The price of everything

Four types of people

“There are four types of people in the world. There are entrepreneurs – who are the guys who get out of bed in the morning and say ‘How can I make money by making things better for people ?’ There are contra-preneurs – who are all the governments and bureaucrats and regulators who try to stop that happening, make it difficult or ban it. There are the con-trepreneurs.. who pretend to be doing the first thing but are just lining their own pockets, usually with government subsidies, with the help of the second group. And there are the non-trepreneurs – which is all the rest of us, who must be pretty bloody thankful every time we jump out of bed that the first lot keep doing it.”

• Sean Corrigan of Cantillon Consulting, interviewed on the latest State of the Markets podcast.

As Mike Tyson never quite said, everyone has a plan until they get punched in the Facebook. Just when it seemed that Elon Musk’s notorious Q1 Tesla conference call couldn’t be surpassed for CEO-inspired trainwreckery, or that Netflix’s Q2 earnings miss and its associated 14% share price fall might be setting some new kind of financial market low standard for 2018, along comes Facebook’s Q2 conference call, which managed to knock $156.6 billion off the company’s market valuation in after-hours trading. As the FT’s John Authers pointed out,

That is, deliciously, very slightly bigger than the current $155.6bn market cap of Facebook's fellow FAANG Netflix.

As JK Galbraith remarked in The Great Crash of 1929,

If there must be madness, something may be said for having it on a heroic scale.

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Per ardua ad astra

“For me, and I think the British people, these aeroplanes represent innovation, ingenuity, determination, and an unwillingness to be bullied.”

• Squadron Leader Andy Millikin, Battle of Britain Memorial Flight, RAF, as featured in the just released film documentary, Spitfire (2018).

 

“Spitfires, George. Greatest plane ever built.. Rolls Royce Merlin engines. Sweetest sound you could hear out here.”

• Dawson (Mark Rylance) in Christopher Nolan’s Dunkirk (2017).

 

“Churchill followed the day’s fighting from No. 11 Group headquarters at Uxbridge, and he left clearly affected. Climbing into his limousine with Ismay, he said, “Don’t speak to me. I’m too moved.” His lips were trembling. They rode in silence for a few minutes. Then Churchill turned to Ismay and said something that “burned into” Ismay’s mind, so much so that he went home that night and repeated the words to his wife.

Five days later, when the most difficult and dangerous period in the battle was about to begin, Churchill paused during a long address to the House of Commons on the overall war situation, and delivered his tribute to the RAF:

“The gratitude of every home in our island, in our Empire, and indeed throughout the world, except in the abodes of the guilty, goes out to the British airmen who, undaunted by odds, unwearied in their constant challenge of mortal danger, are turning the tide of the World War by their prowess and their devotion.”

Then, he spoke the words that had so moved Ismay:

“Never in the field of human conflict was so much owed by so many to so few.”

• From William Manchester and Paul Reid’s The Last Lion, volume three, ‘Winston Spencer Churchill: Defender of the Realm, 1940-1965’.

 

The history of the Spitfire is a catalogue of triumph against adversity. Its designer, the aeronautical engineer RJ Mitchell, died in 1937, three years before his creation’s finest hour. Throughout its history, the Royal Air Force had been dismissive of fighter aircraft, hewing to the conventional wisdom that the bomber would always get through. When, in 1931, the British Air Ministry put out its original request for new fighters, F7/30, three designs were selected, and none of them proved to be much good. The Air Ministry briefly considered ordering aircraft from Poland instead..

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An odd, non-linear game

“Sir, John Authers, in Loser’s Game (The Big Read, December 22), could have delved deeply into the flaws in the asset management business as it has evolved in recent decades, rather than accepting the industry’s own terms or focusing on tweaks to “active” management that might improve results..

“Mr Authers could also have challenged the bureaucratic thinking and methods asset management has adopted in the course of chasing its “bogeys”, starting with the Big Ideas.. Then there are the model portfolios, relative-weightings, “style drift”, investment committees, the requirement to be fully invested and so on — all bog down decision-making and most have nothing to do with genuine investing. In adopting these practices the fund management business has created a recipe for mediocrity.

“In investing, it is never a good idea to do what everyone else is doing. Piling into passive index funds during a year of decidedly poor relative results for active managers, and especially after a long period of rising security prices is likely to lead to future disappointment, just as it did in 1999. This leads us to another line of inquiry for Mr Authers: even assuming “beating” an index is worthwhile, why must we do it all of the time? It is a paradox of investment that in order to do well in the long run, you sometimes have to do “poorly” in the short run. You have to accept the fact that often you will not “beat” an index; sometimes you don’t even want to — think of the Nasdaq in 1999, for example..”

-       Letter to the FT from Mr. Dennis Butler, December 30, 2014.

 

For historians, there are primary sources and secondary sources. Primary sources are the original documents that point to the raw history, like the original Magna Carta, for example. Secondary sources are effectively historical derivatives – they incorporate interpretation and analysis. In financial markets, the equivalent of primary sources are prices – the only raw data that speak unequivocally of what occurred by way of financial exchange between buyer and seller. Everything else amounts to interpretation and analysis, and must by definition be regarded as subjective. So-called fundamentals, therefore, are subjective. There is the price – and everything else is essentially chatter.

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The long march of the bezzle

“China’s HNA Group said on Wednesday that Wang Jian, 57, the group’s chairman and co-founder, accidentally fell and died from his injuries during a business trip in France.

“The company said the death occurred on Tuesday, but didn’t provide further details.

“One of China’s most acquisitive companies, HNA has been under heavy financial and regulatory pressure since last year due to its heavy debt load.”

• Caixin Global, 4 July 2018.

The world of economics is indebted to JK Galbraith, author of The Great Crash 1929, for his coinage, the bezzle.

To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s businesses and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.

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