Teach the Kids (or yourself) to Code or What is the Founder of Google-X Up To?

Following up on this morning's "Technology: So Where's the #&@*$% Innovation?" which looked at the very unappealing combination of intellectual stagnation and arrogance that seems to encapsulate the zeitgeist of Silicon Valley ca 2013. One of the people trying to sort through the mess is the sometimes controversial co-founder of Udacity, Sebastian Thrun.
From his Stanford webpage:

I am a research professor at Stanford, a Google Fellow, and a co-founder of Udacity.
At Google, founded Google X, which is home to projects like the Google self-driving car and the recently announced Google Glass. We are trying to radically innovate, innovate, innovate. And I am on a mission to learn from Google's amazing founders, Sergey and Larry.
At Udacity, we are trying to democratize higher education. Udacity stands for "we are audacious, for you, the student". This is an audacious step, and it has been a thrill ride. At Stanford, I still have my research group, after giving up my tenure earlier in 2011. We do all sorts of research on using AI to improve people's daily lives. 

MORE

I don't know if he has any answers but he does have interests, robots, autonomous vehicles, artificial intelligence, MOOC's etc that may point the way.
From Fast Company, December2013-January 2014:
Udacity's Sebastian Thrun, Godfather Of Free Online Education, Changes Course 

He captivated the world with visions of self-driving cars and Google Glass and has signed up 1.6 million students for online classes. So why is he pivoting away from MOOCs? "We don't educate people as others wished, or as I wished," Thrun says.

There's a story going around college campuses--whispered about over coffee in faculty lounges, held up with great fanfare in business-school sections, and debated nervously by chain-smoking teaching assistants.

It begins with a celebrated Stanford University academic who decides that he isn't doing enough to educate his students. The Professor is a star, regularly packing 200 students into lecture halls, and yet he begins to feel empty. What are 200 students in an age when billions of people around the world are connected to the Internet?

So one day in 2011, he sits down in his living room with an inexpensive digital camera and starts teaching, using a stack of napkins instead of a chalkboard. "Welcome to the first unit of Online Introduction to Artificial Intelligence," he begins, his face poorly lit and slightly out of focus. "I'll be teaching you the very basics today." Over the next three months, the Professor offers the same lectures, homework assignments, and exams to the masses as he does to the Stanford students who are paying $52,000 a year for the privilege. A computer handles the grading, and students are steered to web discussion forums if they need extra help.

Some 160,000 people sign up: young men dodging mortar attacks in Afghanistan, single mothers struggling to support their children in the United States, students in more than 190 countries. The youngest kid in the class is 10; the oldest is 70. Most struggle with the material, but a good number thrive. When the Professor ranks the scores from the final exam, he sees something shocking: None of the top 400 students goes to Stanford. They all took the class on the Internet. The experiment starts to look like something more.

Higher education is an enormous business in the United States--we spend approximately $400 billion annually on universities, a figure greater than the revenues of Amazon, Apple, Facebook, Google, Microsoft, and Twitter combined--and the Professor has no trouble rounding up a group of Silicon Valley's most prestigious investors to support his new project. The Professor's peers follow suit: Two fellow Stanford faculty members launch a competing service the following spring, with tens of millions of dollars from an equally impressive group of backers, and Harvard and MIT team up to offer their own platform for online courses. By early 2013, nearly every major institution of higher learning--from the University of Colorado to the University of Copenhagen, Wesleyan to West Virginia University--will be offering a course through one of these platforms.

Suddenly, something that had been unthinkable--that the Internet might put a free, Ivy League–caliber education within reach of the world's poor--seems tantalizingly close. "Imagine," an investor in the Professor's company says, "you can hand a kid in Africa a tablet and give him Harvard on a piece of glass!" The wonky term for the Professor's work, massive open online course, goes into such wide use that a New York Times headline declares 2012 the "Year of the MOOC." "Nothing has more potential to lift more people out of poverty," its star columnist Thomas Friedman enthuses, terming the new category "a budding revolution in global online higher education."

It is a good story, as well manicured as a college quad during homecoming weekend. But there's a problem: The man who started this revolution no longer believes the hype.
"I'd aspired to give people a profound education--to teach them something substantial," Professor Sebastian Thrun tells me when I visit his company, Udacity, in its Mountain View, California, headquarters this past October. "But the data was at odds with this idea."...MUCH MORE, including some punchy little sidebars.

As for the headline, it refers to Thrun's Udacity where you can indeed teach yourself/your progeny a range of computer skills.
Khan Academy, MIT, Mozilla’s School of Webcraft and Google Code University also have offerings for the little cherubs.
Since most polymaths are of necessity self-taught in the majority of the fields they take on this is one way to find out if your kids actually actually are the geniuses you think they are.

"What Surveillance Valley knows about you" (GOOG)

From Pando Daily:

“In 2012, the data broker industry generated 150 billion in revenue that’s twice the size of the entire intelligence budget of the United States government—all generated by the effort to detail and sell information about our private lives.”
— Senator Jay Rockefeller IV

“Quite simply, in the digital age, data-driven marketing has become the fuel on which America’s free market engine runs.”
— Direct Marketing Association

Google is very secretive about the exact nature of its for-profit intel operation and how it uses the petabytes of data it collects on us every single day for financial gain. Fortunately, though, we can get a sense of the kind of info that Google and other Surveillance Valley megacorps compile on us, and the ways in which that intel might be used and abused, by looking at the business practices of the “data broker” industry.

Thanks to a series of Senate hearings, the business of data brokerage is finally being understood by consumers, but the industry got its start back in the 1970s as a direct outgrowth of the failure of telemarketing. In its early days, telemarketing had an abysmal success rate: only 2 percent of people contacted would become customers. In his book, “The Digital Perso,” Daniel J. Solove explains what happened next:

To increase the low response rate, marketers sought to sharpen their targeting techniques, which required more consumer research and an effective way to collect, store, and analyze information about consumers. The advent of the computer database gave marketers this long sought-after ability — and it launched a revolution in targeting technology.

Data brokers rushed in to fill the void. These operations pulled in information from any source they could get their hands on — voter registration, credit card transactions, product warranty information, donations to political campaigns and non-profits, court records — storing it in master databases and then analyzing it in all sorts of ways that could be useful to direct-mailing and telemarketing outfits. It wasn’t long before data brokers realized that this information could be used beyond telemarketing, and quickly evolved into a global for-profit intelligence business that serves every conceivable data and intelligence need.

Today, the industry churns somewhere around $200 billion in revenue annually. There are up to 4,000 data broker companies — some of the biggest are publicly traded — and together, they have detailed information on just about every adult in the western world.

No source of information is sacred: transaction records are bought in bulk from stores, retailers and merchants; magazine subscriptions are recorded; food and restaurant preferences are noted; public records and social networks are scoured and scraped. What kind of prescription drugs did you buy? What kind of books are you interested in? Are you a registered voter? To what non-profits do you donate? What movies do you watch? Political documentaries? Hunting reality TV shows?...MUCH MORE

Technology: So Where's the #&@*$% Innovation?

Silicon Valley is pretty damned haughty these days, without much real accomplishment to be haute about.
Paraphrased from a 2010 comment on David Rosenberg:

I can handle arrogant as long as you're right, hell I can tolerate a fat guy in a grass skirt and spike heel Manolo Blahniks if he's right.
It would be fun to watch him tottering around.

From Quartz:

2013 was a lost year for tech

All in, 2013 was an embarrassment for the entire tech industry and the engine that powers it—Silicon Valley. Innovation was replaced by financial engineering, mergers and acquisitions, and evasion of regulations. Not a single breakthrough product was unveiled—and for reasons outlined below, Google Glass doesn’t count. If it’s in the nature of progress to move in leaps, there are necessarily lulls in between. Here are all the reasons 2013 was a great big dud for technology as a whole.

Mobile phones stagnated

Apple’s huge iPhone launch concealed a deeper truth—its devices are less distinguishable from each other, 

and from competitors, than ever.AP Photo/Matt Dunham

2013 was the year smartphones became commodities, just like the PCs they supplanted. Even at the high end, Apple and Samsung’s newest flagship phones weren’t big leaps ahead from previous versions. The most that Apple could think to do with the new, faster processor in the iPhone 5S was animate 3D effects that make some users feel ill and a fingerprint sensor that solved a problem that wasn’t exactly pressing. Apple’s new iOS7 mobile operating system, which felt “more like a Microsoft release,” crippled many older iPhones and led to complaints of planned obsolescence. 

Samsung’s update to history’s best-selling Android phone, the Galaxy S series, delivered on the technical specifications but continued the line’s “unpleasant, cheap design.” Packed with new features like touch-free gesture control, the phone also has an “easy mode” in recognition that many will want to switch them off, and suffers from an interface that stutters at odd moments despite its powerful electronics. Meanwhile, Google’s mysterious superphone turned out to be the Moto X, which is a nice Android phone but hardly revolutionary.

The one good thing about all this commodification is that smartphones are cheaper than ever—in 2014 they’ll cost as little as $20 in China—just like high-end televisions. Prices for good tablets have similarly collapsed.

Wearables were a letdown

Samsung’s Galaxy Gear smart watch disappointed.AP Photo/Gero Breloer

The tone-deaf design of Google’s Glass headset—which to anyone but its user is a head-mounted video camera without the tiny light that all other video cameras have to tell you you’re being filmed—made the device such anathema that one pundit wondered whether he should be ashamed to wear it in public. Sergey Brin’s personal campaign to make wearing Glass look normal couldn’t hide the fact that Glass is a technology in search of an application—unless that application is invasions of privacy.

Smart watches were easily the biggest letdown of the year. Despite the fact that nearly every big electronics manufacturer is working on one, the battery and display constraints have stumped designers. Again and again, reviewers have declared existing models unfit for widespread adoption, with both Sony and Samsung unveiling devices that failed to make a compelling case for themselves.

Former giants continued their inglorious decline

Microsoft CEO Steve Ballmer will be pushed out, but not soon enough.Reuters/Lee Jae Won

Microsoft lost nearly a billion dollars on the Surface RT tablet, which was to be the device that pole-vaulted the company over Apple’s iPad and the dying PC industry. Insiders revealed Microsoft’s ruinous internal culture, fostered under a leader who probably never should have been CEO, leading those same insiders to conclude that the only solution is a breakup of the company....MUCH MORE

"The Interrupted Power Law and The Size of Shadow Banking"

Via arXive.org:

(Submitted on 9 Sep 2013 (v1), last revised 5 Oct 2013 (this version, v3))

Using public data (Forbes Global 2000) we show that the distribution of asset sizes for the largest global firms follows a Pareto distribution in an intermediate range that is "interrupted" by a sharp cutoff in its upper tail, which is totally dominated by financial firms. This contrasts with a large body of empirical literature which finds a Pareto distribution for firm sizes both across countries and over time. Pareto distributions are generally traced back to a mechanism of proportional random growth, based on a regime of constant returns to scale: this makes our evidence of an "interrupted" Pareto distribution all the more puzzling, because we provide evidence that financial firms in our sample operate in such a regime.
We claim that the missing mass from the upper tail of the asset size distribution is a consequence of shadow banking activity and that it provides an estimate of the size of the shadow banking system. This estimate -- that we propose as a shadow banking index -- compares well with estimates of the Financial Stability Board until 2009, but it shows a sharper rise in shadow banking activity after 2010.

12 page PDF

MERRY CHRISTMAS

 
Ho Ho Ho!

Back on Thursday.

Gold and Other Metals Holiday Schedule

Via Kitco:

Google Robot Wins the DARPA Robotics Challenge

From Dec. 14's "Why Google Bought DARPA-funded Robot Maker Boston Dynamics (GOOG)":

Because Google is Evil.
We looked at Boston dynamics in last March's "Your DARPA Dollars at Work: The Amazing Boston Dynamics BigDog and LS3 Bio-mimetric Robots"and before that in 2012's "DARPA Wants Robotics to Rise to the Challenge of Disasters". These things are war machines....

Consider the Robotics challenge as akin to 1968's Prague Spring and "Socialism with a human face".
The Challenge is robotics with a human face.
Or something.

Partly due to the almost visceral reaction to Google's purchase of Boston Dynamics the GOOG said they wouldn't solicit any more military contracts.
Maybe a reprise of "Don't be evil".

From ExtremeTech:

DARPA’s Robotic Challenge took place in Florida over the weekend, pitting some of the world’s most advanced humanoid robots against each other in a series of complex tasks, and rather fortuitously for a famously acquisitive Silicon Valley company, the winning robot was fielded by a company called Schaft — a Japanese company that was recently acquired by Google as part of its rather sudden segue into robotics. Google now officially, and probably not unintentionally, has its hands on the best humanoid robot in all the land.

The Schaft robot, made by Shaft Inc of Japan — which is now one of Google’s primary robotics research labs —  is one of around 10 robots that were entered into DARPA’s Robotic Challenge (DRC). Over the weekend, the robots competed in eight different tasks to gauge the current state of semi-autonomous bipedal robots, and, of course, to find out who’s the best. (The winner has a strong chance of winning prize money and securing lucrative future contracts from DARPA and the Department of Defense.) The Schaft team won in four out of eight tasks — terrain, ladder, debris, and hose — and accrued a total score of 27 points. Second-place IHMC Robotics, which used Boston Dynamics’ Atlas robot, came in second with two task wins and 20 points.

Rounding out the rest of the DRC results, Tartan Rescue (Carnegie Mellon + NREC) came in third with its CHIMP robot, picking up 18 points, and MIT came in fourth with an Atlas. NASA’s Valkyrie sadly scored zero points. A full break down of the contest and the results can be found on the DRC Trials website. Some cool videos from the event can be found on DARPA’s YouTube channel.

...MORE

Anthropomorphizing:

Shaft
Who's the black private dick
That's a sex machine to all the chicks?
(Shaft!)
You're damn right

Who is the man
That would risk his neck for his brother man?
(Shaft!)

Can ya dig it?
Who's the cat that won't cop out
When there's danger all about
(Shaft!)

Right on
You see this cat Shaft is a bad mother
(Shut your mouth)
But I'm talkin' about Shaft

Huffington Post Doesn't Hit the Numbers, Gets a Pass From AOL

From Reuters via Capital New York:

Why HuffPost got a pass from AOL this year

The Huffington Post will post a $6 million loss on $100 million in revenue this year, Mark May, an analyst with CitiGroup Research, told Reuters' Jennifer Saba.

The number falls well short of AOL chief Tim Armstrong's projection at the time of The Huffington Post's acquisition that the property, bought for $315 million, would post "$66 million in operating profit in 2013 on $165 million in revenue," Saba writes.

AOL executives tell Saba the company has been intentionally reinvesting ad revenue, but some analysts gave a better reason for why shareholders don't seem too worried (this past year, in fact, the stock is up more than 40 percent, according to Saba).

Macquarie analyst Ben Schachter tells Saba the patent sale to Microsoft allowed the company to put a dividend in investors' pockets; but also that the dial-up subscriber business wasn't shrinking as fast as the company had predicted. Neither of these is expected to be a factor next year, though.

"Going forward, things like The Huffington Post and the overall Brand Group will have to show they are real businesses and profitable," Schachter said. "I've been a broken record about it: Can they make content profitably? Up until recently the answer has been 'no.'"

Read the complete article here: http://goo.gl/IlgyxW

"Time to Short Canada?"

Leo first links to the FT and then takes a look at a couple more reasons Canada may not be the best bet in the casino.
From Pension Pulse and the Financial Times:

Camilla Hall of the Financial Times reports, Short-focused fund to launch in Canada:

Investors in Canada are to get the chance to bet against their own real estate market as one of the first short-focused funds is set to launch in the country, where concerns have grown that there is a housing bubble ready to burst.

The Spartan/Libertas Real Asset Opportunities Fund, set to launch in Toronto in the first quarter of next year, will allow Canadian brokers, developers or pension funds to mitigate their exposure towards a possible downturn in the real estate market, Michael Brown, manager of the fund told the Financial Times.

The new fund reflects broader investor interest in shorting or hedging risk to Canada after high-profile names from Steve Eisman, featured in Michael Lewis’s The Big Short, to Robert Shiller, the Nobel-prize winning economist, have raised questions over the challenges facing the Canadian real estate market.

Under the watch of Mark Carney, the former Bank of Canada governor who now holds the same job at the Bank of England, the country weathered the global financial crisis better than many industrialised peers. But low interest rates have encouraged soaring property prices and household debt levels which many economists say are unsustainable.

“The thesis behind the fund is that the Canadian housing market is one of the most overvalued in the world,” said Mr Brown. “A lot of things people observed in the US in the run-up to 2007-8 crisis are happening here.”...

...MUCH MORE
 
I'm not much help here, other than trading the Loonie and trying to take some money off the Vancouver crowd (see image below) I've tended to prefer the long side of the sleeping giant.

Here's a list of the ETF's with exposure, I'm sure some of these will go down.

100 Years Ago Today: The Birth of the Federal Reserve

Although President Wilson signed the Federal Reserve Act on December 23, 1913 the more interesting story goes back to November 1910.
The five bankers who joined Senator Aldrich and Treasury Assistant Secretary Andrew were Frank Vanderlip (National City Bank of New York), Henry P. Davison (J.P. Morgan), Charles D. Norton (First National Bank of New York), Paul Warburg (Kuhn, Loeb & Co.) and Benjamin Strong (Bankers Trust).
From Forbes:

Forbes founder B. C. Forbes reported in 1916:

Picture a party of the nation’s greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily riding hundreds of miles South, embarking on a mysterious launch, sneaking onto an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned, lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance. I am not romancing; I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written… The utmost secrecy was enjoined upon all. The public must not glean a hint of what was to be done. Senator Aldrich notified each one to go quietly into a private car of which the railroad had received orders to draw up on an unfrequented platform. Off the party set. New York’s ubiquitous reporters had been foiled… Nelson (Aldrich) had confided to Henry, Frank, Paul and Piatt that he was to keep them locked up at Jekyll Island, out of the rest of the world, until they had evolved and compiled a scientific currency system for the United States, the real birth of the present Federal Reserve System, the plan done on Jekyll Island in the conference with Paul, Frank and Henry… Warburg is the link that binds the Aldrich system and the present system together. He more than any one man has made the system possible as a working reality....

And from National Public Radio's Planet Money:

A Locked Door, A Secret Meeting And The Birth Of The Fed

J.P. Morgan: Not a pussycat.

In 1907, the U.S. economy was in the grip of a financial crisis. Unemployment was up. The stock market was down.

People started panicking. They were lining up overnight to pull their money out of healthy banks This can be deadly for an economy: Healthy banks have to shut down, businesses can't get credit, they lay people off, and the economy gets worse.

At the time, the U.S. government had no way to deal with the panic. There was no institution that could step in to stop the run on healthy banks. So the job of stopping the panic fell to one man: J.P. Morgan (of J.P. Morgan fame).

He summoned dozens of the leading financiers in New York to his private library on Madison Ave, and essentially ordered them to contribute to a $25 million pool that would be used to backstop the system. Then he locked them in and made them stay there through the night, until they all agreed to his plan.
The plan worked — it essentially ended the Panic of 1907.

But some powerful people in Washington wondered: what about the next panic? Do we really want the fate of the U.S. economy to hinge on one rich guy in New York?

One person in particular decided this was a problem: Senator Nelson Aldrich, chairman of the Senate finance committee. Aldrich knew there was something America could do so that it would no longer have to rely on one guy to end panics. The U.S. could create a central bank.

This was not a new invention. Countries in Europe already had central banks. And, during panics, the central banks basically did what J.P. Morgan did in the U.S.: Act as lenders of last resort for healthy banks. When depositors were lined up out the door yelling for their money, banks that were basically sound could borrow from the central bank.

But just consider that name: central bank. Throughout American history, both of those words — "central" and "bank" — had been deeply unpopular. The thought of a bunch of rich bankers in New York controlling a powerful central bank did not inspire confidence.

Still, Aldrich realized he needed bankers' help to draw up a plan for a central bank. So he came up with a plan to gather in secret.

He told a handful of New York bankers to come on a given night, one by one, to a train station in New Jersey. There they would find a private rail car hitched to the back of a southbound train. To conceal their identities, Aldrich told the bankers to come dressed as duck hunters and to address each other only by first name...MORE including audio (5 min 38 sec)

Benjamin Strong went on to become the first President of the Federal Reserve Bank of New York from October 5, 1914 – October 16, 1928. As head of the most powerful of the regional Fed banks (and in some ways more powerful than the Fed Chairman) Strong was intimately involved in the great bull market of the '20's and the timing of his death, 11 months before the market's top-tick, has led to a lot of alternative and counterfactual histories of what was to come.

Serious 3D Printing: Metal, Baby, Metal (SI)

Zo, your little printer makes plastic tchotkes....
From 3Ders.org:

World's hardest Christmas trees

With 3D printing processes, shapes can be produced that would be impossible using any other production process. Experienced material researcher Olaf Rehme of Siemens Corporate Technology (CT) has used a 3D printer to create Christmas trees from gas turbine steel. The special steel that Rehme uses for printing the Christmas trees is a nickel alloy.

During the process, commonly known as direct metal laser sintering, the laser beam moves across the bed of metal powder, releasing high energy in the form of heat and melting the metal, and generates an initial layer of the three-dimensional object. Parts are built up additively layer by layer. At the end of the process, a large amount of powder is left over that can be reused for the next printing cycle. This process allows for highly complex geometries to be created directly from the 3D CAD data, fully automatically, in hours and without any tooling.

If you look closely, you'll see the printed tree's fine structure.

Siemens has been using 3D printing processes to speed up gas turbine repair. For certain types of turbines, defective burner parts are simply reprinted on a 3D printer, reducing repair times by as much as 90 percent. Researchers at Siemens CT are now working on processing techniques that would be able to printing objects with extremely high ductility. To generate electricity, turbines have to turn and turn fast. It means that materials of turbine blades need to have high ductability against the massive centrifugal forces. 3D printing with metals can't yet meet these demands. For the little steel-hard trees, however, the technology is sufficient....MORE

"Bitcoin, Magical Thinking, and Political Ideology"

From Alex Payne:

Last week, investor Chris Dixon posed a provocative dichotomy when introducing his employer’s USD $25M investment in Bitcoin service Coinbase:

“The press tends to portray Bitcoin as either a speculative bubble or a scheme for supporting criminal activity. In Silicon Valley, by contrast, Bitcoin is generally viewed as a profound technological breakthrough.”

Now working at vogue venture capital firm Andreessen Horowitz, Dixon is in a fine position to speak for Silicon Valley. But to the extent that the Valley is a placeholder for the technology industry at large, I beg to differ. Bitcoin is “generally viewed” quite differently.

Most charitably, Bitcoin is regarded as a flawed but nonetheless worthwhile experiment, one that has unfortunately attracted outsized attention and investment before correcting any number of glaring security issues.

To those less kind, Bitcoin has become synonymous with everything wrong with Silicon Valley: a marriage of dubious technology and questionable economics wrapped up in a crypto-libertarian political agenda that smacks of nerds-do-it-better paternalism. With its influx of finance mercenaries, the Bitcoin community is a grim illustration of greed running roughshod over meaningful progress.

Far from a “breakthrough”, Bitcoin is viewed by many technologists as an intellectual sinkhole. A person’s sincere interest in Bitcoin is evidence that they are disconnected from the financial problems most people face while lacking a fundamental understanding of the role and function of central banking. The only thing “profound” about Bitcoin is its community’s near-total obliviousness to reality.

Regulation and Other Minor Details Bitcoin owes its present flexibility to a lack of regulation (or, more accurately, a lack of understanding around existing regulations and/or unwillingness to comply with them). If the broader Bitcoin experiment doesn’t implode, the currency will be regulated just as any other. In this best-case scenario for Bitcoin, what of the benefits Dixon claims?

We’re told that Bitcoin “fixes serious problems with existing payment systems that depend on centralized services to verify the validity of transactions.” If by “fixes” you mean “ignores”, then yes: a Bitcoin transaction, like cash, comes with the certainty that a definite quantity of a store of value has changed hands, and little else. How this verifies any “validity” or cuts down on fraud I’m not sure; stolen Bitcoins are spent as easily as stolen cash, which is why theft of Bitcoins has been rampant.

With those risks in mind, are the fees that existing card networks and payment processors charge – Dixon’s “roughly a 2.5% tax on all transactions” – outrageous, or are we perhaps collectively subsidizing the cost of fraud prevention and regulatory compliance? In what plausible universe will legitimate Bitcoin transactions be allowed to take place without such protections, and thereby without the associated costs? (Incidentally, you can expect to pay a similar “tax” just to reclaim some semblance of the anonymity that Bitcoin fails to provide in the form of mixers, a zingy term for money laundering.) To be sure, the credit card companies have fattened their margins beyond the raw cost of moving money around, but we have a miraculous salve for this called regulation.

If Bitcoin’s strength comes from decentralization, why pour millions into a single company? Ah, because Coinbase provides an “accessible interface to the Bitcoin protocol”, we’re told. We must centralize to decentralize, you see; such is the perverse logic of capital co-opting power. In order for Bitcoin to grow a thriving ecosystem, it apparently needs a US-based, VC-backed company that has “worked closely with banks and regulators to ensure that the service is safe and compliant”.

And Coinbase certainly feels, uh, compliant. It took me over a week to use the service to turn US dollars into a fraction of a Bitcoin, an experience that coupled the bureaucratic tedium of legacy consumer financial services with the cold mechanization of notoriously customer-hostile PayPal, but with the exciting twist that I have no idea from moment to moment how much my shiny new Internet money is actually worth.

Magical Thinking
While most of the claims around Bitcoin are merely wince-inducing, there is one that deserves particular attention: that Bitcoin is “a way to offer low-cost financial services to people who, because of financial or political constraints, don’t have them today.”

Economic inequality is perhaps the defining issue of our age, as trumpeted by everyone from the TED crowd to the Pope.....MORE

HT: naked capitalism who also says about another piece, Why I want Bitcoin to die in a fire, Charlie’s Diary. "Must read.".

How To Determine If You Watch Too Many Movies: Christmas Edition

If you recognize more than four or five of these directors' styles you may have seen too many movies.
Via Tastefully Offensive:


Put me down for seven and a New Year's Resolution.

Amazon and BlackRock In the Cloud: "Financial analytics as a service" (AMZN; BLK

From Oreilly Strata:

Analytic services are tailoring their solutions for specific problems and domains

In relatively short order Amazon’s internal computing services has become the world’s most successful cloud computing platform. Conceived in 2003 and launched in 2006, AWS grew quickly and is now the largest web hosting company in the world. With the recent addition of Kinesis (for stream processing), AWS continues to add services and features that make it an attractive platform for many enterprises.

A few other companies have followed a similar playbook: technology investments that benefit a firm’s core business, is leased out to other companies, some of whom may operate in the same industry. An important (but not well-known) example comes from finance. A widely used service provides users with clean, curated data sets and sophisticated algorithms with which to analyze them. It turns out that the world’s largest asset manager makes its investment and risk management systems available to over 150 pension funds, banks, and other institutions. In addition to the $4 trillion managed by BlackRock, the company’s Aladdin Investment Management system is used to manage¹ $11 trillion in additional assets from external managers.
Just as AWS has been adopted by e-commerce companies, some of Aladdin’s users are BlackRock’s peers in the asset-management industry. In the case of Aladdin², asset managers have come to value it’s collection³ of high-quality historical data and analytics (including Monte-Carlo simulations and stress tests). In recent years, the amount of assets that rely on Aladdin grew by about $1 trillion per year. To put these numbers in context, the 6,000 computers that comprise Aladdin keep an eye on about “7% of the world’s $225 trillion of financial assets”. About 17,000 traders worldwide have access to Aladdin.

As more firms come to rely on these massive services, errors and failures that would have been limited to their original users (Amazon and BlackRock) get propagated to many others. Aladdin’s creator BlackRock, fared relatively well in the recent financial crisis, but that hasn’t assuaged concerns over the amount of assets that rely on its investment management systems. Financial managers are particularly sensitive to accusations of having too much faith⁴ in models. Wary of letting their crisis management skills erode due to over-reliance on an external system, many other financial firms choose to retain in-house tools and capabilities. Even BlackRock encourages Aladdin users to think of it as a supplement to their other financial management systems and processes (e.g. Bloomberg or other tools & services)....MORE

A Very Interesting Chart: Portfolio Allocation to Equities and Subsequent 10 Year Returns

Despite doing this stuff for pretty much my entire adult life I've never before seen this correlation. A great catch by Abnormal Returns.

From Philosophical Economics (note the inverted return scale):

The Single Greatest Predictor of Future Stock Market Returns

Consider the following chart, which shows the average investor portfolio allocation to equities from January 1952 to December 2013:

The metric in this chart takes no input from any variables traditionally associated with valuation: earnings, book values, profit margins, discount rates, etc.  It consists only of a simple ratio between two numbers that can easily be calculated in FRED.  Yet, as a predictor of future stock market returns, it dramatically outperforms all other stock market valuation metrics commonly cited.  

In this piece, I’m going to do five things.  First, I’m going to explain, in very simple terms, the accounting principles behind the metric.  The explanation will include instructions (with ready-made links) for how to graph the metric in FRED.  Second, I’m going to discuss the dynamics of asset supply, with a special focus on equities.  Third, I’m going to challenge the conventional framework for understanding the relationship between valuation and stock market returns.  Fourth, I’m going to introduce a new framework, one that relates stock market returns to equity asset supply.  Fifth, I’m going to present a scatterplot of the predictive performance of the metric alongside other metrics, and discuss what the metric is currently forecasting for U.S. equity returns.  I’m going to conclude by briefly touching on the question of whether or not the current U.S. stock market is “overvalued.”

Accounting Principles: Cash, Bonds, Stocks
To begin, let’s arbitrarily divide the universe of financial assets into three categories: (1) cash, (2) bonds, and (3) stocks.  By “cash”, I mean bank deposits and circulating currency.  By “bonds”, I mean any certificate of obligation to repay borrowed cash–commercial paper, bills, notes, bonds, etc.  By “stocks” (or “equity”), I mean shares of ownership in a corporation (public or private).  Note that these definitions are intentional simplifications....MUCH MORE

HT: Abnormal Returns

Intertemporal Arbitrage: "Winning Big by Playing Long-Term Trends" (CNI; PNR)

From our December 3 post "UPDATED--The Economist On How the Commodity Quants Lost It":

I am having great difficulty with the idea that hedge funds couldn't find a way to make money, more after the jump....

...The bolded bit points up one of the failures of the fund managers.
They get paid to figure out the intertemporal arbitrage, a fancy way of saying the task at hand is to understand the time period that gives the fund the greatest advantage versus the market.

The classic example is the individual investor realizing that he can't compete with HFT and looking at longer than nanosecond time periods. This opens up the possibility of not just not-competing with the traders with the lowest latency but of taking advantage of mispricings caused by their behavior. This is exemplified by one of Buffett's baseball metaphors (he has quite a few):

In investments, there's no such thing as a called strike. You can stand there at the plate and the pitcher can throw a ball right down the middle; and if it's General Motors at 47 and you don't know enough to decide on General Motors at 47, you let it go right on by and no one's going to call a strike. The only way you can have a strike is to swing and miss.

The point is, you don't have to be at the market every second You are afforded the luxury of just waiting for the perfect pitch.

Now for a fund manager it get's tricky writing the quarterly report and saying "We didn't do much in Q3, we're waiting for Mr. Market to give us the high hanging curve ball" but if you've been honest with the investors that the tactic you've pulled from the toolbox is akin to the military's hurry-up-and-wait sense of time it is doable.

As a side note anyone who considers a move that is measured in weeks to be a trend is nuts. A trend is John Templeton going into the Japanese markets at 2 times earnings and catching a 40-fold move 1965-1989.

Here is a guy who gets it.
And just for the record I don't do the buy/sell/hold thing, our readers are sharp and can figure out what they (or their advisors) want to do. In the case of the headline symbols, Pentair is a class business and Canadian National got a mention back in 2009's "Pssst, Besides Warren Buffet, Which Berkshire Hathaway Director is a Railroad Fan? (BRK.a; BNI, CNI CSX; NSX; UNP)" when we noted that Bill Gates through the Foundation had 8.4 million shares. Additionally his Cascade Investment LLC owns a bunch (43 million shares), enough to make him the largest shareholder at 12% or so of the company.
From Barron's:

Why Atlanta money manager Harold J. Bowen likes Canadian National Railway and Pentair. 

In asset management, where fund managers can come and go quickly after a bad quarter or two, 39 years is an awfully long time. Atlanta money manager Bowen, Hanes & Co. began running the Tampa fire and police pension fund in 1974, and still is its lone manager, testament to a long run of solid and consistent performance. The fund's stocks, which account for about 75% of its $1.8 billion portfolio, have beaten the S&P 500 in 20 consecutive 20-year rolling periods, dating to 1974. The rest of the portfolio includes investment-grade bonds and cash. As of Sept. 30, the fund's annual 25-year gross total return was 10.48%, tops in its institutional peer group, according to Wilshire Associates.

Bowen, Hanes is led by Harold J. (Jay) Bowen III, 51, its CEO, chief investment officer, and president. The relationship with the Tampa fund was forged by Bowen's father, Harold J. (Jay) Bowen Jr., now 83 and nonexecutive chairman. Like his father, the younger Bowen hews to a long-term approach, trying to discern a stock's outlook for the next three to five years. With about 110 clients, the firm oversees about $2.5 billion. Barron's spoke recently with Bowen to learn about his macro view and a couple of his stock picks.

Barron's: Your firm is bit of a maverick, Jay—one asset manager overseeing an entire pension fund in a world where the consultants shy away from that approach.
Bowen: Yes, it has been that way for quite a while, and it is really sold from a fiduciary standpoint as a way for these boards to best oversee their funds. That's fine, and I am sure there are plenty of examples where that's been successful. But our model is also a very valid one, and as the Wilshire rankings demonstrate, it can actually be better than the multi-manager, consultant-driven model.

You spend a lot of time putting together a macro view. What's important right now?
The past five years have shown that the Federal Reserve really doesn't have much control over monetary velocity or the money supply and that basically the monetary transmission mechanism is broken. That mechanism is the connection between the Fed's balance sheet, which has been expanding rapidly, and the impact that it is having on the real economy in terms of bank lending and job creation. You are not seeing it show up in capital spending or the money supply, or an increase in monetary velocity. So the reserves are just lying fallow on these banks' balance sheets. That's been very important in terms of why these deflationary issues are still out there.

So the most powerful theme over the next five years is going to be how the Fed unwinds its balance sheet. Those reserves are not being put to work, because we are not in an environment where we have a lot of capital formation, risk-taking, and entrepreneurship. That's why I don't see inflation being a problem over the next couple of years. But longer term, I expect that to change.

What are policy makers concerned about right now?
It is going to be very important for investors to focus on how all this monetary stimulus from the Fed is going to end over the next few years. A shorter-term theme, which is kind of a prequel to the longer-term theme, is the increasing emergence of a global confederation of inflationists. We are going to see, particularly with [Janet Yellen expected as the new Fed chair], explicit targeting of both inflation and nominal GDP growth. And there are several pretty powerful special-interest groups that will start calling for higher inflation. Of course, some companies want it because it means higher profits. You also have workers who want it because, although it is nominal, it means higher wages. Politicians see it as the easiest choice in dealing with debt.

But most importantly, many policy makers, including the new Fed chair, are wedded to the belief that targeting our inflation rate and nominal GDP is really what should be done. In 2014, they are going to take it to the next level. These deflationary demons still scare them. This is not just a domestic situation; it is really a global event. If you look at what is going on in Japan, taken as a percentage of GDP, their quantitative easing is big enough to make even [Fed Chairman Ben] Bernanke and Yellen blush.

How is the current stock-picking environment?
During this bull market, which is more than 4½ years old, the market is up over 160%, and we've seen gradual price-earnings multiple expansion. So it's harder now to find stocks selling at 10, 11, and 12 times earnings. But we are not as concerned with the current earnings, if we think a company has potential looking out five years.

What sectors are you staying away from?
We got a hint of our biggest concern this spring, with the taper talk and the sharp run-up in interest rates. You saw what happened to some income-oriented stocks, viewed as bond substitutes, like the utilities and some real-estate investment trusts, which sold off. We remain somewhat leery of those holdings. We're staying away from that group—not that we are looking for, at least in the next year, a major increase in interest rates. But the tapering will commence, the yield curve will steepen [with long-term rates rising faster than short-term rates], and that could hurt those stocks. We also are avoiding retail, which doesn't fit into our long-term top/down approach.

On the other hand, we see the potential for global capital reallocation into the industrial sector, because of a pickup in global growth, relatively attractive valuations, and good total-return potential. In 2014, we see a continuation of this trending up of the dividend-payout ratio. It's gone from about 27% [in 2007] to about 33%, which is still well below its historical average around 50%. The other trend we expect to continue is sluggish top-line growth.

What do you like?
One sector is consumer staples, which provides a nice balance to a portfolio in terms of not being quite as economically sensitive; we can see holding some of these stocks for the next couple of years, although, longer-term, we are going to have to reassess this situation. But these companies have been the beneficiary of significant tailwinds from this disinflationary environment, in terms of falling raw-material costs. It has really allowed them to expand their profit margins, and helped their bottom line. Colgate-Palmolive [CL] and Kimberly-Clark [KMB] are both good examples of companies that have benefited from not only their global approach, but also from this disinflationary tail wind of lower raw-material costs....MORE, including the rationale forCNI and PNR.

Venture Capitalist Tim Draper Wants To Split California Into Pieces And Turn Silicon Valley Into Its Own State

From TechCrunch:

TechCrunch has learned about noted technology investor Tim Draper’s plan to split California into six separate states, including a Northern California slice appropriately named “Silicon Valley.”

Draper shared his vision with TechCrunch tonight. He says he’s submitting a polished version to the state’s Attorney General in the form of a ballot proposition proposal within the next 48 hours. “Six Californias” already has a campaign website up and is eager for an army of volunteers.

We’ve pasted the full ballot initiative below, along with the redrawn map of California. Essentially, the idea is to section off California into six horizontal slices, with Silicon Valley getting its own region stretching from the Sierras to the Bay Area beaches.

Southern California would also get its own slice of isolationist glory, with the new state “West California” consisting of Los Angeles and Santa Barbara, among other areas.

In an email, Draper tells me there are five key reasons he’s pushing the initiative:

“1. It is about time California was properly represented with Senators in Washington. Now our number of Senators per person will be about average.
2. Competition is good, monopolies are bad. This initiative encourages more competition and less monopolistic power. Like all competitive systems, costs will be lower and service will be better.
3. Each new state can start fresh. From a new crowd sourced state flower to a more relevant constitution.
4. Decisions can be more relevant to the population. The regulations in one new state are not appropriate for another.
5. Individuals can move between states more freely.”

Getting such a measure on California’s wacky ballot will be no easy task. Attempts to get initiatives on the state ballot can cost millions of dollars, and often fail. That said, California has a long secessionist history, and there are a number of folks who want to split the West Coast into smaller territories. And Tim Draper, who recently announced plans to step down skip the next fund from his investment firm and has been dedicating more of his time to educational initiatives, certainly has the clout and financial resources that can be helpful in turning political visions into reality....MORE

"BREAKING: Protesters attack Google bus in West Oakland, smashing window"

From Pando daily:

[This is a breaking news post, which we will be updating as more information comes in.]
Tensions between Bay Area activists and tech institutions ratcheted up this morning when protestors attacked a Google bus in West Oakland, smashing the bus’s rear window while Google employees were inside. Local news organization KQED reports that Google has confirmed the attack....MORE

Long Term Outlook for a Major Low in Gold and Platinum-Group Metals

We are not as optimistic as these folks who see a possible bottom as soon as a retest of the late June low, $1179.40.
Our target is $875 sometime in the third quarter of 2014.
$1201.30 up $7.70 last.
From Hightower via the CME:

Gold Transitioning from Currency Surrogate back to Classic Physical Commodity

The last 2 ½ years have not been good for the gold bulls, as consistent and sometimes violent declines in gold prices have injured sentiment and chased away potential investors. In our opinion, gold is in the midst of a transition from being a safe haven/currency surrogate instrument back into a classic physical commodity with a return to good old-fashioned supply/demand tightness. However, we do not think the transition will be easy or quick.

Read Full Report

"US land prices drop for first time in four years"

Following up on Tuesday's "Weighing the Odds of a Crash in Farmland Prices".
From Agrimoney:

US farmland prices have fallen for the first time in four years, undermined by weakness in agricultural commodity prices evident in a drop in wheat prices to 18-month lows this week, while corn stands near three-year lows.

A farmland price index compiled by Creighton University weakened to 47.0 this month, from 54.3 last month, and below the 50.0 level which indicates a static market.

."This is the first time in four years that the farmland-price index has moved below growth neutral," said Creighton economics professor Ernie Goss.

"As agriculture commodity prices have moved lower, so have farmland prices."

'Razor thin margins'

Indeed, the decline, the first since December 2009, comes amid growing ideas of the dent to farmers' spending power as grain prices fall well below historic highs

"If you haven't done so yet, get your pencil out on 2014 crop breakevens. Margins will be razor thin," Mike Mawdsley at Iowa-based broker Market 1 said.

Professor Goss said: "Over the past year, grain prices have declined by roughly 35%," adding that this decline has also "significantly reduced farmers' willingness to purchase agriculture equipment".

A farm equipment market index run by Creighton, which takes its data from states from Illinois to Wyoming, fell by 4.0 points month on month to 44.3, the lowest reading since August last year.

'Fasten your chin strap'...

...MORE

The other index maintained by Creighton University is the Rural Mainstreet Index, which tracks the overall rural economy. The depressed prices for row crops--in particular corn-- and the just reported decline in land prices have not yet filtered out into the broader index. Here's the press release from the University:

Mainstreet Economy

Rural Mainstreet Economy Healthy for December:
Farmland Price Index Lowest in 4 Years

December Survey Results at a Glance:

• Rural Mainstreet Index indicates rural economy expands at a healthy pace.
• Farmland price index sinks to lowest level in four years.
• Bank CEOs see rising regulatory costs as biggest threat to community banks for 2014.
• Agriculture equipment sales decline for sixth straight month.
• Bankers say low agriculture commodity prices are the biggest risk for the 2014 rural economy.

For Immediate Release: December 19, 2013

OMAHA, Neb. – Growth for the Rural Mainstreet economy climbed, according to the December survey of bank CEOs in a 10-state area.  

Overall:  The Rural Mainstreet Index (RMI), which ranges between 0 and 100, with 50.0 representing growth neutral, rose to 56.1 from November’s moderate 54.3.

“The overall index for the Rural Mainstreet Economy continues to indicate that the areas of the nation highly dependent on agriculture and energy continue to expand at a healthy pace. This month we asked bankers to name the biggest threat to the rural economy for 2014. Approximately 80.6 percent named lower agriculture prices to be the greatest economic threat in the next year while 10.6 percent said the Affordable Care Act was the biggest economic challenge for 2014,” said Ernie Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton University....MORE