Liquidity In The System: See Also U.S. Commercial and Industrial Loans

In Sunday's "The secret to stocks’ success so far in 2023? An unexpected $1 trillion liquidity boost by central banks." I forgot one very important consideration, a point made by Joe Carson a few months ago:

Sunday, January 1, 2023

Inverted Yield Curve Not A Sufficient Condition For Recession-Credit Growth & Rate Levels Matter Too

From economist Joe Carson's The Carson Report, January 1:

The inverted Treasury yield curve has raised concern over the risk of recession in 2023, and for a good reason. An inverted yield curve has occurred before the past eight recessions. Yet, something is awry. Banks are not restricting credit as they typically would with an inverted yield curve, and businesses and consumers are borrowing at banks at the fastest rate in fifteen years. What's up?

The thinking behind the inverted yield curve is that banks slow and eventually stop lending when bank funding costs exceed what banks can earn by lending. Yet, bank credit has been accelerating throughout 2022. The latest data for November shows bank lending to businesses, real estate, and consumers rising 11.8% over the comparable period one year earlier. That's the fastest annual growth since 2007....

....MUCH MORE

We will be referring back to this rather astute observation after the next CPI report (or five).

Some previous visits to The Carson Report:

December 2
A "Pain-Free" Tightening Cycle For Companies Is Not How Fed Tightening Cycles End

Our boilerplate introduction:The author, Joe Carson is the former Chief Economist & Director of Global Economic Research at Alliance Bernstein. Prior to that he was Chief Economist at Chemical Bank and at Dean Witter, firms he left in such rough shape they were forced to merge with JPM and MS respectively. (Just Kidding Mr. C.)...

September 30
"Is Deflation A Risk, Or Are These Prognostications A Spurious Call For A Fed Pivot?"
June 22
"Peak Inflation Is Hollow: It Provides No Context To Reduction in Speed or Duration of Cycle"

Here is Mr. Carson's site, The Carson Report

Here's the current situation via the Federal Reserve Bank of St. Louis' FRED database: 

As can be seen, though down a bit from the January 25, 2023 intermediate-term high, it appears that, at best, the growth has only flatlined, that there is still an enormous amount of credit-money sloshing around the system.

Inverted Yield Curve Not A Sufficient Condition For Recession-Credit Growth & Rate Levels Matter Too

From economist Joe Carson's The Carson Report, January 1:

The inverted Treasury yield curve has raised concern over the risk of recession in 2023, and for a good reason. An inverted yield curve has occurred before the past eight recessions. Yet, something is awry. Banks are not restricting credit as they typically would with an inverted yield curve, and businesses and consumers are borrowing at banks at the fastest rate in fifteen years. What's up?

The thinking behind the inverted yield curve is that banks slow and eventually stop lending when bank funding costs exceed what banks can earn by lending. Yet, bank credit has been accelerating throughout 2022. The latest data for November shows bank lending to businesses, real estate, and consumers rising 11.8% over the comparable period one year earlier. That's the fastest annual growth since 2007....

....MUCH MORE

We will be referring back to this rather astute observation after the next CPI report (or five).

Some previous visits to The Carson Report:

December 2
A "Pain-Free" Tightening Cycle For Companies Is Not How Fed Tightening Cycles End

Our boilerplate introduction:The author, Joe Carson is the former Chief Economist & Director of Global Economic Research at Alliance Bernstein. Prior to that he was Chief Economist at Chemical Bank and at Dean Witter, firms he left in such rough shape they were forced to merge with JPM and MS respectively. (Just Kidding Mr. C.)...

September 30
"Is Deflation A Risk, Or Are These Prognostications A Spurious Call For A Fed Pivot?"
June 22
"Peak Inflation Is Hollow: It Provides No Context To Reduction in Speed or Duration of Cycle"

A "Pain-Free" Tightening Cycle For Companies Is Not How Fed Tightening Cycles End

Our boilerplate introduction:

The author, Joe Carson is the former Chief Economist & Director of Global Economic Research at Alliance Bernstein. Prior to that he was Chief Economist at Chemical Bank and at Dean Witter, firms he left in such rough shape they were forced to merge with JPM and MS respectively. (Just Kidding Mr. C.)

From his personal website, The Carson Report, December 1:

"It ain't over until it's over," quoting Yogi Berra, but this has been a "painless" tightening cycle for companies. According to the profit data for nonfinancial companies, profit margins (adjusted for inflation) for the first three quarters of 2022 have averaged 15.6%, essentially matching last year's figure, which was the highest in 60 years.  

In previous Fed tightening cycles aimed at slowing and reversing cyclical inflation forces, real profit margins declined, and by a lot. Declines of 200 to 500 basis points in real profit margins occurred during the tightening cycles of 1980, the 1990s, and the 2000s....

....MUCH MORE 

Also at The Carson Report, November 14:

Uh-Oh! Credit Boom Accelerates---How Does The Fed Stop An Inflation Cycle With Easy Credit? 

Uh-Oh!. The credit boom gets stronger; bank lending for commercial, industrial, real estate, and consumer loans increased by 11.7% in the last twelve months ending in October. That's 50 basis points faster than the previous reading. C&I and real estate lending accounted for the acceleration. In the past year, C&L loans are running at +15.2%, consumer loans (including credit cards) at +12.6%, and real estate at 9.6%. How does the Fed stop an inflation cycle with easy credit? It doesn't....

"Peak Inflation Is Hollow: It Provides No Context To Reduction in Speed or Duration of Cycle"

The author, Joe Carson is the former Chief Economist & Director of Global Economic Research at Alliance Bernstein. Prior to that he was Chief Economist at Chemical Bank and at Dean Witter, firms he left in such rough shape they were forced to merge with JPM and MS respectively. (Just Kidding Mr. C.)

From his personal website, The Carson Report, June 7:

Peak inflation is not a meaningful statistic. In some ways, it is similar to peak growth or peak earnings. Indeed, it provides no context to the reduction in speed or the duration of the cycle. It is hollow. The Fed made a mistake in thinking that the spike in inflation was supply-side driven and, therefore, temporary. It would be equally wrong to conclude that peak inflation signals a quick end to the inflation cycle.

There is a lot of talk of peak inflation as it somehow creates the impression that with inflation coming off its highs, the Federal Reserve has less need to tighten. Yet, peak inflation implies inherent linearity to inflation, which is not the case. Inflation cycles are non-linear. To be sure, inflation cycles rotate, move up and down, and broaden over time.

The thinking behind peak inflation is similar to the supply-side driven view of the current inflation cycle. Supply-driven inflation, according to some, is temporary as it will fall on its own accord once the unique factors disappear or dissipate in intensity. Yet, the error in that analysis is that it overlooks or ignores the spreading effect of inflation. In other words, as certain costs rise, it forces different prices up over time.

For example, in the 1970s, supply shocks (food and energy) played a massive role in starting the inflation cycle. After that, however, the inflation process spread, and for more than a year, inflation measures without food and energy costs were rising faster than those that included them.

A similar script is starting to play out today. For example, consumer price inflation has accelerated by 400 basis points in the past twelve months. Unique factors, such as energy +30%, used cars +23%, and food +9%, accounted for a lot of the spike. Yet, prices other than food, energy, shelter, and used cars accelerated by 330 basis points, rising 5.8%, the most significant acceleration and fastest increase in this broad price index in over 40 years....

....MORE

The man doesn't pull any punches.

Also at The Carson Report this month:

• The "Income" Consequences of the Fed's Inflation Fight: The Main Reason Recession Risks Are High
• The Fed's New Playbook--- "Google Search"
• Fed's Goes Big & Late: Hard Landing Coming

Questions Americans Want Answered: "Is A QE-Adjusted Yield Curve Inverted?...."

 Our boilerplate introduction:

The author, Joe Carson is the former Chief Economist & Director of Global Economic Research at Alliance Bernstein. Prior to that he was Chief Economist at Chemical Bank and at Dean Witter, firms he left in such rough shape they were forced to merge with JPM and MS respectively. (Just Kidding Mr. C.)...

From The Carson Report, April 4:

Is A QE-Adjusted Yield Curve Inverted? It's Not, Confusing Investors and Complicating Policy

Is a QE-adjusted yield curve inverted? It's not. By lifting short-term rates over the past year and anchoring long rates with its new QE tool (quantitative easing), Fed policy creates an "unnatural" inverted yield curve. Nevertheless, if long-term yields remain below short-term rates, it will confuse investors and complicate monetary policy efforts to reverse inflationary pressures. But, importantly, since two conflicting monetary policy forces cause the inversion, there is reason to doubt its predicted outcome. 

The Fed's primary tool is official interest rates. Since early 2022, the Fed has raised official rates by 475 basis points. That carries over point-to-point for increases in short-term Treasury rates, which measure one side of the Treasury yield curve. 

After the Financial Crisis, the Fed created the quantitative easing tool enabling policymakers to continue injecting liquidity by purchasing marketable securities, mostly of longer duration. From the beginning of 2020, the Fed's balance sheet increased by nearly $5 trillion, from $ 4 trillion to a peak of $8.98 trillion in March 2022. It was reduced to around $8 trillion in March 2023, which is still twice what it was at the start of 2020.  

QE creates an anchoring effect on long-term interest rates, the other side of the Treasury yield curve. Several studies have estimated that the scale of the QE is the equivalent of a 200 to 300 basis reduction in the Fed funds rate....

....MUCH MORE 

The QE - basis point comparison he highlights is higher than some who scoff at anything greater than 5 - 10 basis points-equivalent per trillion on the balance sheet but personally I'm starting to think it is even higher than the high end mentioned above, maybe 400 basis points worth of effect. There is something about the effect of QT unwinding the QE that scares the bejeebers out of central bankers.

Also at the Carson Report:

Near-Record High Real Profit Margins Indicate Fed Has A Lot More Work To Do

which will serve as a nice introduction to something from Albert Edwards, coming up 

ICYMI: It Sure Looks Like A Wage/Price Spiral Has Begun

A couple weeks ago we visited the author of this piece in "Peak Inflation Is Hollow: It Provides No Context To Reduction in Speed or Duration of Cycle" wherein he made the very important point that all the jibber-jabber about "peak" inflation doesn't matter and doesn't help the analyst understand where we are and where we're going. Our introduction to that essay:

The author, Joe Carson is the former Chief Economist & Director of Global Economic Research at Alliance Bernstein. Prior to that he was Chief Economist at Chemical Bank and at Dean Witter, firms he left in such rough shape they were forced to merge with JPM and MS respectively. (Just Kidding Mr. C.)

And from his personal website, The Carson Report, July 8:

The June Employment Report Says the Fed "Job" of Reversing Inflation in the Economy is Far From Done 

The June employment report has several important implications and consequences for policymakers and investors. In short, the Fed's "job" of reversing inflation impulses in the general economy is far from done. And with operating profits already in decline, higher official rates will only intensify the squeeze on margins and profits. Here's why.

First, an economy generating over 300,000 jobs a month is well above its potential. June's gain of 372,000 followed an increase of 384,000 in May and 368,000 in April. Adding 1.12 million workers over the last three months should quiet talk of recession and put the focus back on inflation.

Second, official rate hikes and tightening financial conditions have done little to undo the tightness in labor markets. The civilian unemployment rate stood at 3.6% at the end of Q2, off 0.3 percentage points from the start of the year. And it's near a 50-year low. The relatively low joblessness shields the Fed from politics as it fights inflation pressures....

....MORE (the meat of the matter) 

And from Federal Reserve Board Chairman Powell via the Wall Street Journal May 4, 2022: 

Transcript: Fed Chief Powell’s Postmeeting Press Conference 

.... Employers are having difficulties filling job openings, and wages are rising at the fastest pace in many years...

Deeper into the transcript:

...Implications for inflation. Really the wages matter a fair amount for companies, particularly in the service sector. Wages are running high, the highest they’ve run in quite some time. And they are one good example of—or good illustration, really—of how tight the labor market really is, the fact that wages are running at the highest level in many decades. And that’s because of an imbalance between supply and demand and the labor market....

And later:

...So in principle, it seems as though, by moderating demand, we could see vacancies come down, and as a result—and they could come down fairly significantly and I think put supply and demand at least closer together than they are, and that that would give us a chance to have lower—to get inflation—to get wages down and then get inflation down without having to slow the economy and have a recession and have unemployment rise materially. So there’s a path to that....

He used the word "wages" 11 times including this:

...There aren’t enough people to fill these job openings and companies can’t hire and wages are moving up at levels that would not over time be consistent with 2 percent inflation over time. And of course, everyone loves to see wages go up and it’s a great thing, but you want them to go up at a sustainable level because these wages are to some extent being eaten up by inflation....

It doesn't really matter what tomorrow's report says, the die has been cast.

Inflation: Joe Carson Is Not Turning Cartwheels In Response To The Latest Report

Our boilerplate introduction:The author, Joe Carson is the former Chief Economist & Director of Global Economic Research at Alliance Bernstein. Prior to that he was Chief Economist at Chemical Bank and at Dean Witter, firms he left in such rough shape they were forced to merge with JPM and MS respectively. (Just Kidding Mr. C.)...

From The Carson Report:

The Happy Prophecy That The Tightening Cycle Is Over Is Based On Hope, Not Hard Evidence

The current combination of today's low jobless rate (3.4%) and a high core inflation rate (5.5%) occurred only once in the post-war period, which was in the late 1960s. The Fed eventually broke that inflation cycle, doubling the unemployment rate in almost a year and pushing the economy into recession. Still, it required lifting official rates to 9%, approximately 400 basis points above today's rate and well above the trailing inflation rate. 

The financial markets think, "This time is different." Investors believe the Fed can end the inflation cycle without additional tightening. But two factors argue against a benign outcome anytime soon....

....MUCH MORE

"Q2 GDP Does Not Confirm Economic Recession, But It Does Confirm A Corporate Profit Recession."

From The Carson Report, July 28:

The preliminary report on Q2 GDP does not confirm the US economy is in recession, but it does suggest that a corporate profit recession is underway.

Q2 Real GDP declined 0.9% annualized, following a 1.6% decline in Q1. Back=to-back quarterly declines in GDP are rare and usually occur when the economy is in recession. Yet, the drop in real GDP during the first half of 2022 is preliminary and not confirmed by the income side of the GDP accounts.

For example, Real Gross Domestic Income (GDI) expanded 1.8% in Q1, or 340 basis points faster than real GDP. That's a record gap. The long-run average is zero. In other words, Q1 had $677 billion more real GDI and $836 billion in nominal GDI than real and nominal GDP. That makes no sense. Q2 GDI data is unavailable, so it's unclear whether the income side confirms the second quarterly drop in real GDP.

Research has shown that the initial GDI reports are more accurate than GDP. Perhaps that is true because GDI has fewer data inputs. 80% of GDI comes from employee compensation and operating profits, whereas the GDP numbers include hundreds of series on sales, shipments, and inventories, many of which are revised a lot....

....MUCH MORE

Our introduction to a previous visit with the writer:

"Peak Inflation Is Hollow: It Provides No Context To Reduction in Speed or Duration of Cycle"
The author, Joe Carson is the former Chief Economist & Director of Global Economic Research at Alliance Bernstein. Prior to that he was Chief Economist at Chemical Bank and at Dean Witter, firms he left in such rough shape they were forced to merge with JPM and MS respectively. (Just Kidding Mr. C.)....

"Is Deflation A Risk, Or Are These Prognostications A Spurious Call For A Fed Pivot?"

From Joe Carson at The Carson Report, September 29:

Consumer price inflation is at its highest rate in decades, yet some equity managers are screaming that deflation is the most significant risk. Is deflation a credible risk, or are these prognostications a spurious call for a Fed pivot? It's the latter.

First, the US has never recorded one year of deflation in core consumer prices in the sixty-plus years that the Bureau of Labor Statistics has collected data. Think about that. There have been several years of high unemployment, with the jobless rate exceeding 8% and a few at 10%-plus. Also, the US experienced record wealth losses following sharp drops in equity and real estate prices, abrupt drops in commodity prices, and near-collapse in the banking system in 2008-09, and not one year of a decline in consumer prices. That does not mean the future risk is zero. Still, going from high to negative inflation in months has to be exceptionally low. Also, economic and financial conditions would have to get significantly worse, above and beyond what has happened in the past, for a prolonged period before deflation risks would be the dominant worry.

Second, many equity managers form their opinion on inflation/deflation risks based on changes in commodity prices, especially energy. But, commodity prices are inputs into the production process and have a small weight in the overall cost of operations. Also, the US uses more commodities than it produces, so a fall in commodity prices is usually bullish for growth as it frees up cash flow and increases demand (and prices) in other areas....

....MUCH MORE

Our introduction to a previous visit with the writer:

"Peak Inflation Is Hollow: It Provides No Context To Reduction in Speed or Duration of Cycle"
The author, Joe Carson is the former Chief Economist & Director of Global Economic Research at Alliance Bernstein. Prior to that he was Chief Economist at Chemical Bank and at Dean Witter, firms he left in such rough shape they were forced to merge with JPM and MS respectively. (Just Kidding Mr. C.)....

"QE Is The "Albatross" of Monetary Policy"

Our boilerplate introduction:

The author, Joe Carson is the former Chief Economist & Director of Global Economic Research at Alliance Bernstein. Prior to that he was Chief Economist at Chemical Bank and at Dean Witter, firms he left in such rough shape they were forced to merge with JPM and MS respectively. (Just Kidding Mr. C.)...

From The Carson Report, February 14:

Quantitative easing (QE) is the "albatross" of the current stance of monetary policy. Quantitative easing was a monetary tool created during the Great Financial Recession. Operating at the "zero" bound of official rates, the Fed found a new channel (QE) to provide monetary stimulus and liquidity to the economy and financial markets. QE was a new way of making money as the Fed bought bonds directly from the financial markets in exchange for cash, increasing the broad money supply.

The first quantitative easing program ran from 2009 to 2014. During that period, the Fed's balance sheet exploded to over $4 trillion from about $500 billion before the Great Financial Recession. The Fed started the second QE program when the pandemic hit. That boosted the Fed balance sheet to $8.8 trillion, more than twice the size after the first program....

....MUCH MORE

Possibly also of interest:
Follow-up: Commercial and Industrial Loans Are Still Rising Quickly

Following on the point made by Joe Carson in "Inverted Yield Curve Not A Sufficient Condition For Recession-Credit Growth & Rate Levels Matter Too" I thought I'd look at large bank lending and damn, things still look loosey-goosey....

• A "Pain-Free" Tightening Cycle For Companies Is Not How Fed Tightening Cycles End
• "Is Deflation A Risk, Or Are These Prognostications A Spurious Call For A Fed Pivot?"
• "Peak Inflation Is Hollow: It Provides No Context To Reduction in Speed or Duration of Cycle"

"Economists React to the November Jobs Report: ‘Paves the Way for Fed Rate Hikes’"

From Real Time Economics:

The Labor Department on Friday reported that U.S. nonfarm employers added a seasonally adjusted 178,000 jobs in November and the unemployment rate fell to 4.6%, its lowest level since August 2007. The workforce-participation rate edged lower and average hourly earnings for private-sector workers softened. Here’s how economists and analysts reacted to the news.

“Today’s jobs report sets a baseline for the Trump administration. Jobs gains were solid, led by professional and business services and construction. But manufacturing jobs fell yet again in November. The president-elect faces strong headwinds in bringing those jobs back. And recent wage gains and unemployment declines make this a tough economy to improve on.” —Jed Kolko, Indeed
“The decline in the unemployment rate to a new cyclical low of 4.6% last month, from 4.9%, was due to a combination of a 160,000 increase in the household survey measure of employment together with a 226,000 decline in the labor force….The upshot is that the labor market appears to be approaching full employment.” —Paul Ashworth, Capital Economics

“This jobs report paves the way for Fed rate hikes. It also tops off a recent run of continually positive economic data.” —Jason Schenker, Prestige Economics

“In our view, this report easily clears the bar for a December rate hike and represents some of the continued progress towards the dual mandate that the committee desires. Of course, it could decide that the tightening of financial conditions since September is sufficiently large to forestall a hike, but we consider that to be very unlikely at this point.” —Michael Gapen and Rob Martin, Barclays
....
“Overall, the report shows modest job gains, which is not totally unexpected given the uncertainty surrounding the election.” —Joe Carson, AllianceBernstein

“Perhaps the most surprising development was the sharp decline in the unemployment rate, which fell to 4.6%—a nine-year low. Economists had respected it to remain steady at 4.9%. Positive job creation certainly contributed to that drop, but unanticipated declines in the civilian labor force and the labor-force participation rate reduced the estimated rolls of the unemployed by 387,000. It’s quite likely that both of those factors will move higher in the coming months. As such, it’s possible that the jobless rate could edge higher in the coming months—even if the recent trend in job creation remains positive—before resuming its downward trend.” —Jim Baird, Plante Moran Financial Advisors

“This was the last hurdle on the path to a December hike, and it has been cleared convincingly. It is now incredibly hard to imagine what would stop the Fed from going. The debate now is all about what rates will do next year and beyond.” —Luke Bartholomew, Aberdeen Asset Management

...MORE 

"Rarely Has the Gap Between The Bull & Bear Case Been So Wide: Who's Right? Can Both Be Wrong?"

 From Joe Carson's The Carson Report, May 21:

Rarely has the gap between the bull versus bear case on the economy been so wide. The bulls say the advance in the broad equity market, despite its narrow breadth, argues against a recession in the second half of this year. Yet, the bears say that the trusted inverted yield curve indicator, or the spread between 3-month Treasury bills and the 10-year Treasury note, shows the most inversion in almost 50 years, signaling a recession in the months immediately ahead. Who's right? Can both be wrong?

The bull/bear case rests on the housing sector. A sharp decline in housing construction, between 40% and 80% from cycle peak levels, preceded the start of every recession. That, in turn, triggered a sharp drop in jobs, income, and spending. Only once in the post-war period did the economy enter into recession without a sharp plunge in housing construction. That happened in 2000 when the tech-equity bubble burst, triggering a series of corporate bankruptcies and a two-year decline in capital spending.

None of that is happening nowadays....

....MUCH MORE

"Johnny Carson’s Longtime Malibu Estate Just Landed on the Market for $110 Million"

From the Robb Report

The legendary TV host acquired the four-parcel Point Dume complex in the mid-1980s for $9.5 million and resided there until his death in 2005. 

Heeere’s Johnny’s house! It’s been two decades since Johnny Carson died at age 79. Now an epic oceanfront Malibu estate best known as the longtime home of the late-night TV legend has popped up for sale at a substantial $110 million, with the listing held by Chris Cortazzo of Compass. 

 The Tonight Show host acquired the four-parcel Point Dume complex in the mid-1980s for $9.5 million. Carson’s widow Alexis inherited the property upon his death in 2005, then sold the entire spread two years later for $46 million to billionaire apparel mogul-turned-film producer Sidney Kimmel and his wife Caroline. In 2019, the Kimmels transferred the place to venture capitalist Riaz Valani, an early investor in the e-cigarette manufacturer Juul, and his wife Augusta Tigrett, a daughter of Hard Rock Café co-founder Isaac Tigrett and Ringo Starr’s ex-wife Maureen Starkey. The clandestine deal took place off-market and was valued at $40 million in cash, more than half off the original $81.5 million asking price....

....MUCH MORE 

Again:

https://www.compass.com/listing/6962-wildlife-road-malibu-ca-90265/1933477151613203889/ 

"OpenAI’s $38B cloud deal with Amazon takes ChatGPT maker further beyond Microsoft"

I'm getting some semantic satiation with "billions." 

From GeekWire, November 3:

ChatGPT maker OpenAI, exercising newfound freedom under its renegotiated Microsoft partnership, will expand its cloud footprint for training and running AI models to Amazon’s infrastructure under a new seven-year, $38 billion agreement.

The deal, announced Monday, positions Amazon as a major infrastructure provider for Microsoft’s flagship AI partner, highlighting seemingly insatiable demand for computing power and increasingly complex alliances among big companies seeking to capitalize on AI.

It comes as Microsoft, Amazon, and big tech companies attempt to reassure investors who’ve grown concerned about a possible bubble in AI spending and infrastructure investment.

Under its new Amazon deal, OpenAI is slated to begin running AI workloads on Amazon Web Services’ new EC2 UltraServers, which use hundreds of thousands of Nvidia GPUs. Amazon says the infrastructure will help to run ChatGPT and train future OpenAI models.

Amazon shares rose nearly 5% in early trading after the announcement.

“Scaling frontier AI requires massive, reliable compute,” said OpenAI CEO Sam Altman in the press release announcing the deal. “Our partnership with AWS strengthens the broad compute ecosystem that will power this next era and bring advanced AI to everyone.”

Matt Garman, the AWS CEO, said in the release that Amazon’s cloud infrastructure will serve as “a backbone” for OpenAI’s ambitions.

In an interview with CNBC, Dave Brown, Amazon’s vice president of compute and machine learning services, said the new agreement represents “completely separate capacity” that AWS is building out for OpenAI. “Some of that capacity is already available, and OpenAI is making use of that,” Brown told CNBC.

Amazon has also been deepening its investment in AI infrastructure for Anthropic, the rival startup behind the Claude chatbot. Amazon has invested and committed a total of $8 billion in Anthropic and recently opened Project Rainier, an $11 billion data center complex for Anthropic’s workloads, running on hundreds of thousands of its custom Trainium 2 chips....

....MUCH MORE 

Billions. From October 24's "Google and Anthropic wave hands about mega TPU deal worth 'tens of billions'"
I had a similar reaction: "What's with the 'tens of billions'" when I saw the news yesterday, probably because I had just read Carl Sagan swear he never said "billions and billions." 

***** 

....And Professor Sagan?

I never said it. Honest. Oh, I said there are maybe 100 billion galaxies and 10 billion trillion stars. It’s hard to talk about the Cosmos without using big numbers. I said "billion" many times on the Cosmos television series, which was seen by a great many people. But I never said "billions and billions." For one thing, it’s too imprecise. How many billions DUH "billions and billions"? A few billion? Twenty billion? A hundred billion? "Billions and billions" is pretty vague. When we reconfigured and updated the series, I checked—and sure enough, I never said it.

But Johnny Carson—on whose Tonight Show I'd appeared almost thirty times over the years—said it.
He'd dress up in a corduroy jacket, a turtleneck sweater, and something like a mop for a wig. He had created a rough imitation of me, a kind of Doppelganger, that went around saying "billions and billions" on late-night television. It used to bother me a little to have some simulacrum of my persona wandering off on its own, saying things that friends and colleagues would report to me the next morning. (Despite the disguise, Carson—a serious amateur astronomer—would often make my imitation talk real science.)
Astonishingly, "billions and billions" stuck. People liked the sound of it. Even today, I'm stopped on the street or on an airplane or at a party and asked, a little shyly, if I wouldn't—-just for them—say "billions and billions."

"You know, I didn't actually say it," I tell them.
"It's okay," they reply. "Say it anyway."

I'm told that Sherlock Holmes never said, "Elementary, my dear Watson" (at least in the Arthur Conan Doyle books); Jimmy Cagney never said, "You dirty rat"; and Humphrey Bogart never said, "Play it again, Sam." But they might as well have, because these apocrypha have firmly insinuated themselves into popular culture.

I'm still quoted as uttering this simple-minded phrase in computer magazines ("As Carl Sagan would say, it takes billions and billions of bytes"), newspaper economics primers, discussions of players' salaries in professional sports, and the like.

For a while, out of childish pique, I wouldn't utter or write the phrase, even when asked to. But I've gotten over that. So, for the record, here goes: "Billions and billions."....

—Billions and Billions: Thoughts on Life and Death at the Brink of the Millennium, Carl Sagan, 1997 

And from October 29's "Jamie Powell, Winston Churchill, and Anthony Downs On A Variant Of Semantic Satiation": 

....And the original meaning of 'semantic satiation'?

Semantic satiation is a phenomenon whereby the uninterrupted repetition of a word eventually leads to a sense that the word has lost its meaning. This effect is also known as semantic saturation or verbal satiation. 

The concept of semantic satiation was described by E. Severance and M.F. Washburn in The American Journal of Psychology in 1907. The term was introduced by psychologists Leon James and Wallace E. Lambert in the article "Semantic Satiation Among Bilinguals" in the Journal of Experimental Psychology (1961)....MORE at ThoughtCo

So two rules: 1) Don't bore your audience; 2) Don't drone on and on to the point that people no longer hear or care what you are trying to express....

"FBI Raids and Subpoenas Have Been Occurring on Wall Street. What’s Up?"

From Wall Street on Parade, February 17:

Yesterday, the Wall Street Journal dropped the bombshell that the Justice Department has been conducting raids on prominent short-sellers, including Muddy Waters’ Carson Block and Andrew Left of Citron Research. The Journal reported that the Justice Department “has seized hardware, trading records and private communications….”

Reuters reported yesterday that the Justice Department’s probe is “part of a wide-ranging investigation into short-sellers and hedge funds focused on suspected coordinated manipulative trading, according to two people familiar with the matter.” Reuters also reported that “dozens” of subpoenas have been issued to various firms since early last year.

Of particular interest to Wall Street On Parade was a report on December 10 by Reuters which indicated that trading activity in the shares of GSX Techedu was in the cross hairs of the Justice Department because both Muddy Waters and Citron Research had circulated negative research on the company.

If GSX Techedu, a Chinese online tutoring firm, is being probed, we can assure you that more than short-sellers need to be under investigation by the Justice Department. (The company has changed its name to Gaotu Techedu.)

GSX Techedu was one of the stocks that had been purchased in huge quantities by Archegos Capital Management before Archegos blew itself up in March of last year. Archegos was using tricked-up derivative contracts provided by major Wall Street firms that allowed it to hide its ownership interests in various stocks and obtain massive amounts of margin loans provided by the same Wall Street firms. (See our report: Archegos: Wall Street Was Effectively Giving 85 Percent Margin Loans on Concentrated Stock Positions – Thwarting the Fed’s Reg T and Its Own Margin Rules.)

When we checked 13F filings with the SEC that were dated prior to the Archegos blowup to find out who might have been fronting for Archegos’ position in GSX Techedu, we found the following: Goldman Sachs held over 20 million shares of GSX Techedu with a put option on just 3.45 million shares; Morgan Stanley held over 14 million shares; UBS held more than 11 million shares; Bank of America held more than 5.8 million shares; Citigroup, over 4.8 million shares; and JPMorgan Chase, over 4 million shares.

The market value for all six megabanks’ holdings in GSX Techedu was more than $3 billion as of December 31, 2020....

....MUCH MORE

"Uber isn't sure if it can 'remain a viable business' without building self-driving cars"

If I were a late round Uber investor this would be a bit concerning.
We've posted on Kalanick and his "existential" quote, which is one thing, but this is a statement to a Federal Court.

From Business Insider. April 8:

If you're to believe Uber's lawyers, the fate of the $69 billion company is tied up in one bid from an opponent trying to stop its work on self-driving cars.

Waymo, a subsidiary of Google-parent company Alphabet, sued Uber in February claiming it stole trade secrets. Weeks later, it filed a preliminary injunction to try to stop Uber's work on self-driving cars until the case resolves.

Uber obviously doesn't want that to happen, but not because it may just slow down its research. A stop to the self-driving car work would apparently threaten to topple Uber's entire business. 

In its response to court on Friday, Uber said stopping its work on self-driving cars would threaten its future as a "a viable business."

"To hinder Uber's continued progress in its independent development of an in-house lidar that is fundamentally different than Waymo's, when Uber has not used any of Waymo's trade secrets, would impede Uber's efforts to remain a viable business, stifle the talent and ingenuity that are the primary drivers of this emerging industry, and risk delaying the implementation of technology that could prevent car accidents," Uber said (emphasis ours).

Of course, many people question whether a company that's believed to be losing billions of dollars a year is a "viable" business to begin with. The six-year-old company hasn't yet figured out how to make humans in the drivers seat work as a profitable business, and it's also tackling everything from food delivery to vertical take off planes.

Discussions about the current viability aside, Uber continues to repeat that self-driving cars are "existential" to its future even though internally the company crowned 2017 the year of the driver (the human kind).

Even when it comes to its bottomline, Uber hasn't bet the house, based on its own internal calculations. In March, The Information revealed that removing the driver from the equation would "only increase Uber's projected long-term net profit margin by as much as 5 percentage points," according to the report.
 
So if a robocar fleet is the El Dorado of profitability, why does it consider self-driving cars the only way it can remain viable? It's because its CEO Travis Kalanick has a great fear of his entire business being left behind and has already bet that autonomous cars are the future.

Take this interview with Business Insider in August 2016 right after it purchased Otto, the company at the heart of the lawsuit (emphasis ours):

Biz Carson: You called the development of autonomous vehicles existential to the company, and you've also called buying Otto another existential move. So what is so existential about it and where is that threat really coming from?

Kalanick: I think it starts with understanding that the world is going to go self-driving and autonomous. Because, well, a million fewer people are going to die a year. Traffic in all cities will be gone. Significantly reduced pollution and trillions of hours will be given back to people — quality of life goes way up. Once you go, "All right, there's a lot of upsides there" and you have folks like the folks in Mountain View, [California,] a few different companies working hard on this problem, this thing is going to happen. So if that's happening, what would happen if we weren't a part of that future? If we weren't part of the autonomy thing? Then the future passes us by, basically, in a very expeditious and efficient way.

Carson: How soon will self-driving cars realistically be a significant portion of Uber's fleet?

Kalanick: That is the trillion-dollar question, and I wish I had an answer for you on that one, but I don't. What I know is that I can't be wrong. Right? I have to make sure that I'm ready when it's ready or that I'm making it ready. So, I have to be tied for first at the least....

....MORE

Previously:

Remember that time Uber's Kalanick said having autonomous was crucial to the company's very survival? (a deep dive) 

Sure you do:

"We're at the very beginning stages of becoming a robotics company," Uber CEO Travis Kalanick said at the Vanity Fair Summit in San Francisco in October. "As we move toward the future, autonomy is a pretty critical thing for us. It's existential."

-via c|net, Dec. 2016

I think he chose his words carefully, an existential threat literally threatens the existence of a firm and he has known since at least 2014 that without major breakthroughs in autonomous vehicles Uber could never be worth what they had convinced investors to pay:

"When there's no other dude in the car, the cost of taking an Uber anywhere becomes cheaper than owning a vehicle. So the magic there is, you basically bring the cost below the cost of ownership for everybody, and then car ownership goes away."

-Uber CEO Travis Kalanick, May 28, 2014

Combine Kalanick's statements and the corporate culture he created with the fact the central figure in the Waymo lawsuit was in contact with Uber before he left the Alphabet company's autonomous efforts  and even a dull-witted paralegal could make a case for conspiracy,
And that would threaten Uber's existence....

There's also a variation of the sentiment in "Uber to put self-driving cars on the road in SF 'very soon'" 

Lest We Forget: "Uber isn't sure if it can 'remain a viable business' without building self-driving cars"

A repost from April 10, 2017:

If I were a late round Uber investor this would be a bit concerning.
We've posted on Kalanick and his "existential" quote, which is one thing, but this is a statement to a Federal Court.

From Business Insider. April 8:

If you're to believe Uber's lawyers, the fate of the $69 billion company is tied up in one bid from an opponent trying to stop its work on self-driving cars.

Waymo, a subsidiary of Google-parent company Alphabet, sued Uber in February claiming it stole trade secrets. Weeks later, it filed a preliminary injunction to try to stop Uber's work on self-driving cars until the case resolves.

Uber obviously doesn't want that to happen, but not because it may just slow down its research. A stop to the self-driving car work would apparently threaten to topple Uber's entire business. 

In its response to court on Friday, Uber said stopping its work on self-driving cars would threaten its future as a "a viable business."

"To hinder Uber's continued progress in its independent development of an in-house lidar that is fundamentally different than Waymo's, when Uber has not used any of Waymo's trade secrets, would impede Uber's efforts to remain a viable business, stifle the talent and ingenuity that are the primary drivers of this emerging industry, and risk delaying the implementation of technology that could prevent car accidents," Uber said (emphasis ours).

Of course, many people question whether a company that's believed to be losing billions of dollars a year is a "viable" business to begin with. The six-year-old company hasn't yet figured out how to make humans in the drivers seat work as a profitable business, and it's also tackling everything from food delivery to vertical take off planes.

Discussions about the current viability aside, Uber continues to repeat that self-driving cars are "existential" to its future even though internally the company crowned 2017 the year of the driver (the human kind).

Even when it comes to its bottomline, Uber hasn't bet the house, based on its own internal calculations. In March, The Information revealed that removing the driver from the equation would "only increase Uber's projected long-term net profit margin by as much as 5 percentage points," according to the report.
 
So if a robocar fleet is the El Dorado of profitability, why does it consider self-driving cars the only way it can remain viable? It's because its CEO Travis Kalanick has a great fear of his entire business being left behind and has already bet that autonomous cars are the future.

Take this interview with Business Insider in August 2016 right after it purchased Otto, the company at the heart of the lawsuit (emphasis ours):

Biz Carson: You called the development of autonomous vehicles existential to the company, and you've also called buying Otto another existential move. So what is so existential about it and where is that threat really coming from?

Kalanick: I think it starts with understanding that the world is going to go self-driving and autonomous. Because, well, a million fewer people are going to die a year. Traffic in all cities will be gone. Significantly reduced pollution and trillions of hours will be given back to people — quality of life goes way up. Once you go, "All right, there's a lot of upsides there" and you have folks like the folks in Mountain View, [California,] a few different companies working hard on this problem, this thing is going to happen. So if that's happening, what would happen if we weren't a part of that future? If we weren't part of the autonomy thing? Then the future passes us by, basically, in a very expeditious and efficient way.

Carson: How soon will self-driving cars realistically be a significant portion of Uber's fleet?

Kalanick: That is the trillion-dollar question, and I wish I had an answer for you on that one, but I don't. What I know is that I can't be wrong. Right? I have to make sure that I'm ready when it's ready or that I'm making it ready. So, I have to be tied for first at the least....

....MORE

And Travis doing his "KimKierkegaardashian"* existentialist bit:

March 16, 2017
Remember that time Uber's Kalanick said having autonomous was crucial to the company's very survival? (a deep dive)

Sure you do:

"We're at the very beginning stages of becoming a robotics company," Uber CEO Travis Kalanick said at the Vanity Fair Summit in San Francisco in October. "As we move toward the future, autonomy is a pretty critical thing for us. It's existential."

-via c|net, Dec. 2016

I think he chose his words carefully, an existential threat literally threatens the existence of a firm and he has known since at least 2014 that without major breakthroughs in autonomous vehicles Uber could never be worth what they had convinced investors to pay:

"When there's no other dude in the car, the cost of taking an Uber anywhere becomes cheaper than owning a vehicle. So the magic there is, you basically bring the cost below the cost of ownership for everybody, and then car ownership goes away."

-Uber CEO Travis Kalanick, May 28, 2014

Combine Kalanick's statements and the corporate culture he created with the fact the central figure in the Waymo lawsuit was in contact with Uber before he left the Alphabet company's autonomous efforts  and even a dull-witted paralegal could make a case for conspiracy,
And that would threaten Uber's existence.

From Bloomberg, March 16:

Fury Road: Did Uber Steal the Driverless Future From Google?...

And that's before we even get to stuff like:

Does Uber Go Bankrupt If Didi Chuxing Decides To Compete In the United States?  

*

Explains my day https://t.co/L1mzdQpfUi

— KimKierkegaardashian (@KimKierkegaard) June 9, 2017

Two black holes ate each other and rippled the fabric of spacetime: https://t.co/mpPAhpOZ3V pic.twitter.com/03lwXqZaWs

— VICE (@VICE) June 4, 2017

Life is not a problem to be solved, but a reality to covfefe

— KimKierkegaardashian (@KimKierkegaard) May 31, 2017

"Google and Anthropic wave hands about mega TPU deal worth 'tens of billions'"

I had a similar reaction: "What's with the 'tens of billions'" when I saw the news yesterday,  probably because I had just read Carl Sagan swear he never said "billions and billions." 

From The Register, October 23: 

But AWS is still the AI upstart's primary partner 

Google and Anthropic have struck a deal that will see the AI upstart gain access to up to a million of the web giant’s tensor processing units (TPUs) and involve “tens of billions of dollars.”

The two companies announced the deal on Thursday, with Anthropic pitching it as “expanded capacity” that the company will use to meet surging customer demand and allow it to conduct “more thorough testing, alignment research, and responsible deployment at scale.”

Google’s take on the deal is that it will enable Anthropic to “train and serve the next generations of Claude models,” and involves “additional Google Cloud services, which will empower its research and development teams with leading AI-optimized infrastructure for years to come.”

The search and ads giant claims the deal “represents the largest expansion of Anthropic's TPU usage to date” and says the AI upstart “chose TPUs due to their price-performance and efficiency, and the company's existing experience in training and serving its models with TPUs.”

Anthropic’s announcement points out it’s betting on companies other than Google.

“Anthropic’s unique compute strategy focuses on a diversified approach that efficiently uses three chip platforms – Google’s TPUs, Amazon’s Trainium, and Nvidia’s GPUs,” the statement explains. “This multi-platform approach ensures we can continue advancing Claude's capabilities while maintaining strong partnerships across the industry.”

Anthropic also stated: “We remain committed to our partnership with Amazon, our primary training partner and cloud provider, and continue to work with the company on Project Rainier, a massive compute cluster with hundreds of thousands of AI chips across multiple U.S. data centers.”

AI infrastructure announcements nearly always feature enormous numbers and breathless enthusiasm about how the tech will improve everything … but little detail about how players will pay for, and profit from, the billions spent on giant chip farms....

....MUCH MORE, including four 'More Context' links. 

Recently - OpenAI turns to Google's AI chips to power its products, source says (GOOG; NVDA)

The Google product has been a long time acoming. Some previous posts:

June 2016 - Machine Learning: JP Morgan Compares Google's New Chip With NVIDIA's (GOOG; NVDA) 

April 2017 - Watch Out NVIDIA: "Google Details Tensor Chip Powers" (GOOG; NVDA)

May 2018 - Ahead of Today's NVIDIA Earnings: A Look at One of the Competitors (GOOG; NVDA)
We'll have much more on Google next week but for today the next-gen Tensor Processing Unit...

June 2023 - "Elon Musk Predicts Nvidia’s Monopoly in A.I. Chips Won’t Last" (NVDA; TSLA)

September 2023 -  Chips: "Google TPU v5e AI Chip Debuts after Controversial Origins"

July 2024 - Apple Trained Its Large Language Model On Broadcom-Designed TPUs In Google's Cloud, Meh (AVGO, GOOG, AAPL)

And many, many more, use the 'search blog' box, upper left, if interested. 

Google of course has its own AI model entrants, Gemini among others and so, of course, is not giving Mr. Altman their best chips. 

And Professor Sagan? 

I never said it. Honest. Oh, I said there are maybe 100 billion galaxies and 10 billion trillion stars. It’s hard to talk about the Cosmos without using big numbers. I said "billion" many times on the Cosmos television series, which was seen by a great many people. But I never said "billions and billions." For one thing, it’s too imprecise. How many billions DUH "billions and billions"? A few billion? Twenty billion? A hundred billion? "Billions and billions" is pretty vague. When we reconfigured and updated the series, I checked—and sure enough, I never said it.

But Johnny Carson—on whose Tonight Show I'd appeared almost thirty times over the years—said it.
He'd dress up in a corduroy jacket, a turtleneck sweater, and something like a mop for a wig. He had created a rough imitation of me, a kind of Doppelganger, that went around saying "billions and billions" on late-night television. It used to bother me a little to have some simulacrum of my persona wandering off on its own, saying things that friends and colleagues would report to me the next morning. (Despite the disguise, Carson—a serious amateur astronomer—would often make my imitation talk real science.)
Astonishingly, "billions and billions" stuck. People liked the sound of it. Even today, I'm stopped on the street or on an airplane or at a party and asked, a little shyly, if I wouldn't—-just for them—say "billions and billions."

"You know, I didn't actually say it," I tell them.
"It's okay," they reply. "Say it anyway."

I'm told that Sherlock Holmes never said, "Elementary, my dear Watson" (at least in the Arthur Conan Doyle books); Jimmy Cagney never said, "You dirty rat"; and Humphrey Bogart never said, "Play it again, Sam." But they might as well have, because these apocrypha have firmly insinuated themselves into popular culture.

I'm still quoted as uttering this simple-minded phrase in computer magazines ("As Carl Sagan would say, it takes billions and billions of bytes"), newspaper economics primers, discussions of players' salaries in professional sports, and the like.

For a while, out of childish pique, I wouldn't utter or write the phrase, even when asked to. But I've gotten over that. So, for the record, here goes: "Billions and billions."....

—Billions and Billions: Thoughts on Life and Death at the Brink of the Millennium, Carl Sagan, 1997 

Monsanto Profit Tops Estimates; 2010 Outlook Repeated (MON)

The stock is down $1.32 at $74.02.
First up, the nuts and bolts from Bloomberg:

Monsanto Co., the world’s largest seed producer, reported fourth-quarter profit that exceeded analysts’ estimates because of higher corn and vegetable seed sales. The company maintained its forecast for 2010 earnings.

Profit in the three months that ended Aug. 31 was 2 cents a share, excluding some items, St. Louis-based Monsanto said today in a statement. The average estimate of 13 analysts in a Bloomberg survey was for profit of 1 cent. The net loss widened to $233 million, or 43 cents a share, from $172 million, or 31 cents, a year earlier, largely because of restructuring costs.

Chief Executive Officer Hugh Grant is cutting 8 percent of the workforce as farmers spend less and Chinese competitors sell cheaper generic versions of the company’s Roundup herbicide. Monsanto repeated its 2010 earnings forecast after two earlier cuts in the outlook for the glyphosate-based weed killer.

“We expect continued growth in seeds and genomics gross profit, offset by a sharp decline in Roundup/glyphosate,” Donald Carson, a New York-based analyst at UBS AG, said in an Oct. 5 report. “We anticipate a cautious start to fiscal 2010.” He rates the shares “buy.”>>>MORE

And from Blogging Stocks (be careful, look at that first sentence):

Monsanto: Pull-back is Buy opportunity

Monsanto's (NYSE: MON) stock has not cooperated since the June 15, 2009 Buy recommendation, as the shares have drifted about 10% lower.

Still, nothing has changed regarding MON's value proposition, hence I'm Reiterating my June 15, 2009 Buy recommendation, when shares were at $84.97. Higher-value-added, next-generation seeds will see substantial demand increases as the economic recovery progresses. Moreover, there is ample room to expand international sales, as emerging markets continue to develop their agriculture sectors and seek higher per acre yields.
True, fertilizer prices slipped as the end of the northern hemisphere growing season approached, and this perhaps explains at least some of MON's recent 10% stock price dip.

Even so, from a technical standpoint, the stock price decline will represent a triple-bottom, provided MON holds support in the $69-$72 range. A sustained drop below $68 would be bearish. Hence, the Sell/Stop Loss has been revised to $62 from the earlier $41....

"The Great Diamond Hoax of 1872"

From The Smithsonian via Brewminate:

How a Kentucky grifter and his partner pulled off one of the era’s most spectacular scams – until a man of science exposed their scheme.

The rush for gold that began in California in 1848 and for silver in Nevada in 1859 filled the West with people hooked on the Next Big Thing. From grubby prospectors washing dirt in a thousand Western streams to bankers and speculators in San Francisco, New York and London, everyone, it seems, embraced the idea that the West’s mountains and riverbeds held an abundance of mineral wealth there for the taking.

An announcement in the Tucson Weekly Arizonian in April of 1870 catches the mood of the moment: “We have found it! The greatest treasures ever discovered on the continent, and doubtless the greatest treasures ever witnessed by the eyes of man.” Located in the Pyramid Mountains of New Mexico, the “it” was a new mine dubbed the Mountains of Silver. Bankers hurried in, miners claimed stakes, investors sought capital in distant cities and surveyors laid out a town nearby. But in the end, the much-touted venture did not yield enough of the stuff for a single belt buckle.

At about the same time came news of a diamond rush in South Africa, the third major diamond find known to the world after one near the city of Golconda, India, and an 18thcentury site discovered by the Portuguese in Brazil. Stoked by the tall tales of early 19th-century trapper-guides like Jim Bridger and Kit Carson about diamonds, rubies and other gems that could be scooped right off the ground, avaricious dreamers were soon looking for precious stones in Arizona and New Mexico, where the terrain was said to resemble South Africa’s. An odd diamond or two had actually turned up during the gold rush, especially near Placerville, California. In a report on the phenomenon, a state geologist helpfully recommended that “though it may not pay to hunt for diamonds, yet it always pays to pick them up when you do happen to see them.”

And so the stage was set for the Great Diamond Hoax, a brilliantly acted scam by two Kentucky grifters that would embroil, among others, some of California’s biggest bankers and businessmen, a former commander of the Union Army, a U.S. representative, leading lawyers on both coasts, and the founder of Tiffany & Co. Accurately described by the San Francisco Chronicle in 1872 as “the most gigantic and barefaced swindle of the age,” the scheme was also noteworthy for the manner of its unraveling and its colorful characters. Not only did it propel to prominence a geologist later befriended and admired by Theodore Roosevelt, it also gave a fed-up American public some hope that honest science could triumph, at least occasionally, over hucksterism and greed.

Swelled by the completion of the transcontinental railroad in 1869, the San Francisco of 1870 was a city of some 150,000 souls. One of them was Philip Arnold, a Kentuckian born in the same county as Abraham Lincoln. A poorly educated former hatter’s apprentice, Mexican War veteran and gold rush forty-niner, Arnold had spent two decades working in mining operations in the West, making enough money to pay for periodic visits back to Kentucky, where he bought a farm, married, started a family and perhaps stashed a little cash. In 1870, he was working as an assistant bookkeeper for the Diamond Drill Co., a San Francisco drill maker that used diamond-headed bits. For a bookkeeper, Arnold, then just past 40, showed a surprising interest in the industrial-grade diamonds that kept the drills running. He even plowed through learned works on the subject.

By November of that year, Arnold had acquired a bag of uncut diamonds, presumably taken from his employer, and mixed them with garnets, rubies and sapphires that he likely bought from Indians in Arizona. He also had acquired a partner, John Slack, an aptly named older cousin from Kentucky who, like Arnold, had fought in the Mexican War and had gone after gold in 1849. Indeed, in the months ahead, as the two men hatched their scheme, Slack played the listless, taciturn foil to the voluble and cunning Arnold.

The first person the pair approached was George D. Roberts, the sort of businessman described in newspapers as prominent, but his was a prominence earned by moving fast and not asking too many questions. Arnold and Slack turned up one night at Roberts’ San Francisco office, looking weather-beaten and clutching a small leather bag. Inside was something of great value, they said, which they would have deposited in the Bank of California except for the late hour. The two men feigned a reluctance to talk about what was in the sack until Arnold allowed himself to let slip the words “rough diamonds.” But Arnold and Slack were more circumspect about where they’d found the jewels, mumbling something about Indian territory, an answer that carried a certain truth, but not in the way Roberts took it.

The bag of diamonds sank the hook deep. “Roberts was very much elated by our discovery,” Arnold told the Louisville Courier-Journal in December 1872, soon after their scheme had been exposed, “and promised Slack and myself to keep it a profound secret until we could explore the country further and ascertain more fully the extent of our discoveries.” Like many able liars, Arnold had an intuitive sense of how others would react to his fictions. What better way to get Roberts to spread the word than to make him swear an oath of silence?

Almost before his office door banged shut behind the two miners, Roberts broke his promise. First he told the founder of the Bank of California, William C. Ralston, a legendary financier who built hotels and mills and invested in almost everything else, including the Comstock Lode and the completion of the transcontinental railroad when the s0-called Big Four—Collis Huntington, Leland Stanford, Mark Hopkins and Charles Crocker—came up a little short. The banker had also put money into the Mountains of Silver venture, and in return, the nearby town of Grant had been courteously restyled Ralston, New Mexico. Then Roberts got word to the theatrically named Asbury Harpending, who was in London trying to float a stock offering for the Mountains of Silver. Harpending swallowed the bait as hungrily as Roberts had. As Harpending, an even shadier businessman than Roberts, recalled 45 years later in The Great Diamond Hoax and Other Stirring Incidents in the Life of Asbury Harpending, his colorful and mendaciously self-serving memoir, he knew that “they had got something that would astonish the world.” He made his way to San Francisco “as fast as steamships and railroads would carry us,” arriving back home in May 1871.

In the meantime, Arnold and Slack led Roberts to believe that they had made another visit to the diamond field and had returned with 60 pounds of diamonds and rubies said to be worth $600,000. More convinced than ever, Roberts drew others into the trap with this second, bigger bag of jewels, which he claimed a local jeweler had authenticated. Roberts, Ralston, Harpending and now San Francisco mining entrepreneurs William Lent and Gen. George S. Dodge wanted to get Arnold and Slack out of the picture as soon as possible by buying out their interests. At first, the two prospectors appeared to resist a quick payday. But then Slack asked for $100,000 for his share—$50,000 now and $50,000 after the two made what they claimed would be a third visit to the diamond field.

Once Slack got his first 50 grand, he and Arnold headed off to England to buy uncut gems. In July 1871, under assumed names—Arnold was Aundel and Slack used his middle name, Burcham—they bought $20,000 worth of rough diamonds and rubies, thousands of stones in all, from a London diamond merchant named Leopold Keller. “I asked them where they were going to have the diamonds cut,” Keller later testified in a London court, but of course they never intended to cut the stones. Some would go to San Francisco as further evidence of the richness of their find. Others would be planted in the still secret field for their investors to discover....

....MUCH MORE