More on Krugman's Theory of Interstallar Trade

This is odd. In the intro to last Friday's "Why we should actually build the Death Star" I noted in passing:

No mention of  "The Theory of Interstellar Trade" (Krugman 1978) which work led to the Nobel prize winning New Trade Theory and New Economic Geography but not to New Keynesianism.
Further, TTIT was the precursor to Krugman's more important Alien Invasion Hypothesis...

Yesterday Barry Ritholtz linked to Scientific American:

To seek out new markets....(Credit: adapted from NASA image, Les Bossinas)

Everyone needs a little light relief sometimes, including the Nobel winning economist and writer/blogger extraordinaire Paul Krugman. A few months back he reminded the world of a short paper he’d written some years ago on the rather unexpected topic of interstellar finance. You can teleport a copy to your automated reading device by clicking here.

It’s a lot of fun, with a satirical slant lurking between the lines. But it’s also quite serious, because the specifics of sub-light-speed interstellar travel do pose some rather unfamiliar and intriguing conundrums: Krugman points out that transit times for goods are of course extremely large, and the passage of time itself is a function of inertial frames and the acceleration of frames. Relativity says that you can keep your roses fresh for Alpha Centauri, but your first customers may dead by the time you get there. Electromagnetic communication is naturally far faster than the transmission of material goods (although that’s a situation we already encounter here on Earth), which allows for trade to be set up. And having one-way transport, rather than round trips, of cargo vessels or merchants is okay for stable economic function on an interstellar scale.

He also shows that, in terms of capital, interstellar arbitrage and competition will tend to equalize interest rates between two locations (planets, ring-worlds, Dyson spheres, whatever) as long as they’re in the same inertial frame. This, as far as I can see, is astrophysically tenable. Typical relative motions of stars in our bit of the Milky Way are of the order of 10-40 kilometers a second. Although large by terrestrial standards, these velocities introduce a time dilation factor between systems of no more than 1.0000000089, or barely a millionth of a percent....MORE

HT: The Big Picture

Although not technically an example of the "Baader-Meinhof Phenomenon", I can't for the life of me remember the related psychological experience so I'm going to say I had a B-M.

Shanghai's Gold Has Been Trading at a Discount to London the Last Couple Days

From Reuters:
Asia Gold-Chinese prices at a discount on credit crunch fears

Chinese gold prices closed lower than global prices on Tuesday for the first time this year, traders said, as fears of a credit tightening prompted investors to sell bullion for cash.

Prices on the Shanghai Gold Exchange closed about $2 an ounce lower than international spot prices, compared with April-May premiums as high as $30.

The last time Chinese prices traded at a discount to international prices was just before Christmas last year, according to traders.

"The rise in borrowing costs in onshore China plays a crucial role. People don't want to keep the metal and they try to dump it to raise cash," said one precious metals trader in Hong Kong.

Another trader said there had not been a significant drop in demand but liquidation of stocks was taking its toll on prices. "It really is driven by money markets."

On Monday, money market rates in China reached their highest levels since June's dramatic cash crunch as some market players believed that regulators had signalled they might clamp down on excessive liquidity to get property prices and inflation under control....MORE

Chartology: Tesla Breaks Down

Following up on last Wednesday's "Chartology: Tesla's Head and Shoulders Formation (TSLA)".
$156.52 down $6.34.
From iBank Coin:

With earnings early next month, Tesla continues to weaken as a momentum leader in today’s tape.
The 30-minute chart, below, indicates a breached falling channel. $158 is likely the first level bulls need to recapture.

Overall, though, as I noted in my video market recap yesterday Tesla has the type of action you seen when monster stocks finally decide to have that violent correction, even if it does eventually lead to a great buying opportunity.

What are you trading this morning? Throw some tickers my way.

please click on image to enlarge
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...MORE

Technical Analysis: Louise Yamada Says Commodities Are In A Death Cross

As I said in 2012's "Louise Yamada Sees a Big Bear":

Louise was very sharp during her time at Smith Barney but had a stumble just before the start of the bull back in 2009* that made me shy away from posting:
March 2, 2009
Louise Yamada: Don’t “venture into the waters” 

That was exactly one week before the bear market bottom.
Here's her latest via Yahoo Finance:
Long-term commodity prices are at a critical point. And, right now, the technicals indicate they're headed down.

That's what legendary technical analyst Louise Yamada, managing director at Louise Yamada Technical Research Advisors, says is ahead. She reached that conclusion by analyzing the long-term chart of the Thomson Reuters Equal Weight Continuous Commodity Index (the CCI). The CCI is a basket of 17 commodity futures such as contracts on metals, grains, energy, and livestock. It is considered a benchmark for commodity prices.

Since mid-February 2011, the CCI is down 25%. According to Yamada, that was the start of a bearish signal in the charts.

"It is a descending triangular formation which suggests that every rally along the way over three years has failed," says Yamada. "In other words, someone sold into each of the rallies over the past couple of years."

It's not just the descending triangle that has Yamada worried for the index. The moving averages have also been bearish for over a year and half....MORE

There is So Much Corn and It Is Being Harvested So Fast That There Is A Shortage of Propane to Dry It

Today's $4.29 print was a life of contract low.
From Agrimoney:
Rapid US corn harvest fuels propane shortage fears

US farmers are harvesting  corn harvest so fast that there is a "growing concern" they have enough fuel to dry the crop which, thanks to cool and moist conditions, is coming in relatively wet.

US farmers harvested 20% of their corn acreage in the week to Sunday, equivalent to nearly 18m acres (7.2m hectares), using the latest official estimate of the area that growers will harvest.

That progress, equivalent to an area bigger than Ireland, took the total harvested to 59%, and represented one of the fastest weeks on record.

Last year, for instance, harvest progress peaked at 15%.

"This is only the fourth time that US farmers have harvested 20% or more in one week," Paul Georgy, president at broker Allendale, said.

And the extent of the grain harvested, after weather which has presented growers with rains but without the frost to help drydown, is fuelling a shortage of propane needed to dry the crop.

'Growing concern'

"There is a growing concern over the inability to get propane, which is used in corn dryers around the country, for drying corn," CHS Hedging said.

"Cool Midwest temperatures don't allow the corn to dry down very easily," the broker said, reporting at 17-25% the level of moisture in crop harvested over the weekend....MORE

We've been posting on this price weakness since  December 2012: 

Dec 2012

Macquarie "Wheat 50% overvalued - corn to hit three-year low"

March
Corn Hammered Limit Down on Stocks/Intentions Report
May
Corn: Deutsche sees potential for price below $4
July
Macquarie Calling For Corn in the Low $4's 
August
4 Reasons Why Corn Could Get Cheaper Still
Corn Futures Resume Normal Service, Collapse
September
Iowa State's Worst Case Corn Prices: $2.89 By 2017

And many more. It's almost depressing how monotonic the declines have become.

"The 'triviality' of the Efficient Market Hypothesis"

From The Physics of Finance:

By way of Lars Syll, some comments from Robert Shiller on the difference between the obviously true (and not very interesting) version of the Efficient Markets Hypothesis -- "markets are hard to beat)" -- and the obviously false (yet still widely believed) version that markets possess some kind of mysterious and magical wisdom. The latter is probably the most damaging perversion in finance; maybe in all of economics. Shiller's is also my view, but of course, this is not at all a coincidence as I been influenced by many things Shiller has written over the years: 

Professor Fama is the father of the modern efficient-markets theory, which says financial prices efficiently incorporate all available information and are in that sense perfect. In contrast, I have argued that the theory makes little sense, except in fairly trivial ways. Of course, prices reflect available information. But they are far from perfect. Along with like-minded colleagues and former students, I emphasize the enormous role played in markets by human error, as documented in a now-established literature called behavioral finance …

Actually, I do not completely oppose the efficient-markets theory. I have been calling it a half-truth. If the theory said nothing more than that it is unlikely that the average amateur investor can get rich quickly by trading in the markets based on publicly available information, the theory would be spot on. I personally believe this, and in my own investing I have avoided trading too much, and have a high level of skepticism about investing tips....MORE

Patent Troll, Nathan Myhrvold's Intellectual Ventures, May Have Their Entire Business Model Upended in Court

From Reuters via peHUB:
Intellectual Ventures faces novel attack on patent business — Reuters

Seven years ago, Intellectual Ventures bought a patent on technology that helps detect malicious software embedded in digital content. The price? $750,000.

Now Intellectual Ventures is arguing in a Delaware courtroom that Internet security firms Symantec and Trend Micro should pay roughly $310 million combined for a license to that patent through the end of last year.

Intellectual Ventures, a multi-billion-dollar firm that virtually invented a new market for patents and inventions, says that figure represents fair compensation given how extensively Symantec and Trend Micro products rely on the technology.

Symantec and Trend Micro are fighting back – and advancing a novel legal theory that could pose a significant threat to the business model of Intellectual Ventures (IV) and other patent acquisition firms.

The two companies are asking a federal judge to bar IV from seeking such large licensing fees on the grounds that a patent acquired for so little couldn’t possibly be worth so much. That’s on top of more traditional arguments that Symantec and Trend Micro do not violate IV’s patents in the first place.

In court filings and at a hearing in August, Symantec and Trend Micro lawyers argued that the law prohibits IV from calculating such a high royalty. A patent license is, by definition, less valuable than outright ownership of a patent, Symantec and Trend Micro lawyers said.

“They have turned that thing into a diamond,” Trend Micro lawyer Yar Chaikovsky said at the hearing.

Representatives of Intellectual Ventures, Symantec and Trend Micro all declined to comment on the case....MORE

Climateer Line of the Day: "Serve in Place of" Edition

I came upon this, first concurred and then couldn't stop laughing:

"...bank money would trade heterogeneously and at different values — undermining its fungibility (a very important feature of money)...

Yes, yes it is a very important feature and the sentiment expressed so innocently is damned hard to disagree with.
That's from FT Alphaville's Izabella Kaminska's personal blog, Dizzynomics.

Of course I was reminded of something, in this case the Latin etymology of 'fungible' (fungi vice) which led to this when I tried to pronounce "fungi"--
From Sesquiotica:
fungible, fungi

We were setting out some refreshments at Domus Logogustationis for our monthly Words, Wines, and Whatever tasting event. Maury had paused to scrutinize a piece of truffled Gorgonzola.

“I believe this is a bit mouldy.”

I peered over. Elisa, ready to hand, made a funny face. “It’s supposed to be! It’s blue cheese!” she said.

“Yes,” said Maury, holding up the offending wedge, “but there is the mould in the cheese and the mould on the cheese. Moulds are not fungible.”

“Ironically,” I said.

“Why ironically?” Elisa asked.

“Because they’re fungi,” Maury said, pronouncing it “fun-jye.”

“Fungi?” Elisa said, saying it “fun-guy.”
“I am often thought one such, thank you,” Maury replied.

Elisa was about to say something, the caught herself and gave Maury a light swat. “Ha ha. But you said ‘fun-jye.’”

“Well, yes,” said Maury, “I was going with the usual way of saying anglicized Latin terms. We don’t, after all, say fungible with a velar g. Or pretty much any other similar Latin-derived word, except for fungi, which has both options available.”...MORE, but be warned,  this way lies madness.

Still laughing.

Wash Your Money In a Vineyard: "Money laundering taints wine trade"

From the South China Morning Post:

Avi Jorisch says while vineyards in France are favoured investments for Chinese and Russian money launderers, it's only the tip of the iceberg in terms of trade-based 'dirty money' schemes

Bucolic regions in the south of France represent the newest frontier for law enforcement and intelligence officials searching for dirty funds. Since 2008, thousands of people with alleged criminal connections have reportedly arrived in southwest France from eastern Europe, Hong Kong and mainland China to snap up vineyards to launder their money. European and Asian officials must take steps and curb this trend, including establishing trade transparency units to combat trade fraud.

In its latest annual report, the French anti-money-laundering unit, Tracfin, singled out Chinese, Russians and Ukrainians who buy vineyards, voicing concern that they might be using this type of investment to clean their ill-gotten gains. According to wine analysts, Chinese purchasers are one of the largest groups of vineyard owners in France and have been purchasing so many estates in the Bordeaux region that the local Chamber of Commerce reportedly has a help desk specifically for them.

Chinese nationals own as many as 50 wine estates and vineyards in the region, and there are reports of Chinese purchases in Burgundy. Russian investors are following suit, but according to wine experts, they prefer the Cognac region.

Global Financial Integrity, a respected organisation in Washington that monitors money laundering, reports a significant amount of illicit money leaving China and Russia, which partially explains these types of investments. According to its estimates, between 2000 and 2011 nearly US$4 trillion left China's economy, principally for tax evasion purposes, and between 1994 and 2011 over US$200 billion flowed out of Russia.

The vast majority of this tainted money was moved using trade-based money laundering schemes. According to Global Financial Integrity, developing countries are losing about US$100 billion every year to trade mispricing, which represents approximately 4.4 per cent of the developing world's total government revenue.

Typically, trade-based money laundering schemes involve invoice fraud and trade manipulation, principally via misrepresentation of price, quantity or quality of imports or exports.

Specific tactics include over-invoicing, under-invoicing, double invoicing, and false invoicing. With these methods, large amounts of money can be moved while avoiding taxes, tariffs and customs duties, greatly complicating law enforcement efforts to follow the financial trail.

Purchasing vineyards is an excellent method to launder money. Reports have emerged of prospective vineyard owners in France offering to pay in cash, which should throw up a red flag. Moreover, the price of wine is never fixed; it is easy to over- or under-invoice. Paying in cash is not atypical; and perhaps best of all, it has all the trappings of high society....MORE

I owe someone a Hat Tip on this, we don't have the SCMP in any of the readers or terminals. If you had the story first we'll do the right thing.

Diamonds: Have You Been Depressed Since DeBeers Was Delisted? Hangdog Since Harry Winston Split? Cheer Up Bunky, There's Always Alrosa

Common sense tells us that the only way to increase the value of 

diamonds is to make them scarce, that is to reduce production.

-Ernest Oppenheimer, 1910

 I know, treading dangerously close to a little alliteration.

From the FT's beyondbrics blog:
Russia’s Alrosa: an investor’s best friend?

Alrosa might be considered the king of diamonds. It is the world’s largest rough diamond producer by volume, with almost 1bn carats of resources.

It’s certainly the king of privatisations, as far as 2013 is concerned. A stake of 16 per cent stake in the company was sold for $1.3bn in an IPO on Monday, making it Russia’s first state privatistion of the year.

The Russian government and the regional government of Yakutia each contributed 7 per cent to the IPO, with a further 2 per cent from the company itself.

Russia also plans to sell off significant stakes in various companies, including Russian Railways and the airline Aeroflot by 2016 as part of its long-term privatisation strategy. Plans to sell part of oil giant Rosneft have been shelved. So the flotation of Alrosa will attract attention – and not just because of the traditionally closed nature of the diamond industry.

Investors will be relieved by the low price. The pricing of Rb35 ($1.10) per share is at the lower end of the company’s initially suggested price range of Rb35-38 per share. The company is also cheap in comparison to its peers. According to a note from Gazprombank:

We estimate [2014 entreprise value/Ebitda] during the placement at 4.9x versus the average of 6.2x for diamond producers, 6.0x for global diversified miners and 11.5x for luxury goods manufacturers.

The sale has consequently been oversubscribed by $400m. US investors including asset management group Lazard is thought to buy up to three fifths of the offered stake, Reuters reported....MORE

Long Time Horizon's: The Methuselah Trust of Hartwick College

The post immediately below, "From Rob Arnott's Research Affiliates: What Assets Should Go Into a Portfolio You Can't Touch for Three Years", reminded me of one of the odder stories in the investment biz.
First posted September 2011.
From Lapham's Quarterly:


Disclaimer: although Lapham's used the bullion picture this is not an to hold asset for more than the next 50-150 years. Gold will be one of the first targets for both asteroid miners and their deep sea counterparts.

Hartwick College didn’t really mean to annihilate the U.S. economy. A small liberal-arts school in the Catskills, Hartwick is the kind of sleepy institution that local worthies were in the habit of founding back in the 1790s; it counts a former ambassador to Belize among its more prominent alumni, and placidly reclines in its berth as the number-174-ranked liberal-arts college in the country. But along with charming buildings and a spring-fed lake, the college once possessed a rather more unusual feature: a slumbering giant of compound interest.

With bank rates currently bottomed out, it’s hard to imagine compound interest raising anyone much of a fortune these days. A hundred-dollar account at 5 percent in simple interest doggedly adds five bucks each year: you have $105 after one year, $110 after two, and so on. With compound interest, that interest itself get rolled into the principal and earns interest atop interest: with annual compounding, after one year you have $105, after two you have $110.25. Granted, the extra quarter isn’t much; mathematically, compound interest is a pretty modest-looking exponential function.

Modest, that is, at first. Because thanks to an eccentric New York lawyer in the 1930s, this college in a corner of the Catskills inherited a thousand-year trust that would not mature until the year 2936: a gift whose accumulated compound interest, the New York Times reported in 1961, “could ultimately shatter the nation’s financial structure.” The mossy stone walls and ivy-covered brickwork of Hartwick College were a ticking time-bomb of compounding interest—a very, very slowly ticking time bomb. 

One suspects they’d have rather gotten a new squash court.

The notion of a “Methuselah” trust has a long history—and as with many peculiar notions, Benjamin Franklin got there first. Upon his death in 1790, Franklin’s will contained a peculiar codicil setting aside £1,000 (about $4,550) each for the cities of Boston and Philadelphia to provide loans for apprentices to start their businesses. The money was to be invested at compound interest for one hundred years, then a portion of the fund was to be used in Boston for a trade school. For Philadelphia, he recommended using the money for “bringing, by pipes, the water of Wissahickon Creek into the town”—or perhaps “making the Schuylkill completely navigable.” The whole scheme was perfectly suited for a man who once half-jokingly proposed that, in preference “to any ordinary death” he be “immersed in a cask of Madeira wine” for later revival, as he had “a very ardent desire to see and observe the state of America a hundred years hence.”

Franklin’s plans soared beyond a mere century, though. After a portion of the funds were to be paid out for a first set of public works, the remainder was then to grow for another century—until, by Franklin’s estimate, in 1990 both cities would receive a £4,061,000 windfall from their most famous native son.

“Considering the accidents to which all human affairs and projects are subject in such a length of time,” Franklin admitted, “I have, perhaps, too much flattered myself with a vain fancy that these dispositions, if carried into execution, will be continued without interruption and have the effects proposed.”

Nonetheless, Franklin’s experiment inspired Peter Thellusson, a London merchant and a director of the Bank of England, to even dizzier heights. Thellusson had an impressive fortune of some £600,000 by his death in July 1797, worth about $68 million today. But at the reading of the old financier’s will, his reckless sons received the shock of their lives. “It is my earnest wish and desire,” he lectured them from beyond the grave, “that they will avoid ostentation, vanity, and pompous shew; as that will be the best fortune they can possess.”

It would also be almost the only fortune they’d possess. Most of the estate was to be invested at compound interest until every currently existing heir was dead, whereupon upward of £19 million would cascade onto their distant descendants. It was as if, one legal scholar marveled, Thellusson had “locked his treasure in a mausoleum and flung the key to some distant descendant yet unborn.”

His heirs did not take the news well: one took out a pistol and shot the old man’s portrait....MORE

HT: Longreads who also had a LED story that I'll get to next week.

From Rob Arnott's Research Affiliates: What Assets Should Go Into a Portfolio You Can't Touch for Three Years

Alternate title: No news is good news.
From Research Affiliates: 
The Deserted Island Portfolio

Leave it to Tom Hanks. Only the most acclaimed actor of our generation could have garnered an Oscar nomination for absolute silence, interrupted only by an occasional shouting match with his co-star, a bloodied volleyball named Wilson. Castaway, released in 2000, showed Hanks’s character, a pudgy executive from FedEx, marooned on a South Pacific island as the lone survivor of an airplane crash. His only companion was a volleyball that washed ashore in a FedEx package. The flick now regularly pops up on cable and remarkably always seems to draw me in, suspending my channel surfing for a few minutes. There’s just something about the drama of surviving on a deserted island¹ that requires nothing more than watching what happens next.

To most, a portfolio management process without frequent performance reviews and benchmark comparisons is about as foreign as a movie without dialogue or co-stars. But most asset management programs have very long horizons, where a month or quarter—let alone a day or a week—is but a statistically insignificant blip. Actuarially, even an octogenarian has a nearly 10-year time horizon. In recent talks with advisors, I asked how many had clients whose investment portfolios were designed to meet liabilities less than 10 years out. Anecdotally, I can tell you well under 5% of the advisors raised their hands.

Of course, some institutional investment programs also are designed to meet prospective payout streams that go on for decades. This is indeed a blessing because the capital markets are inherently noisy and unpredictable over the short term, but remarkably steady and predictable over the long term. But all of us succumb to the temptation to check the impact of recent market movements on manager performance. One large pension client specifically affirmed this tendency by telling our CIO that “we are long-term investors but short-term reviewers.”

What if we couldn’t evaluate performance for the next quarter or the next year or even the next three years? At Research Affiliates, we call this thought experiment the “Deserted Island portfolio.” Like Hanks’s character, we would be exiled to a remote, uninhabited island. But before we get banished to the beach, we could build a portfolio we would buy and hold, save for an annual rebalancing back to target allocations. In the interim, there’d be no cable news feed and no benchmark comparisons, nothing to reinforce the brilliance or stupidity of our portfolio selections.

Today this exercise reveals some unusually good opportunities for those willing to embrace maverick risk.

Deserted Island Logic

In the late 1980s, Paul B. Andreassen conducted a series of experiments demonstrating that investors who received no news about their stock market investments did better than those who saw the headlines. The theory is that investors often overreact to short-term news that has little effect on the long-term fair value of the company. Some 25 years later, the 24/7 news cycle and nearly continuous performance measurement cycle makes it all the easier for investors to overreact, generally to the detriment of portfolio returns.

We are unlikely to change this dynamic, and the reason is simple. Nearly all of us in the investment business are agents rather than the actual owners of capital. We oversee others’ nest eggs, pensions, and charitable trusts, most of which have timelines measured in decades. Acting as their clients’ agents, advisors and managers of capital with discretionary authority have a very different timeline, one that is often measured in a handful of years. If our results fall short in comparison with common benchmarks and peer groups, we risk being “de-selected.”...MORE

HT: Abnormal Returns

Possibly related:
Long Time Horizon's: The Methuselah Trust of Hartwick College

New Website Generates Haiku from the NSA’s Watchlist of Badwords

And if everyone doesit at the same time, emailing, texting and phoning the results there will be a meltdown of such proportions that it could be tapped as an energy source.
From VentureBeat:

 

Lacrosse?

A brand-new website, NSA Haiku, takes words from the NSA’s watchlist of bad words and mixes them up to create weird and wonderful mashups of seditious and subversive haiku. From the resulting works of art, it’s clear that those NSA spooks are very interested in sex and suspicious packages.

Not to mention enriched ice wings:

...The 366 words contain such gems as Islamist, which every terrorist knows to use in his or her email, smart, which it is always important to be when the NSA is hunting you, and IED, because the bad guys have clearly adopted U.S. military jargon.

Another list that NSA Haiku also draws from is one that was released way back in 1998; it contains oddities like AOL founder Steve Case and one-time Apple CEO John Scully — or perhaps Scully from the X-Files. Plus, of course, cocaine, illuminati, assassinate, and yes, sex....MORE

Oil Boom: U.S. Ship Builders Thriving With Tankers

This is one part of the economy where you see the velocity of money is greater than the 1.5 or whatever the Fed is reporting.
From CNBC via Yahoo Finance:

Made-in-USA shipbuilding finds an unlikely ally

The 820-foot Liberty Bay sits dry-docked in Philadelphia 's Aker Shipyard. A massive supertanker destined for the West Coast, the ship is set to launch next week when it will undergo its final outfitting before being delivered to SeaRiver Maritime in April. It's taken more than 1,000 workers a year to build the Liberty Bay, and construction has already begun on her sister ship in the same yard.

And while it might not be surprising that the City of Brotherly Love is home to a thriving shipbuilding economy, the reason for the boom might be: domestic oil production.

Thanks to the century-old Jones Act, which requires all goods moved between U.S. ports to be carried by U.S.-flagged and U.S.-built vessels, shipbuilders across the country are working overtime to keep up with demand for tankers that can transport the bounty of newly drilled shale oil and gas now being produced in the United States.

When it launches, the Liberty Bay will be able to deliver 33 million gallons of oil from Alaska's North Slope to refineries on the West Coast in a single trip. SeaRiver Maritime, Exxon Mobil's (XOM) marine affiliate, has commissioned the two ships. At a cost of $200 million each, the tankers represent a significant investment that will help boost Philadelphia's economy.

According to the Department of Transportation, 15 tankers are on order or under construction at shipyards across the country, with options for many more. It's the biggest boom the industry has seen in 20 years. 

When Aker (Oslo Stock Exchange: AKER-NO) finishes with the two ships for Exxon, it will begin construction on four more for another client, with the option to deliver another four after that. In all, the company has won orders for $1.1 billion, and has tripled in size since 2011....MORE  

We've looked at some of the other beneficiaries of the boom, railroads, railcars, barge builders and operators:
More Berkshire Hathaway and Energy: "Buffett Like Icahn Reaping Tank Car Boom From Shale Oil" (BRK.b)
Goldman Sachs: "Bakken shale production will surprise Wall Street" and Carl Icahn does a drive-by (CLR; OAS; ARII; TRIN)
Barron's Feature: "Betting on the Buffett of Barges" (CKH) Special Bonus: A Case Study in Financial Brilliance
Oil: "Barges Are the New Trains -Valero" (KEX; TRN)  

Kirby is the largest U.S. barge operator.
Trinity manufactures rail cars and barges.
Both stocks have outperformed the larger market over the last year:

Commodity Market Squeezes of the Past decade

From Reuters:

...TRADER: Arcadia, with assistance
MARKET: Dated Brent
PERIOD: 2000
STRATEGY: Tosco claimed in a lawsuit, later settled out of court, that Arcadia gained a monopoly position in late August and early September after obtaining control of more '15-Day' Brent contracts than it knew could be delivered. Glencore, who was named as a co-conspirator, also bought a number of Brent cargoes to satisfy a tender to supply refiners in India.
PRICES: Traders calculated that the value of Europe's benchmark Dated Brent crude jumped by more than $3 from Aug. 21 to Sept. 5 as cargoes were bought.
FALLOUT: U.S. oil refiner Tosco filed a lawsuit against Arcadia for inflating the price of crude. Tosco claimed Arcadia, then a wholly owned subsidiary of Japan's Mitsui, was aided by Swiss-based trader Glencore and other unidentified conspirators to raise the price of Brent crude. The lawsuit was settled out of court. At the time, China's biggest crude oil importer Unipec suspended trade with Arcadia and Glencore.

TRADER: Sempra
MARKET: Dated Brent
PERIOD: Q1 2002
STRATEGY: U.S. energy trader Sempra snapped up almost an entire month's Brent crude oil program after carrying out a huge exchange-for-physical (EFP) trade, under which it swapped Brent futures for forward contracts that delivered oil. Most of the crude was shipped to China.
PRICES: Dated Brent spreads and premiums strengthened during the month.
FALLOUT: Sempra's was one of the last classic short squeezes in the North Sea Brent market before pricing agency Platts introduced additional types of crude into its benchmark methodology, making it all but impossible for a single trader to buy an entire month's worth of crude.

TRADER: BP
MARKET: Propane
PERIOD: Early 2004
STRATEGY: BP was alleged to have bought nearly all the propane in the Mont Belvieu storage fields in advance, then held onto it until the end of the month, when other companies who needed the gas on a northern pipeline would pay up for it.
PRICES: This is unclear, but some media reported that BP had ultimately lost money on the gambit.
FALLOUT: In 2007 BP agreed to pay $303 million in civil and criminal penalties for attempting to corner the U.S. propane market, the biggest CFTC fine in history. In return, the government agreed to end criminal probes related to propane, gasoline, crude and other commodity trade. BP also agreed to pay $52 million to settle a class action lawsuit brought by customers who said they paid inflated prices in April 2003 and the first half of 2004.
A separate criminal case against four BP traders, who had pleaded not guilty to mail fraud and conspiracy, was dismissed in 2009 because the trades had occurred on the over-the-counter market, not on a regulated exchange.

TRADER: Brian Hunter for Amaranth Advisors LLC
MARKET: U.S. Natural Gas
PERIOD: Aug-Sept. 2006
STRATEGY: Hunter bet on the March/April spread; that April prices would drop relative to March before storage had the chance to refill to meet summer cooling demand. He had made that bet in 2005 and won big because Hurricane Katrina had knocked some Gulf of Mexico supplies offline and the price of gas rose as high as $15.78 in December, the highest ever, as the market feared a supply shortage. The fund had natural gas futures positions valued at more than $5 billion in December 2005. By the time September 2006 rolled around, with no hurricanes, storage was at a healthy level and the spread began to move against him.
PRICES: Between Aug. 25, 2006 and Sept. 27, 2006, natural gas futures lost 41 percent of their value as Hunter unwound his positions.
FALLOUT: By the end of September 2006, the losses from the bad trades were estimated at $6.4 billion and the fund went out of business. The CFTC charged Amaranth with attempted market manipulation and focused on Hunter's ability to amass thousands of positions both on the NYMEX and in the electronic over-the-counter market on the InterContinental Exchange.

In 2009, Amaranth was ordered to pay a $7.5 million fine to the CFTC for attempted manipulation of natural gas prices. As a result of the incident, ICE in 2007 began reporting in more detail its weekly positions to the CFTC.

By January 2010, the CFTC began including some of the ICE data in its weekly Commitment of Traders reports. In April 2011 the U.S. Federal Energy Regulatory Commission ordered Hunter to pay a $30 million fine for manipulating energy markets prices....MORE

"The Financial Crisis and the Systemic Failure of Academic Economics"

From the WEA's Pedagogy blog:

Kiel Working Paper 1489 | February 2009
David Colander, Hans Föllmer, Armin Haas, Michael Goldberg, Katarina Juselius,
Alan Kirman, Thomas Lux, and Brigitte Sloth

Abstract:
The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.

Okay but other than that....

Probabilistic Investing

The only thing that makes sense for long haul commitments right now is "Own the cash flow" which means private equity or some other form of direct (as opposed to 'portfolio') investment.
From Mebane Faber:

My readers are probably tired of my droning on about valuations in the US and abroad (if you’re new here, short summary: US is expensive, and the rest of the world is cheap)...MORE 

 

"Here We Go: SocGen Warns There Is 'Possibility' Fed May Increase QE Next Week"

This is a few days old but really demonstrates how far down the rabbit hole we've fallen when a Jean-Paul Sartre play, "Huis Clos" (No Exit) is the first thing that comes to mind upon reading this.
From ZeroHedge:

And so, one by one, the crazy pills theories start rolling out. Yesterday, as we first pointed out, Deutsche Bank made waves when it became the first "serious" organization to suggest that the Fed has now missed its tapering window, and will plough on thorough until the next downturn without ever lowering the pace of Flow (of course the reflexive paradox that the economy would be in an out of control depression without QE in the first place somehow does not figure in that calculation).

And while this has not been a novel idea (we first predicted that once perpetual QE starts it will never taper, long before QE 3, aka QE^ternity was even publicly announced last summer)  today, all the penguin "pundit" copycats have jumped aboard this theory. Well, not all. SocGen has decided to make waves of its own with an even crazier pills idea: instead of no taper... ever... the Fed, that glorious redistributor of wealth from the middle class to the 1%, while happy to adhere to that old saying: "a funded welfare program a day, keeps the guillotines away" will not only not announce a Taper in next week's FOMC meeting but will in fact hike QE!
From SocGen:

Although we assign a very low probability to a decision by the FOMC to increase asset purchases at its October meeting, it is not a possibility we can ignore. Assuming the Fed does not increase asset purchases this year, we consider the bottom of the range on the 10yT to be 2.40%. The market impact of an increase in Treasury and/or MBS purchases would be to rally the long-end of the curve back towards 2.00%, destroy volatility (again), possibly tighten the mortgage basis, and supporting equity, credit and emerging markets.

The potential downsides to increasing asset purchases would be that (1) the market would assume the FOMC was focusing on a very grim economic picture; (2) the perceived risk of inflating asset bubbles in various market segments would rise; and (3) the FOMC may run into a credibility problem (again) by whipsawing the market.
... 
The question now may very well be whether or not the FOMC will choose to increase asset purchases at the next meeting, or whether it will include language in the FOMC statement that indicates they are strongly considering the option. A simple interim solution would be to reinsert the language that appeared in the May through July FOMC statements that “the Committee is prepared to increase or reduce the pace of its purchases to maintain appropriatepolicy accommodation as the outlook for the labor market or inflation changes.”
...
Market Impact
The outcome for the US rates market going into year-end could vary dramatically based on what the FOMC signals next week.
Scenario 1: The FOMC statement is relatively unchanged, recognizes recent economic weakness as potentially temporary, and suggests that a reduction in asset purchases within the next six months has not been removed from consideration. Probability: 50%.

Lower end of range on 10yT: 2.40% through November; possible sell-off in December if data begins to improve.

Scenario 2: The FOMC statement reinstates language that asset purchases could be increased or reduced, and raises greater concern about recent economic weakness. Probability: 40%.

Lower end of range on 10yT: 2.30% through November; sell-off muted or unlikely unless December FOMC statement and communication begin to reinstate possibility of tapering in Q1 14 in response to improving fundamentals.

Scenario 3: The FOMC increases asset purchases by $10-20bn in October. Probability: 10%, with full disclaimer that our economics team thinks this probability is closer to 0.0001% and that your author is nuts!

Lower end of range on 10yT: 2.00%. The bull flattening of the Treasury curve will run us all over.

In retrospect, this suggestion as ludicrous as it is, makes sense....MORE

Take a Walk on the Wild Side: Lou Reed Dies at 71

He's fortunate he lived that long. What to post? Sweet Jane? Heroin?


From Rolling Stone:

Lou Reed, Velvet Underground Leader and Rock Pioneer, Dead at 71 
New York legend, who helped shape nearly fifty years of rock music, underwent a liver transplant in May

Lou Reed, a massively influential songwriter and guitarist who helped shape nearly fifty years of rock music, died today. The cause of his death has not yet been released, but Reed underwent a liver transplant in May.
Look back at Lou Reed's remarkable career in photos

With the Velvet Underground in the late Sixties, Reed fused street-level urgency with elements of European avant-garde music, marrying beauty and noise, while bringing a whole new lyrical honesty to rock & roll poetry. As a restlessly inventive solo artist, from the Seventies into the 2010s, he was chameleonic, thorny and unpredictable, challenging his fans at every turn. Glam, punk and alternative rock are all unthinkable without his revelatory example. "One chord is fine," he once said, alluding to his bare-bones guitar style. "Two chords are pushing it. Three chords and you're into jazz."

Lewis Allan "Lou" Reed was born in Brooklyn, in 1942. A fan of doo-wop and early rock & roll (he movingly inducted Dion into the Rock and Roll Hall of Fame in 1989), Reed also took formative inspiration during his studies at Syracuse University with the poet Delmore Schwartz. After college, he worked as a staff songwriter for the novelty label Pickwick Records (where he had a minor hit in 1964 with a dance-song parody called "The Ostrich"). In the mid-Sixties, Reed befriended Welsh musician John Cale, a classically trained violist who had performed with groundbreaking minimalist composer La Monte Young. Reed and Cale formed a band called the Primitives, then changed their name to the Warlocks. After meeting guitarist Sterling Morrison and drummer Maureen Tucker, they became the Velvet Underground. With a stark sound and ominous look, the band caught the attention of Andy Warhol, who incorporated the Velvets into his Exploding Plastic Inevitable. "Andy would show his movies on us," Reed said. "We wore black so you could see the movie. But we were all wearing black anyway."

"Produced" by Warhol and met with total commercial indifference when it was released in early 1967, VU’s debut The Velvet Underground & Nico stands as a landmark on par with the Beatles' Sgt. Pepper's Lonely Hearts Club Band and Bob Dylan's Blonde On Blonde. Reed's matter-of-fact descriptions of New York’s bohemian demimonde, rife with allusions to drugs and S&M, pushed beyond even the Rolling Stones’ darkest moments, while the heavy doses of distortion and noise for its own sake revolutionized rock guitar. The band’s three subsequent albums – 1968’s even more corrosive sounding White Light/White Heat, 1969’s fragile, folk-toned The Velvet Underground and 1970’s Loaded, which despite being recorded while he was leaving the group, contained two Reed standards, “Rock & Roll” and “Sweet Jane,” were similarly ignored. But they’d be embraced by future generations, cementing the Velvet Underground’s status as the most influential American rock band of all time....MUCH MORE

"Are real rates too high or too low?"

From The Economist's Free Exchange blog:

Something Wicksell this way comes 

If the government fixes the price of petrol, apartments or avocadoes, it will learn soon enough if it got the price wrong: too low, shortages appear; too high, gluts materialize. In the market for credit, it’s a tougher call. The central bank in the short run fixes the price of credit via the interest rate, but has no ready way of knowing it got it right. With a fiat currency, an increased demand for credit automatically brings forth more supply, and a decrease in the demand reduces the supply.

Yet out there, somewhere, is a "correct" interest rate, sometimes called the natural interest rate, or Wicksellian rate. This week’s Free Exchange column explains:

Over a century ago Knut Wicksell, a Swedish economist, drew the distinction between the financial rate of interest that borrowers actually pay and the natural rate of interest that was determined by the return on capital. If the financial rate is below the natural rate, businesses can reap unlimited profits by borrowing as much as they can and ploughing it into high-returning projects. Eventually, though, all that additional spending pushes up prices, money and credit, and eventually, financial interest rates.

The natural interest rate is often assumed to be constant. … But, according to Wicksell, the natural rate is “never high or low in itself, but only in relation to the profit which people can make with the money in their hands, and this, of course, varies. In good times, when trade is brisk, the rate of profit is high, and, what is of great consequence, is generally expected to remain high; in periods of depression it is low, and expected to remain low.”

Central banks pay implicit homage to Wicksell. Their models, for instance in this paper by Thomas Laubach and John Williams, assume the existence of an equilibrium real rate of interest that keeps the economy operating at potential. Keep the actual rate below the equilibrium rate, and the economy speeds up, eventually generating inflation. Keep it above, and it slows down, eventually tipping into recession. But unlike Wicksell, the Fed does not invoke the difference between the financial rate and the return on capital to explain how monetary policy works. Indeed, the empirical link between capital spending and interest rates is not very strong. Rather, the primary channels by which monetary policy works are household durable consumption, housing, and financial variables such as the exchange rate and the stock market.

At root, though, Wicksell’s original formulation is still relevant. Households may not think of themselves as having some target return on capital, but they still have preferences for consuming now versus consuming in the future. Atering interest rates, by bending those preferences, can stimulate or dampen aggregate demand today. Make the real interest rate negative enough, and the increased pleasure that comes from consuming today vs saving and consuming tomorrow becomes overwhelming. This, ultimately, is why the IS curve in the IS-LM model slopes down.

As Greg Mankiw and John Campbell noted back in 1989, it’s hard to find a strong, empirical connection between movements in real interest rates and movements in consumption. After crunching the numbers, they found that consumption responded far more to expected income. This doesn’t mean there’s no role for the interest rate; it could be that, to influence consumption, the interest rate must offset opposite pressure from changes in expected income. In other words, when consumers expect to be much wealthier in the future, they are more willing to borrow against that wealth. To prevent an inflationary surge in consumption, the central bank tightens. When households expect to be less wealthy, they don't want to borrow until the central bank lowers interest rates enough.

That seems to be what ails America now. The University of Michigan each month asks households how much they expect their income to grow in the coming year, and as the nearby chart shows, those expectations have collapsed. Since the start of 2009, the median household has expected its income to grow just 0.4% in the next 12 months, i.e. decline in real terms....MORE