Most French Thing Ever: Lunch With Hollande Edition--UPDATED

But first, La Môme Piaf, stand, if you wish:



From the Independent:

Iran and France cancel diplomatic lunch to welcome Hassan Rouhani after French refuse to take wine off the menu

Considering the business deals announced in the last couple days, Total in the oil fields, CMA GCM in shipping, this was a very principled call on M. Hollande's part.

Update-- The Financial Times reports:

"...this was denied by the Élysée Palace".

But then they would, wouldn't they?
Diving deeper into the commercial aspects, the FT also reported:

There was even a deal to develop 25 hectares of land in Iran to produce 9,000 tonnes of tomatoes a year.

Walgreens tells Theranos to stop sending lab tests to California lab (WBA)

From The Verge:

The drugstore chain has also suspended lab services at its Palo Alto store

The drugstore chain Walgreens told Theranos to stop sending clinical lab tests to its Newark, California lab today. Walgreens has also decided to immediately suspend Theranos laboratory testing services at its store in Palo Alto, California. The decision, which will affect Theranos Wellness Centers located inside Walgreens, comes a day after a warning letter sent to Theranos was made public by the US Centers for Medicare and Medicaid Services.

"Walgreens informed Theranos that tests collected at 40 Theranos Wellness Centers located at stores in Arizona must be sent only to Theranos’ certified lab in the Phoenix area or to an accredited third-party lab for analysis," a Walgreens statement explains. "No patient samples will be sent to the Newark lab until all issues raised by CMS have been fully resolved."...MORE

HT the story was out there: The Fly
 
Yesterday:
The Letter: US Government Says Theranos Lab Poses 'Immediate Jeopardy to Patient Safety'---UPDATED

Who Needs Workers? "The world's first robot-run farm will harvest 30,000 heads of lettuce daily"

From Tech Insider:

 

The Japanese lettuce production company Spread believes the farmers of the future will be robots.

So much so that Spread is creating the world's first farm manned entirely by robots. Instead of relying on human farmers, the indoor Vegetable Factory will employ robots that can harvest 30,000 heads of lettuce every day.

Don't expect a bunch of humanoid robots to roam the halls, however; the robots look more like conveyor belts with arms. They'll plant seeds, water plants, and trim lettuce heads after harvest in the Kyoto, Japan farm.

"The use of machines and technology has been improving agriculture in this way throughout human history," J.J. Price, a spokesperson at Spread, tells Tech Insider. "With the introduction of plant factories and their controlled environment, we are now able to provide the ideal environment for the crops."...MORE

HT:  MISH'S Global Economic Trend Analysis

Oil Trading: Well That Was Interesting

Following up on yesterday's "Oil Prices Rebound on Smaller-than-feared Crude Build--UPDATED":

...Futures  $31.77 up 32 cents.
For what it's worth, a move to that $34.00-$34.50 range would cause so much pain to remaining shorts that there might be some overshoot as the margin clerks take control of the trading, which would set up a dandy spot to short and contemplate the fact that the southern islands boast as many shades of blue as Ireland has green....

Here's today's action via FinViz:

That spike got to $34.82. Luck, pure luck. $33.26 up 96 cents last.
So where to next?
I have no clue although the daily charts show the support that failed around $39-40 in late December would pose serious resistance should we get there:

And on the other hand (you knew there was an "other hand" didn't you) despite all the talk of production cutbacks this market is, as the old-timers used to say, well supplied.

Questions America Wants Answered: Should You Have A Separate Toilet Room Inside Your Bathroom?

Well yes, but first, from AFNS:

New Starbucks Opens In Rest Room Of Existing Starbucks

CAMBRIDGE, MA—Starbucks, the nation's largest coffee-shop chain, continued its rapid expansion Tuesday, opening its newest location in the men's room of an existing Starbucks.

"Coffee lovers just can't stand being far from their favorite Starbucks gourmet blends," said Chris Tuttle, Starbucks vice-president of franchising. "Now, people can enjoy a delicious Frappuccino or espresso just about any time they please, even while defecating."

The new men's-room-based Starbucks, the coffee giant's 1,531st U.S. location, will be open to both men and women when not "in use." In addition to offering specialty coffees from around the world, it will serve freshly baked pastries, Italian pannini sandwiches and soups, as well as the rest room's usual selection of toilet paper and soap.

"This is a great addition," said Jonathan Connolly, a Boston-area banker who tried out the new Starbucks Tuesday....MORE

Do not start telling me about kopi luwak. Do not.
And the headline story, from Curbed:

Toilet Room Within the Bathroom: The Ultimate Luxury or Just Absurd?

Forgive us for taking it to the loo two weeks in a row on Weekly Decor Rant but one issue in the controversial realm of bathroom design that drew particularly strong feelings from Curbed readers and editors alike was the water closet. Yep, that means a separate room with a toilet built into a larger bathroom containing the rest of the good stuff—a "toilet room," if you will. Sure, cramped urban dwellers with tiny apartments can't even fathom entertaining the scheme, which is more common in older British houses than homes stateside. But that hasn't stopped many from coveting such a setup, especially those living with partners.

Having a "toilet room" means being able to, for functional or general atmosphere purposes, keep all the intimate business you do in the bathroom somewhat independent—a proper "separation of church and state" as one friend puts it. A reader further explains in a comment to last week's discussion on bathroom pet peeves:

Pet peeve - when there is a separate loo and a decent sized bathroom and they knock through. NO! I don't want my bath/shower interrupted by someone needing the loo.

Meanwhile, another reader points out that having a separate WC just seems like a silly use of space:...MORE

Don't most master bedroom suites already come with his-n-hers sitting rooms,dressing rooms, bathrooms and closets-with-small-kitchenettes?
What's one more door?

Also at Curbed, possibly related:
Why Homes in Major U.S. Cities Are Nearly Impossible To Afford

Personal Observations on the Reliability of the Shuttle by R. P. Feynman

A follow up to yesterday's "Bill Gates On Richard Feynman: 'The Best Teacher I Never Had'" on today's 30th anniversary of the Challenger disaster.
This is an addendum to the official Rogers Commission report on the cause of the explosion and catastrophic disintegration of the shuttle.

From science.ksc.nasa.gov (Kennedy Space Center):

"For a successful technology, reality must take precedence 

over public relations, for nature cannot be fooled."

Appendix F - Personal observations on the reliability of the Shuttle by R. P. Feynman

Introduction
It appears that there are enormous differences of opinion as to the probability of a failure with loss of vehicle and of human life. The estimates range from roughly 1 in 100 to 1 in 100,000. The higher figures come from the working engineers, and the very low figures from management. What are the causes and consequences of this lack of agreement? Since 1 part in 100,000 would imply that one could put a Shuttle up each day for 300 years expecting to lose only one, we could properly ask "What is the cause of management's fantastic faith in the machinery?"

We have also found that certification criteria used in Flight Readiness Reviews often develop a gradually decreasing strictness. The argument that the same risk was flown before without failure is often accepted as an argument for the safety of accepting it again. Because of this, obvious weaknesses are accepted again and again, sometimes without a sufficiently serious attempt to remedy them, or to delay a flight because of their continued presence.

There are several sources of information. There are published criteria for certification, including a history of modifications in the form of waivers and deviations. In addition, the records of the Flight Readiness Reviews for each flight document the arguments used to accept the risks of the flight. Information was obtained from the direct testimony and the reports of the range safety officer, Louis J. Ullian, with respect to the history of success of solid fuel rockets. There was a further study by him (as chairman of the launch abort safety panel (LASP)) in an attempt to determine the risks involved in possible accidents leading to radioactive contamination from attempting to fly a plutonium power supply (RTG) for future planetary missions. The NASA study of the same question is also available. For the History of the Space Shuttle Main Engines, interviews with management and engineers at Marshall, and informal interviews with engineers at Rocketdyne, were made. An independent (Cal Tech) mechanical engineer who consulted for NASA about engines was also interviewed informally. A visit to Johnson was made to gather information on the reliability of the avionics (computers, sensors, and effectors). Finally there is a report "A Review of Certification Practices, Potentially Applicable to Man-rated Reusable Rocket Engines," prepared at the Jet Propulsion Laboratory by N. Moore, et al., in February, 1986, for NASA Headquarters, Office of Space Flight. It deals with the methods used by the FAA and the military to certify their gas turbine and rocket engines. These authors were also interviewed informally.

Solid Rockets (SRB)

An estimate of the reliability of solid rockets was made by the range safety officer, by studying the experience of all previous rocket flights. Out of a total of nearly 2,900 flights, 121 failed (1 in 25). This includes, however, what may be called, early errors, rockets flown for the first few times in which design errors are discovered and fixed. A more reasonable figure for the mature rockets might be 1 in 50. With special care in the selection of parts and in inspection, a figure of below 1 in 100 might be achieved but 1 in 1,000 is probably not attainable with today's technology. (Since there are two rockets on the Shuttle, these rocket failure rates must be doubled to get Shuttle failure rates from Solid Rocket Booster failure.)

NASA officials argue that the figure is much lower. They point out that these figures are for unmanned rockets but since the Shuttle is a manned vehicle "the probability of mission success is necessarily very close to 1.0." It is not very clear what this phrase means. Does it mean it is close to 1 or that it ought to be close to 1? They go on to explain "Historically this extremely high degree of mission success has given rise to a difference in philosophy between manned space flight programs and unmanned programs; i.e., numerical probability usage versus engineering judgment." (These quotations are from "Space Shuttle Data for Planetary Mission RTG Safety Analysis," Pages 3-1, 3-1, February 15, 1985, NASA, JSC.) It is true that if the probability of failure was as low as 1 in 100,000 it would take an inordinate number of tests to determine it ( you would get nothing but a string of perfect flights from which no precise figure, other than that the probability is likely less than the number of such flights in the string so far). But, if the real probability is not so small, flights would show troubles, near failures, and possible actual failures with a reasonable number of trials. and standard statistical methods could give a reasonable estimate. In fact, previous NASA experience had shown, on occasion, just such difficulties, near accidents, and accidents, all giving warning that the probability of flight failure was not so very small. The inconsistency of the argument not to determine reliability through historical experience, as the range safety officer did, is that NASA also appeals to history, beginning "Historically this high degree of mission success..."

Finally, if we are to replace standard numerical probability usage with engineering judgment, why do we find such an enormous disparity between the management estimate and the judgment of the engineers? It would appear that, for whatever purpose, be it for internal or external consumption, the management of NASA exaggerates the reliability of its product, to the point of fantasy.

The history of the certification and Flight Readiness Reviews will not be repeated here. (See other part of Commission reports.) The phenomenon of accepting for flight, seals that had shown erosion and blow-by in previous flights, is very clear. The Challenger flight is an excellent example. There are several references to flights that had gone before. The acceptance and success of these flights is taken as evidence of safety. But erosion and blow-by are not what the design expected. They are warnings that something is wrong. The equipment is not operating as expected, and therefore there is a danger that it can operate with even wider deviations in this unexpected and not thoroughly understood way. The fact that this danger did not lead to a catastrophe before is no guarantee that it will not the next time, unless it is completely understood. When playing Russian roulette the fact that the first shot got off safely is little comfort for the next. The origin and consequences of the erosion and blow-by were not understood. They did not occur equally on all flights and all joints; sometimes more, and sometimes less. Why not sometime, when whatever conditions determined it were right, still more leading to catastrophe?

In spite of these variations from case to case, officials behaved as if they understood it, giving apparently logical arguments to each other often depending on the "success" of previous flights. For example. in determining if flight 51-L was safe to fly in the face of ring erosion in flight 51-C, it was noted that the erosion depth was only one-third of the radius. It had been noted in an experiment cutting the ring that cutting it as deep as one radius was necessary before the ring failed. Instead of being very concerned that variations of poorly understood conditions might reasonably create a deeper erosion this time, it was asserted, there was "a safety factor of three." This is a strange use of the engineer's term ,"safety factor." If a bridge is built to withstand a certain load without the beams permanently deforming, cracking, or breaking, it may be designed for the materials used to actually stand up under three times the load. This "safety factor" is to allow for uncertain excesses of load, or unknown extra loads, or weaknesses in the material that might have unexpected flaws, etc. If now the expected load comes on to the new bridge and a crack appears in a beam, this is a failure of the design. There was no safety factor at all; even though the bridge did not actually collapse because the crack went only one-third of the way through the beam. The O-rings of the Solid Rocket Boosters were not designed to erode. Erosion was a clue that something was wrong. Erosion was not something from which safety can be inferred.

There was no way, without full understanding, that one could have confidence that conditions the next time might not produce erosion three times more severe than the time before. Nevertheless, officials fooled themselves into thinking they had such understanding and confidence, in spite of the peculiar variations from case to case. A mathematical model was made to calculate erosion. This was a model based not on physical understanding but on empirical curve fitting....MORE

HT: Longform 

Grantham, Mayo's James Montier on Fed-Induced Bubbles, Market Valuations, Smart Beta and Liquid Alts

As always, apologies to Mr. van Otterloo for relegating him to Pierce, Fenner, Smith and Beane status.
From Advisor Perspectives, Jan. 26:

James Montier is a member of Grantham Mayo van Otterloo’s (GMO’s) Asset Allocation team. Prior to joining GMO in 2009, he was co-head of Global Strategy at Société Générale. Mr. Montier is the author of several books including Behavioral Investing: A Practitioner’s Guide to Applying Behavioral Finance; Value Investing: Tools and Techniques for Intelligent Investment; and The Little Book of Behavioral Investing. Mr. Montier is a visiting fellow at the University of Durham and a fellow of the Royal Society of Arts. He holds a B.A. in Economics from Portsmouth University and an M.Sc. in Economics from Warwick University.

Advisors and retail investors can access GMO’s asset allocation by buying the Wells Fargo Advantage Absolute Return instead of the GMO Benchmark-Free Allocation Fund and the Wells Fargo Advantage Asset Allocation Fund instead of the GMO Global Asset Allocation Fund. The minimum investment for the GMO Funds is $10 million, while the minimum investment for the Wells Fargo Funds is $1,000.
I spoke with James on January 15.

You wrote two papers in the past year (The Idolatry of Interest Rates Part I: Chasing Will-o’-the-Wisp and The Idolatry of Interest Rates Part II: Financial Heresy) on a world without a natural interest rate, The Idolatry of Interest Rates. If interest rates were not being administered by central banks, at what level do you think the market would be setting them?

That’s a fascinating question to which I genuinely do not know the answer. The reason is that interest rates have pretty much always been an administered price. It has always been central banks or governments at least that have set interest rates, at least a benchmark rate. Without that foundation rate, it would be an interesting problem for the financial markets to try and solve. But I don’t think there’s a natural rate that could be divined that everyone would be obliged to respect.

There has always been an interest rate set by the government and/or the central bank. For much of history it was basically the governments, and obviously more recently it has been the central banks.
Without somebody setting at least a rate, I don’t know what markets would price since everybody seems to think of interest rates in the corporate markets as a spread of the government. It is not obvious to me what rate it would be.

Given that administered interest rates are in effect, they are really fixing the price of the cost of capital. Price fixing of other assets historically resulted in market distortions. What, if any, distortions do you perceive, and when and how do you think they might be resolved?

When I look at the world today, pretty much every financial asset has been impacted by the administered rates. Effectively, what has happened is the central banks have been behaving in a way that William McChesney Martin would’ve hated. He was the longest serving Federal Reserve governor of all time, and his famous saying was that the central bank’s job was to “take the punch bowl away just when the party was getting interesting.”

But we’ve had central bank governors – Greenspan, Bernanke and Yellen – who are more like teenagers at a prom night. They are spiking the punch bowl and handing out free drinks and hoping to get lucky at the end of the night.

They have engendered an enormous amount of risk-taking, and you can see that in the fixed income markets and the well-known indices. You can see it in equity markets. When we look at equity markets, we see them to be significantly more expensive than we would like to see in terms of the concept of a fair return to equity. Pretty much every financial asset has been a victim of the way in which these administered prices have been set.

Let me ask you about the role of the Internet in commerce. I want to suggest that it’s not the first network that has been inherently deflationary; the telegraph and railroads are other examples from the past that helped drive down costs and prices. What do you think about the Internet and the impact that it has had on interest rates, profit margins or reversion to the mean?

There was a book written during the tech bubble and then released just after by a chap called Alasdair Naim. It’s called the Engines That Move Markets. It was a history of technological revolutions over time and how they played out. It was fascinating in as much as every single one of them you could argue was essentially deflationary in some regard – sometimes in a very specific narrow sector, sometimes in a much broader context. But one of the intriguing patterns that struck me when I read that book was that all of the benefits that these new technologies brought ultimately always accrued to the consumers, not to the producers. But people always got massively over-excited about the producer side – “This new technology was the new hope.” It didn’t matter whether it was railroads or telegraph or the Internet. There’s always been this insane mania-like thing associated with these big technological innovations because people have always thought they were going to capture the profits.

Invariably they didn’t. They end up transferring the surplus to the consumer and benefiting the consumer through the engine of lower prices. In many ways this downward pressure on prices is also the kind of good deflation, if you will. It is not the evil lack-of-demand-driven deflation that we usually associate with the word, the 1930s terrible experience with everybody out of work and nobody having any money to spend. That is a really bad deflation. This is a gentle downward pressure on prices brought about by competition, and it’s actually to the consumer’s benefit, and therefore, pretty good.

In terms of the three issues you mentioned, I don’t think it’s had a huge impact on rates. Rates have been set with a mind to things other than perhaps the kind of deflation. Central banks are much more worried about the lack of growth in the economy generally than the general downward pressure of prices. Let’s not forget that, on average, prices are still rising, just not as fast as they used to. The Internet is just part of that general process. It is depressing prices in some areas. But areas where prices are still rising, for example, school fees, always spring to mind. I don’t think the Internet had a huge impact on rates.

...MUCH MORE

HT: The Big Picture

Lyft, Drivers Settle One of Many Employee Classification Lawsuits

From ars technica:

Lyft, drivers settle labor lawsuit with $12.25M payment, new work agreement
Lawyer who filed suit against Lyft still has class-action suit pending against Uber.

California drivers who sued Lyft in 2013 over whether they should be treated as employees or contractors have settled their closely watched lawsuit, court documents show.

According to a Tuesday proposed settlement, which is likely to be finalized by the San Francisco federal judge overseeing the case next, Lyft will pay $12.25 million and will re-word its labor agreement with its workers, making it harder for the company to fire drivers at any time. The plaintiffs’ lawyers will take 30 percent of that amount; the remainder will be divided among California-based drivers and go toward covering court fees. The changes to the terms of service will be applied nationwide.

The settlement in Cotter v. Lyft has no immediate legal impact on other cases brought by the same plaintiffs' lawyer, Shannon Liss-Riordan, who has introduced a slew of similar labor suits against GrubHub, DoorDash, Caviar, and Uber.

In this case, the fundamental issue remains unsettled: drivers are still treated as contractors and still aren’t reimbursed for work-related costs like gas, insurance, and other expenses. Contractors are also not eligible for worker's compensation, unemployment, and other benefits. Liss-Riordan’s pending case against Lyft’s biggest rival, O’Connor v. Uber, aims to answer essentially the same questions.
In respective statements, both Lyft and Liss-Riordan applauded the settlement.

"We are pleased to have resolved this matter on terms that preserve the flexibility of drivers to control when, where, and for how long they drive on the platform and enable consumers to continue benefiting from safe, affordable transportation," Kristin Sverchek, Lyft’s general counsel, said in a statement sent to Ars.

Liss-Riordan called the settlement an "adequate resolution." She said that while this case doesn’t create a precedent of liability, it and others can be used to set the tone for the industry. "While the settlement does not achieve everything we had hoped for—namely a reclassification of the drivers as employees (as other sharing-economy companies have done recently, including Shyp, Instacart, Luxe Valet, Munchery, Eden, and most recently Honor)—it will result in some significant changes that will benefit the drivers," she wrote.

It ain't over yet
One labor law professor told Ars that this settlement still doesn’t resolve the fundamental question of whether startups can rely on this type of labor model....MORE

Possibly also of interest:
Meet the Lawyer Taking on Uber and the Rest Of the On-demand Economy

She's pretty good at this. In the FedEx case a couple years ago Liss-Riordan got the judge to totally reject FDX's argument: that the defendent

 ...manages a "sophisticated information and distribution network" but doesn't directly provide delivery services...

FedEx settled for $228 million and had to give the newly classified employees a hearty "Welcome aboard".

Starting Tomorrow "Changing contract expiration dates will affect crude oil futures comparisons"

As we wait for the natural gas storage release here's something else from the EIA that may be of interest:

January 26, 2016 
Changing contract expiration dates will affect crude oil futures comparisons

Source: U.S. Energy Information Administration, Intercontinental Exchange, CME Group

---

A change to the North Sea Brent crude oil futures contract will alter the way prices for Brent futures are compared to futures prices for West Texas Intermediate (WTI) crude oil. Beginning January 29, the Brent contract will expire, or rollover to the next month, approximately two to three weeks before expiration of the WTI contract for delivery in the same month. Prior to the change, the Brent contract rollover was only five to seven days ahead of the WTI rollover.

With earlier expiration dates for the Brent contract, the prompt month prices for Brent and WTI represent the same delivery period on fewer days each month. For example, on Monday, February 1, the prompt Brent contract will represent crude oil deliveries in April, while the prompt WTI contract will represent deliveries in March. The mismatch will continue for most of the month until the WTI contract for March delivery expires on February 22.

Crude oil futures contracts allow crude to be bought and sold for delivery at specific dates in the future, allowing market participants to lock in a price today for the future delivery of a barrel of oil. One of the roles of futures markets is price discovery, or price determination in a marketplace of buyers and sellers.

Two of the most important crude oil futures benchmarks are Brent, which trades on the Intercontinental Exchange (ICE) in London, and West Texas Intermediate (WTI), which trades on the New York Mercantile Exchange (Nymex) in New York. Both futures contracts have an underlying physical crude oil trade basis: cargoes of North Sea Brent, Forties, Oseberg, Ekofisk (BFOE) crude oils for the Brent contract and crude oil deliveries to the crude oil storage hub of Cushing, Oklahoma for WTI. The changing of the expiration date of the Brent futures contract is intended to better align the timing of when BFOE cargoes are bought, sold, and loaded onto tankers....MORE

Kocherlakota: "Monetary Policy is Not About Interest Rates"

From Mr. Kocherlakota's Google blog, prior to yesterday's Fed release:

The Federal Open Market Committee has a problem.  The problem is not that it raised rates by a scant quarter percentage point in December.   The problem is the overall policy framework that led the Committee to take that action.  The Committee needs to switch to a framework that is less focused on a particular time path of interest rates, and more focused on the achievement of its goals.    

The FOMC’s current policy framework goes back to at least mid-2013.   It can be defined by two key words gradual and normalization.  Both words refer to the level of monetary accommodation.  In terms of the target range for the fed funds rate, the word “gradual” is generally interpreted by those who watch the Fed closely to mean about four increases of a quarter percentage point.   The word “normalization” is generally interpreted to mean “returning to about 3.5 percent”.   

To be fair: the evolution of the macroeconomy does enter into this framework.  But it only matters to the extent that it might lead the FOMC might tweak the pace of interest rate increases up or down.  The main mission is still defined by those two key words: gradual and normalization.

Unfortunately, this mission of gradual interest rate normalization seems increasingly inconsistent with the FOMC’s being able to achieve its macroeconomic objectives over the medium-term.  In terms of the FOMC’s employment mandate: the fraction of those aged 25 to 54 who have a job remains well below what Americans should view as “normal”. The nation needs above-trend growth for several more years to cure this problem - and that’s certainly not my forecast for 2016. 

The above is somewhat arguable (because some see the low labor force participation rate as either desirable and/or beyond the reach of monetary policy).  But the inflation picture is clear.  Inflation has run below the FOMC’s target of 2% for almost four years.  Like many others (including, as the December minutes indicate, the FOMC’s own staff), I don’t expect it to return to target for several more years.  

Both the inflation situation and (perhaps more arguably) the employment situation seem to call for more monetary stimulus, not less.  But the FOMC is set on gradual normalization of interest rates.   This framework seems grounded in a troubling aversion to both low interest rates and interest rate volatility.   Markets have taken note of the FOMC’s aversion to unusual levels of monetary stimulus.  We see clear signs that investors have increasing doubts about the FOMC’s ability/willingness to keep inflation as high as 2% over the long run - especially during periods of low growth. ...MORE

HT: A couple sites had this linked yesterday, I think Economists View was first.
Here's Mr. K's homepage.

Possibly also of interest, December's "Kocherlakota: The Fed Chose To Have A Slow Recovery".

SEC Suspicious Of Tech Companies' Plunging Valuations Post-IPO

From Fast Company:

Tech upstarts like Box and Etsy saw a steep decline in valuation after going public last year—and regulators want to understand why.

A number of tech companies with sky-high valuations prior to going public last year—Box, Square, and Etsy, to name a few—have since seen their worth drop significantly. The Securities and Exchange Commission (SEC) thinks the stockbrokers who advise investors may be to blame, according to Bloomberg.

Chairwoman Mary Jo White said on Tuesday that a "significant" change in the value of a tech startup post-IPO begs the question of whether investors were misled by stockbrokers. "You have to make sure you don’t have some very aggressive promoters taking advantage of that climate," she told Bloomberg. At a time when every startup worth upwards of $1 billion is touted as a "unicorn," this is doubly important, especially if the investors being courted don't have the know-how of venture capitalists....MORE

It doesn't 'beg' the question, it raises the question.

-xkcd's finest
Here are the very earnest folks at Explain xkcd: #386 Duty Calls 

"Is the re/insurance industry really prepared for a large tail event?"

No.
The plan is to lay any claims over about $50 billion on taxpayers.
That's insured losses not total losses.
Short the re/insurers this year. The probabilities are shifting against them and although it's not a lock it is still the way to bet.

From Artemis:

It’s been questioned whether the insurance and reinsurance sector is ready for a significant tail event that could cause losses of $150 billion or more, or if the industry is too focused on being ready for the next Katrina.

For the first time since 1851 the state of Florida has gone a decade without a landfalling hurricane, and while the insurance and reinsurance industry is prepared for the next Katrina in terms of capital adequacy, events “deep in the tail” are what the industry should pay more attention too, according to Risk Management Solutions (RMS) co-founder and Chief Executive Officer (CEO), Hemant Shah.

“I worry more about our focus on events like Katrina, our tail is very long. When we simulate events, Katrina is not the 100-year loss in the U.S. We simulate events across perils that could cause well in excess of $100 billion in loss, and I think that is the kind of event the industry should be more mindful of, events deep in the tail,” explains Shah.

A consistent inflow of reinsurance capital from both traditional and increasingly alternative sources, as well as the ongoing benign catastrophe loss landscape, has bolstered the market’s overall capitalisation in recent times.

And while the current market sits awash with capacity, resulting in a supply/demand imbalance that continues to pressure rates for both reinsurance and increasingly primary players, it’s expected the sector could absorb a 1-in-100 or 1-in-250 loss event.

Shah, however, feels there “is often too much focus on the 1-in-100 or the 1-in-250” event, and believes the industry needs to look deep into the tail, where “there are some scary events.”

Speaking with A.M. Best, Shah underlined that a $150 billion hurricane along the U.S. East coast, a West coast quake, or a huge earthquake in the New Madrid seismic zone, has the potential to “cause significantly more losses than we’re accustomed to thinking about in the Katrina scale.”...MORE

Total economic losses from Katrina were over $150 billion with around $82 billion of that being property damage. Commercial re/insurance payouts were $41.1 Bil. and National Flood Insurance Program payouts were another $16 billion.

The key to business in the 21st century is to socialize the losses while privatizing the profits.

"China Central Bank Makes Largest Cash Injection in Three Years"

From China Real Time:

China’s central bank is putting the largest amount of cash into the financial system in nearly three years, using a weekly market operation to pre-empt a holiday-induced funding squeeze and offset rapid capital outflows. As WSJ’s Shen Hong reports:

The People’s Bank of China offered 340 billion yuan ($51.89 billion) of short-term loans, known as reverse repurchase agreements, to commercial banks in a routine money market operation Thursday.

The central bank provided 440 billion yuan via similar tools Tuesday, the first leg of its twice-a-week liquidity-management exercises.

Advertisement 

Given the maturity of 190 billion yuan of previously issued loans, the PBOC’s net cash injection this week totals 590 billion yuan, the biggest of its kind since early February 2013, when it reached 662 billion yuan.

Read the full story on WSJ.com.

"Goldman's Former Head of Junk Bond Trading Has Some Choice Words About the Credit Market"

From Bloomberg: 

The unwinding of the "efficient capital structure" beckons.

It may feel as if bond bears are everywhere these days, but for Jeff Bahl, former head of U.S. high-yield credit trading at Goldman Sachs and now a portfolio manager at Bahl & Gaynor, there aren't enough of ’em.

Taking matters into his own hands, Bahl's latest letter to investors comes with a warning label:

Warning: This is not your cookie-cutter advisor letter. During periods of market stress, there is the clockwork mailing of generic and uninspired advisor letters. These cookie-cutter notes tend to be chock full of “hope” and a universal message to “buy the beaten up stocks”. The Taylor Swift and crafts station is in another room.

What follows is a "while history does not repeat, it certainly rhymes"-style argument applied to the high-yield debt market, which has jumped from about $944 billion outstanding back in 2008 to $1.8 trillion currently.

And while Bahl isn't predicting an "end of times"-style wave of corporate defaults, he is drawing on his two decades of bond trading experience to call for a turn in the credit cycle that will spur deleveraging.

Over the past two decades, we’ve experienced firsthand a few significant booms and busts within the credit markets. During each boom, it felt as if the trend had real permanence and extrapolations were sent to epic proportions. And, the violent unwind of each of those booms was stronger and longer than anyone had thought. Glory. Greed. Fear.

At issue is the feedback loop that has allowed companies to take on ever increasing amounts of debt, helped by investors chasing the uncorrelated and higher returns on offer from junk bonds....MORE

HT: FT Alphaville's Further Reading post. 

The Letter: US Government Says Theranos Lab Poses 'Immediate Jeopardy to Patient Safety'---UPDATED

Update below.
Original post:
.
From The Verge:

The Centers for Medicare and Medicaid Services has decided that Theranos' Newark, California, facility poses "immediate jeopardy to patient safety." A letter sent to the company on January 25th says that the lab has been given 10 days to comply with "acceptable evidence of correction." 

Specifically, the document cites problems with the laboratory director, the technical supervisor, hematology, and the lab's systems. CMS has not released the laboratory inspection report that led to this letter so the details of these infractions remain unclear. But the level assigned to these determinations — "Condition-level deficiencies" — are among the most serious that CMS can make. They mean that Theranos’ Newark lab was found to be in violation of accepted professional standards. 

Developing...

Update: Bloomberg has some reaction from the company:

“This survey of our Newark, CA lab began months ago and does not reflect the current state of the lab,” Brooke Buchanan, a Theranos spokeswoman, said in an e-mail. “As the survey took place we were simultaneously conducting a comprehensive review of our laboratory’s systems, processes and procedures to ensure that we have best-in-class quality systems....” 

...MORE

Roundup of Analyst Reactions to Today's Fed Statement

The markets responded by haircutting a couple percent from the day's highs. For a more granular look, MoneyBeat does the heavy lifting:

Economists React to the Fed: ‘No Major Change Yet to the Policy Outlook’

The Federal Reserve left interest rates unchanged Tuesday following a two-day policy meeting, after raising rates for the first time in nearly a decade last month. Though officials signaled concerns about the economic outlook, they didn’t rule out another rate increase at their next meeting in March. Economists offered their take on the decision, and the Fed’s policy statement: 

“When it comes to the statement, what’s most obvious is the absence of content, not the presence. Nowhere did Yellen & Co. reference ‘market volatility,’ a euphemism for the global equity declines experienced in 2016….There’s only one thing to learn from this barrel-of-oil-sized hole in the rather terse [Federal Open Market Committee] statement: March depends on job markets (still running strong) and inflation theory (no data, but the Fed believes).” –Guy LeBas, Janney Montgomery Scott 

“The first line of the statement leads with ‘labor market conditions improved further even as economic growth slowed late last year,’ a clear reminder of what drives the Fed at this stage in the cycle. Yes, they have to watch market and global developments, but when wages are beginning to accelerate and the Fed expects ‘some additional decline in underutilization of labor resources,’ following ‘strong job gains,’ it is clear that the bar for market turmoil to deflect them from ‘gradual’ tightening has been raised.” –Ian Shepherdson, Pantheon Macroeconomics 

“Policy makers are indicating that it is too soon to gauge the impact from the sharp fall in global equity and oil prices and because of that they are not prepared to offer an assessment on the risks to the economic outlook, labor markets and inflation. Clearly by not offering a risk assessment on the outlook the FOMC is indicating that at this time there is a low probability of them raising official rates at the March meeting. “ –Joseph Carson, AllianceBernstein 

“The FOMC statement was reworded to signal increased concern about ‘global economic and financial developments,’ but, overall, the tweaks to the statement were limited enough to be consistent with no major change yet to the policy outlook. In the end, decisions will depend on the data and market developments.” –Jim O’Sullivan, High Frequency Economics

...MORE

ZeroHedge also had a few:

"The statement following today’s FOMC meeting acknowledged the recent tightening of financial conditions and risks from international developments, and noted that these factors could affect the risks around the outlook. Assuming a modest improvement in financial market conditions, we expect the committee to follow through with a rate hike in March." –Jan Hatzius, Goldman Sachs  

Two important changes in statement were acknowledgment that FOMC is “closely monitoring” global economic, financial developments and disappearance of sentence that said FOMC “reasonably confident” inflation will rise to objective.Omission of “reasonably confident” sentence doesn’t mean FOMC thinks it won’t hit inflation target but it not longer wants to “pound the table." FOMC has backed off a little on how confident it is with regard to inflation and the ability of economy to weather global headwinds –Ethan Harris, Bank of America

...MORE

Bill Gates On Richard Feynman: "The Best Teacher I Never Had"

From Mr. Gates' personal blog, gatesnotes:

Thirty years ago I went on vacation and fell for Richard Feynman.

A friend and I were planning a trip together and wanted to mix a little learning in with our relaxation. We looked at a local university’s film collection, saw that they had one of his lectures on physics, and checked it out. We loved it so much that we ended up watching it twice. Feynman had this amazing knack for making physics clear and fun at the same time. I immediately went looking for more of his talks, and I’ve been a big fan ever since. Years later I bought the rights to those lectures and worked with Microsoft to get them posted online for free. 

In 1965, Feynman shared a Nobel Prize for work on particle physics. To celebrate the 50th anniversary of that honor, the California Institute of Technology—where he taught for many years before his death in 1988—asked for some thoughts about what made him so special. Here’s the video I sent:... 

....In that video, I especially love the way Feynman explains how fire works. He takes such obvious delight in knowledge—you can see his face light up. And he makes it so clear that anyone can understand it. 

In that sense, Feynman has a lot in common with all the amazing teachers I’ve met in schools across the country. You walk into their classroom and immediately feel the energy—the way they engage their students—and their passion for whatever subject they’re teaching. These teachers aren’t famous, but they deserve just as much respect and admiration as someone like Feynman. If there were a Nobel for making high school algebra exciting and fun, I know a few teachers I would nominate. 

Incidentally, Feynman wasn’t famous just for being a great teacher and a world-class scientist; he was also quite a character. He translated Mayan hieroglyphics. He loved to play the bongos. While helping develop the atomic bomb at Los Alamos, he entertained himself by figuring out how to break into the safes that contained top-secret research. (Feynman cultivated this image as a colorful guy. His colleague Murray Gell-Mann, a Nobel Prize–winner in his own right, once remarked, “Feynman was a great scientist, but he spent a great deal of his effort generating anecdotes about himself.”) 

Here are some suggestions if you’d like to know more about Feynman or his work:....MORE

Previously:

July 28, 2009
Gates Puts Feynman Lectures Online

Oct. 19, 2014
"Richard Feynman on the Social Sciences"
And many more in-between. Use the search blog box, if interested.
e.g. from 2013's "Thinking About Science":

For guidance I often seek out a bongo drummer-slash-raconteur.
We post this once a year, usually around Nobel Prize time. 
Here's the musician riffing on science:

During the Middle Ages there were all kinds of crazy ideas, such as that a piece of of rhinoceros horn would increase potency. Then a method was discovered for separating the ideas--which was to try one to see if it worked, and if it didn't work, to eliminate it. This method became organized, of course, into science. And it developed very well, so that we are now in the scientific age. It is such a scientific age, in fact, that we have difficulty in understanding how witch doctors could ever have existed, when nothing that they proposed ever really worked--or very little of it did.

But even today I meet lots of people who sooner or later get me into a conversation about UFO's, or astrology, or some form of mysticism, expanded consciousness, new types of awareness, ESP, and so forth. And I've concluded that it's not a scientific world.

Most people believe so many wonderful things that I decided to investigate why they did. And what has been referred to as my curiosity for investigation has landed me in a difficulty where I found so much junk that I'm overwhelmed. First I started out by investigating various ideas of mysticism and mystic experiences. I went into isolation tanks and got many hours of hallucinations, so I know something about that. Then I went to Esalen, which is a hotbed of this kind of thought (it's a wonderful place; you should go visit there). Then I became overwhelmed. I didn't realize how MUCH there was.

At Esalen there are some large baths fed by hot springs situated on a ledge about thirty feet above the ocean. One of my most pleasurable experiences has been to sit in one of those baths and watch the waves crashing onto the rocky slope below, to gaze into the clear blue sky above, and to study a beautiful nude as she quietly appears and settles into the bath with me.

One time I sat down in a bath where there was a beautiful girl sitting with a guy who didn't seem to know her. Right away I began thinking, "Gee! How am I gonna get started talking to this beautiful nude woman?"

I'm trying to figure out what to say, when the guy says to her, "I'm, uh, studying massage. Could I practice on you?" "Sure," she says. They get out of the bath and she lies down on a massage table nearby. I think to myself, "What a nifty line! I can never think of anything like that!" He starts to rub her big toe. "I think I feel it," he says. "I feel a kind of dent--is that the pituitary?" I blurt out, "You're a helluva long way from the pituitary, man!" They looked at me, horrified--I had blown my cover--and said, "It's reflexology!" I quickly closed my eyes and appeared to be meditating....MUCH MORE 

Long time readers will recognize the words of the bongo drummer as amateur magician and author, Richard Feynman.
He was also a safecracker and lockpick.
He invented the word nanotechnology.
In 1965 he was awarded the Nobel prize in physics for his work in quantum eletrodynamics.
The above snip is from his 1974 Cal Tech commencement address "Cargo Cult Science". 

Although Feynman loved to tell jokes the number of jokes about Feynman is rather small.

Here's one he would have liked:...

A Puzzling Fall In Start-up Jobs

As our smart, loyal (and good-looking) readers know, it's not small businesses that create jobs it's small new businesses that do so.*
From Real Time Economics:

The Missing Startup Recovery

America’s entrepreneurs still hadn’t regained their footing six years after the recession ended, a troubling sign for an economy that once counted on fast-growing startups for employment and ideas. 

A new report by the Labor Department shows 232,000 establishment “births” in the second quarter of 2015, a slight decline from the prior quarter. Those accounted for 831,000 jobs. 

As a share of the overall labor market, the number of jobs attributed to such births has fallen noticeably since before the recession, from about 12.5% of the total to a little more than 11%. Commerce Department data, which isn’t as current but reaches back to the 1970s, shows the trend stretching back decades.

...MORE

*As I said in Sept. 2012's " The Death of IPO's and What it Means for You and The Country":

With today's jobs report this topic is going to get spun like a top.
(96,000 jobs 38 months after the recession ended? Come on)

Let's state what should be obvious right up front: Small business is no better at job creation than big business and because of the churn of bankruptcies and closures probably worse on a net basis.

Most small businesses don't grow very fast and can't create jobs.

The key variable, as even a cursory review* of the literature makes clear, is the age of the business.
In particular firm births are correlated with both net and gross job creation and it is only because most new firms are small that small business is credited with job creation.

Because of the facts of who creates jobs, a policy initiative that focuses only on size without taking age of the enterprise into consideration will have little effect other than redistributing wealth to the wrong group of companies....

...A good place to start is "Who Creates Jobs? Small vs. Large vs. Young" (47 page PDF)
Kelley Edmiston at the Kansas City Fed is also pretty good. (25 page PDF)
A related topic "What Do Small Businesses Do?" by a couple University of Chicago econ guys (64 page PDF)

Possibly also of interest:

One More Time: It's Not Small Businesses that Create Jobs...
"Think Small Business Is Job Engine? Think Again"
The Slow-Motion Collapse of American Entrepreneurship
And many more (sorry readers)

Oil: And Now Transneft Says Russia and OPEC Could Play Nice Together

Following up on "Oil Prices Rebound on Smaller-than-feared Crude Build" immediately below.
Front futures now up 91 cents at $32.36.

From Reuters:

Russia's Transneft says Moscow, OPEC to discuss output cuts: agencies

Russian state oil pipeline monopoly Transneft said on Wednesday Russia and the Organisation of the Petroleum Exporting Countries (OPEC) would discuss possible output cuts, TASS news agency reported.
.
RIA news agency also cited Transneft Chief Executive Nikolai Tokarev as saying a meeting at the Russian Energy Ministry had discussed possible talks with Saudi Arabia on oil.
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Senior Russian officials told Reuters earlier on Wednesday Russia's government is not discussing cooperation with OPEC, after a co-owner of the country's No. 2 oil producer Lukoil said Moscow and the exporter group should join forces to battle low oil prices.

Recently:
Oil: As Ruble Collapses, And Despite Tough Talk, Russia Signals It May Consider Working With OPEC To Cut Production

Oil Prices Rebound on Smaller-than-feared Crude Build--UPDATED

Update below.
Original post:

Yesterday I commented, in "Oil: Crude Storage at Capacity--Goldman Sachs":

Front futures up 32 cents on hopes, dreams.$30.66, last. 

More seriously, because the drop went so far so fast there are air pockets all the way up to $34-$34.50 that oil could levitate to without a lot of resistance....

The futures got to $31.76 and I'm checking the requirements for joining Mensa, thinking Polynesia sounds nice for a couple days and the good folks at the American Petroleum Institute release their weekly estimate.
Of course ZeroHedge sounded strangely aroused in "Crude Plunges After API Reports Biggest Inventory Build Since 1996".

But today is a new day and the EIA report has come out and I get to stand by my earlier statement on the support/resistance upside.
For now though I'll maybe hold off on the traveling and the joining clubs stuff.

From Reuters via CNBC:

Brent futures turned positive and U.S. crude pared losses on Wednesday after the government reported a large build in crude stockpiles, but less than an earlier industry report indicated. 

The Energy Information Administration reported crude inventories rose by 8.4 million barrels in the week through Jan. 22, bringing the total in storage to 494.9 million barrels, the highest on record. 

U.S. crude stocks rose by 11.4 million barrels last week to 496.6 million, the American Petroleum Institute said, topping analyst expectations for an increase of 3.3 million barrels.
Crude stocks at the Cushing, Oklahoma, delivery hub fell by 771,000 barrels, EIA said.
Meanwhile, gasoline stocks rose by 3.5 million barrels, while distillate fuel inventories were down by 4.1 million barrels....MORE

Futures  $31.77 up 32 cents.
For what it's worth, a move to that $34.00-$34.50 range would cause so much pain to remaining shorts that there might be some overshoot as the margin clerks take control of the trading, which would set up a dandy spot to short and contemplate the fact that the southern islands boast as many shades of blue as Ireland has green:

Update:
Oil: And Now Transneft Says Russia and OPEC Could Play Nice Together