, we show how their approaches to the sector have evolved, from traditional equity investments to investments into ICOs and cryptocurrency hedge funds.
Key Takeaways
USV initially focused on bitcoin, making its first bet in early 2013 on popular cryptocurrency exchange Coinbase.

Since then, USV has expanded its strategy to bet on more novel blockchain use cases: OpenBazaar is a blockchain-based, decentralized e-commerce platform, while Filecoin is a tokenized file storage protocol. Filecoin raised upwards of $200M in its ICO held earlier this year.

Andreessen Horowitz’s early investments highlighted an interest in both bitcoin (Earn, Coinbase) and private blockchains for financial services (Axoni, Ripple).

Notably, Earn was founded by Balaji Srinivasan, a former general partner at Andreessen Horowitz, and has pivoted from bitcoin mining to building a social network where users can earn money by replying to e-mails. Andreessen Horowitz has participated in two rounds to Earn totaling $116M....MORE

"ETF Disrupters Set Sights on Insurance Industry"

I had a friend who was deconstructing and reconstructing equity indexed annuities fifteen years ago; he was like a mad scientist with his formulas and all, and waaay too happy doing what seems like a rather mundane task.
And like many mad scientists he couldn't sell* the low-fee result to any of the big marketers (looking at you Allianz)

Here's Institutional Investor:
PowerShares’ co-founders are re-entering asset management, this time with the first exchange-traded fund lineup that will mimic annuities and bank structured products.

Bruce Bond and John Southard, who co-founded Invesco’s PowerShares, are returning to the exchange-traded fund industry with the first ETFs to offer benefits found only in bank structured products and annuities.

The ETFs, which have not yet been approved by the Securities and Exchange Commission, are so-called defined outcome products, which are rules-based and have pre-determined returns on the upside and capped losses on the downside.

Structured notes offered by banks and insurance company annuities provide similar benefits, but charge hefty fees and contractually lock up investor money. Bond and Southard’s new ETFs, which will be subadvised by Milliman Financial Risk Management, will be priced at under 1 percent, a fraction of the cost for similar insurance and bank products. The ETFs will all track the Standard & Poor’s 500 stock index....MUCH MORE
*Back in 2010 we had a mad scientist anecdote in "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....

It's All About the Protein: "Bakers, farmers struggle to make any dough on poor wheat crop"

Ahead of today's USDA report a look at what's up with wheat.
From Reuters:
Chicago’s iconic sandwiches - Italian beef heroes dripping with gravy, and hot dogs loaded with pickles and hot peppers - wouldn’t be such culinary institutions without the bread.

But this fall, bakers faced a crisis getting the right kind of bread to delis and sandwich shops locally and across the United States.

Gonnella Baking Co - which supplies the buns to Major League Baseball’s Wrigley Field - faced an unusual problem in October when flour from this year’s U.S. wheat harvest arrived at their factories containing low levels of protein.

That meant bakers couldn’t produce bread with the airy texture customers demand, setting off two weeks of tinkering with temperatures and the mixing process, and the eventual purchase of gluten as an additive. By the time the alchemy was done, Gonnella had thrown away more than $20,000 worth of substandard bread and buns, said president Ron Lucchesi.
“That really was a headache,” Lucchesi said.

The problem spans the $23 billion U.S. bread market and highlights a paradox in the global wheat trade. Despite a worldwide grains glut, high-protein hard wheat is scarce after two years of poor U.S. harvests. The shortage hurts bakers and millers who prize high-protein wheat, along with the farmers who grow it.

Wholesale bakers such as Grupo Bimbo, Flowers Foods Inc and Campbell Soup Co’s Pepperidge Farms are feeling the squeeze on margins, said Stephen Nicholson, senior grains and oilseeds analyst with Rabobank. All three companies have seen their stock prices fall over the last two years, a period when the benchmark S&P 500 index gained more than 26 percent.

Millers such as Archer Daniels Midland Co, Ardent Mills, General Mills Inc have been able to pass on much of their higher wheat costs in sales of flour to bakers, he added. But bakers have not been able to pass those costs to grocers, who have been unwilling to pay higher prices because of increased competition and price deflation.

 Global wheat inventories have risen to record-high levels due in part to heavy production from Russia. Meanwhile, U.S. per capita consumption of wheat flour in 2016 fell to its lowest level in nearly three decades, and U.S. farmers planted their smallest winter wheat crop in more than a century....MUCH MORE
"Wheat Nerds and Scientists Join Forces to Build a Better Bread"
Along the same lines—and focusing on Jones and the Bread lab but a bit more science-y— is October 2015's "The Bread We Eat Is Junk Food: Blame the Wheat".
Worth a look for nutrition wonks.

Monday, December 11, 2017

Climateer Line of the Day: Neurotransmitters and Facebook Edition

Via The Verge:
 "The short-term, dopamine-driven feedback loops we've created are destroying how society works.  No civil discourse, no cooperation; misinformation, mistruth. And it's not an American problem — this is not about Russians ads. This is a global problem."
—Former Facebook Vice President for Addicting Users, Chamath Palihapitiya
And the rest of the story:

Former Facebook exec says social media is ripping apart society
‘No civil discourse, no cooperation; misinformation, mistruth.’
Another former Facebook executive has spoken out about the harm the social network is doing to civil society around the world. Chamath Palihapitiya, who joined Facebook in 2007 and became its vice president for user growth, said he feels “tremendous guilt” about the company he helped make. “I think we have created tools that are ripping apart the social fabric of how society works,” he told an audience at Stanford Graduate School of Business, before recommending people take a “hard break” from social media. 

Palihapitiya’s criticisms were aimed not only at Facebook, but the wider online ecosystem. “The short-term, dopamine-driven feedback loops we’ve created are destroying how society works,” he said, referring to online interactions driven by “hearts, likes, thumbs-up.” “No civil discourse, no cooperation; misinformation, mistruth. And it’s not an American problem — this is not about Russians ads. This is a global problem.”...MUCH MORE, including video
"The Neurochemistry of Smartphone Addiction"
As stated in the introduction to last month's "Early Facebook investor compares the social network to Nazi propaganda, likens its workers to Goebbels and claims it is creating a climate of 'fear and anger'":
We visited Elevation Partners' Managing Director Roger McNamee on Sunday for a TL;DR version in: "Climateer Line of the Day: Bono's Guy Talks Regulating Facebook and Google".

In that piece I noted our point of attack has been the neurochemistry of deliberately trying to addict your users. The thinking being, this is where the giants are most vulnerable and is the argument most amenable to soundbite journalism/attention - grabbing/framing. Turnabout being fair play and all that....

Electric Vehicles: China, China Uber Alles...

They actually named the thing the Weltmeister? The World Master?

From Reuters:

Chinese electric car maker to put 'Weltmeister' on road next year
WM Motor Technology Co, one of a new breed of Chinese electric car companies, will use its company name “Weltmeister” as its brand and plans to start taking orders for its first product, a sport-utility vehicle, from April.

The Shanghai-based startup plans to start producing its first car at a new plant in Wenzhou during the second quarter of next year, Freeman Shen, WM Motor’s founder and chief executive, told Reuters ahead of a media event.

The exterior design for the SUV was presented at the event in Shanghai on Monday. WM Motor also unveiled a logo for the brand that will adorn its cars....MORE
Seriously, Worldmaster? Anyone else feel like a little Horst-Wessel-Lied? Too much? We'll go with Lili Marlene.
Here's the Wehrmacht choir version::

Market Structure: "Bitcoin Futures Tumble As Spot-Arbitrage Collapses"

From ZeroHedge:
Update: The Bitcoin Futures-Spot arb spread has collapsed to around $600 in the early evening trading (led by Futures selling more than spot buying)...
From a premium of over 13% last night, Futures now trade at just 4.5% above spot as the arb-spread tumbles.
On a side note, we se that the Bitcoin Trust premium to NAV has also collapsed in recent days from over 140% to around 10%...
...Something we would expect to close:
“Arbitrage will close that gap, but it will be days and weeks,” Cboe Chief Executive Officer Ed Tilly said on Bloomberg Television Monday, less than a day after launching the product.

“If you’re doing a cash-settled future, it’s just a bet,” said Aaron Brown, a former managing director at quant hedge fund AQR Capital Management who invests in the cryptocurrency and writes for Bloomberg Prophets.

“If that’s not related to any underlying physical transaction, the only people who want to do it are gamblers.”

The wide arb spread is “a big issue. It’s an illiquidity, it has to go away.” The price gap between bitcoin and bitcoin futures won’t last forever, said Dave Weisberger, CEO of CoinRoutes, a cryptocurrency data and order routing company.

“The futures will ping-pong between premium and discount,” he said. “I suspect at some point, potentially triggered by a negative event, it will flip. Markets go up and down, and bitcoin has been no different. It’s just been fast.”...

"Rush for Ruthenium Has Metal Soaring 375 Percent in 2017: Chart"

Following up on June's "The Cobalt Trade Worked Out, On To Ruthenium":

From Bloomberg Quint:
(Bloomberg) -- Demand for hard drives and for electrochemical applications has driven little-known ruthenium to the highest price in more than seven years. Soaring to $190 an ounce, according to Johnson Matthey Plc, it’s more than quadrupled this year, outperforming all major commodities -- and it may have more to run. “This rally has legs,” Jonathan Butler, a precious metals strategist at Mitsubishi Corp. in London, said by email. “There’s good industrial buying out there.”
So, one might be asking oneself, what's next, how do I find what moves after cobalt and ruthenium?
It's easy, you can do it at home.

First gather up your tools: some darts and a periodic table:

Oops, wrong periodic table.
Here's one from Science Notes:

Throw your darts, note where they land,  invest away and survive, thrive & save civilization!

Past success in not a guide for future civilization performance
The information provided in Climateer Group webinars and accompanying material is for informational purposes only.  It should not be considered civilizational or societal advice.  You should consult with a technologist or other qualified professional to determine what may be best for your individual needs. 
Climateer Group does not make any guarantee or other promise as to any results that may be obtained from using our content. No one should make any survival decision without first consulting his or her own survival advisor and/or deity and conducting his or her own research and due diligence. 
To the maximum extent permitted by law, Climateer Group disclaim any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any deaths or other losses. 
Your mileage may vary, close cover before striking, not all civilizations thrive, good luck.

Fairness, Capuchin Monkeys and Wall Street

The speaker, Frans de Waal, is one of the heavyweights of the primate world. Actually, we all are among the heavyweights of the primate world but he's up there with Jane Goodall in the study of primates.
A quick hit via TED:

The Futures Ecosystem

From RCM Alternatives:
HT: Barry Ritholtz, The Big Picture

Crypto: The Intangibles that go into Valuation With a Look at Contango in the Market for Water from the Grotto of Massabielle in the Sanctuary of Our Lady of Lourdes, France

I believe I shall begin referring to the contango in Bitcoin futures as "The Learning Curve™".

Our headline is a sentence from a September, 2013 post "Are collectibles good long-term investments? "The Investment Performance of Emotional Assets", a rather rambling look at oddball things people pay money for (and which some, for better or worse, call asset classes).
It begins:
...On Monday we posted a short bit on collectibles, riffing off a Quartz piece:
Cars, coins and stamps are now more profitable luxuries than art, wine and jewelry (there's an ETF for that)

Which we got timestamped just before Izabella Kaminska had three FT Alphaville posts:
A classic car bubble?
The art of myth-making
The growing scarcity of scarce markets
Addressing respectively 1) the Knight Frank luxury investment index; 2) the intangibles that go into valuation with a look at contango in the market for water from the Grotto of Massabielle in the Sanctuary of Our Lady of Lourdes, France and 3) a meta-analysis of the attributes of markets in non-standardized goods.

She is such a show off.

So today we visit with Elroy Dimson, one of the few economists I've ever come across who has the market feel of a trader and the soul of a poet intellectual chops to be the Chairman of the Strategy Council for the Norwegian Government Pension Fund, you know, the big one.

In his spare time he is part of the hot new boy band Dimson, Marsh and Staunton who do the Global Investment Returns Yearbook for Credit Suisse....
Looking back I believe I was still suffering some sort of market PTSD, five years after the beginning of the grins-n-giggles phase of the 2008 unpleasantness. Or something.
Izabella's "Art of myth-making" post begins:
In this post, we consider the roles of narrative and myth in value creation.
We’ll start with the argument that a powerful enough narrative or myth can turn even abundant commodities into stores of value in their own right.
Case in point, this bottle of water from Lourdes:

This is a great example of how myth alone can turn a bottle of ordinary water — abundant in the part of France it comes from — into an object of value (and additional utility). Whether you consider the object valuable or not is dependent entirely on whether you are a believer in the underlying myth or not....MORE
That whole post is a quick primer on some of the psych features that go into the shape of the futures curve.

This short stroll down memory lane was prompted by Ms. Kaminska's most recent post, "Bitcoin contango" which links to a couple of earlier market structure posts and has at least two informed comments from the cheap seats.
Definitely worth a visit, if one is so inclined:

Ag Commodities Ahead of Tomorrow's USDA WASDE Report

From Blue Line Express at Inside Futures:

Corn, Beans, & Wheat Ahead of Tomorrows USDA Report
CORN (March)
Last Weeks Close: March corn futures finished Friday up 1 cent, trading in a range of 2 cents. Funds were estimated to have been buyers of 3,500 contracts. On the week, March corn futures finished 6 cents lower and traded in a 10-cent range for the week. Fridays commitment of traders report showed that funds hold a net short position of 160,519 contracts, this versus laws weeks -196,763; a reduction of 36,244. Keep in mind that this data is compiled through Tuesday. We saw the funds holding a record net short position of 230,556 in the middle of November, that position has decreased 70,037 or 30%.

Fundamentals: Tomorrows USDA report will likely be the highlight of the week in terms of new news coming across the wire that doesnt involve weather forecasts. The average analyst estimate for US corn carryout is at 2.478 billion bushels with estimates ranging from 2.394-2.517billion bushels. The average estimate for world ending stocks is 202.72mt with the range being 195.7-205mt. Once we get through the USDA report the attention will shift back to weather and crop development in South America.

Technicals: Corn has been range bound for the better part of the last three months which has presented some great opportunities for traders who recognized a sideways trend and werent sidetracked from the hope of a breakout. First technical resistance we will be watching this week comes in from 358-360 . On the support side of things, we are watching 348 -350. Until we get a fundamental catalyst to provide the market with a breakout or a breakdown we will continue to trade the range.

Bias: Neutral

Resistance: 358-360 ****, 369 -370 ***, 375****
Support: 348 -350**, 334-335 ***, 323-325 **

The grains are down from a quarter to three quarters percent. 

Saxo Bank's 'Outrageous Predictions' For 2018

From Saxobank: