Measure the Wage-Price Spiral and Economic Growth Discrepancies During Hyperinflation

There will be little warning in the event hyperinflation begins in the US.  There aren't many real-time tracking tools that function well during hyperinflation besides the prices of food and energy in your local neighborhood.  I expect the federal government to continue to rely upon the Employment Cost Index (ECI) to track wages and the Consumer Price Index (CPI) to track prices.  Economists traditionally regard a wage-price spiral as a hyperinflationary phenomenon.

I believe it will also prove worthwhile to track the difference between Gross Domestic Product (GDP) and Gross Domestic Income (GDI).  They are theoretically supposed to be equivalent but the BEA has revised the calculations behind GDP so much that there is now a noticeable statistical discrepancy between the two figures.  Here's the BEA's 2010 explanation for its preference of GDP over GDI as a reporting metric.  I can live with the preference for more timely data sources, but the ideal solution would be an interagency effort to get the GDI source updates more frequently.  Here's the BEA's regular update of differences between GDP and GDI.  If you get lost, just go to the BEA's website and find this info on the page for GDP, or use that site's search function that we paid for with our taxes.

Here's the FRED chart for GDP.

Compare it to the FRED chart for GDI.

They compare pretty darn well according to my eyeballs.  I'll perform more robust statistical comparisons if they start seriously diverging.  I expect the statistical discrepancy between GDP and GDI will describe the nature of any stagflation period during the early onset of hyperinflation.  If the discrepancy grows rapidly, it will indicate a rapidly stagflating economy that will tempt policymakers (specifically the Federal Reserve) to increase any hyperinflationary stimulus.  Comparing the discrepancy to ECI and CPI will indicate how quickly the hyperinflationary response takes effect.  Rapid rises in ECI and CPI will show the wage-price spiral taking effect.  This is all Alfidi Capital theory at this point.  Time will tell whether my expectations prove correct.

These statistics won't be useful as triggers for investment decision points once hyperinflation really gets roaring.  Their monthly and quarterly updates won't be frequent enough for a wage-price spiral that adjusts daily in the real world.  They will instead be useful as integrity checks for policymakers.  Any attempt to suppress knowledge of deteriorating economic conditions will reduce policymakers' credibility in the eyes of the public.  

The Haiku of Finance for 12/31/13

Annual review
Market's gain exceeds earnings
Hard to gain from there

IRA Rollovers and 401(k) Problems

FINRA is warning financial advisers in Regulatory Notice 13-45 that they need to remember their fiduciary duties when discussing IRA rollovers with clients.  I have no such fiduciary duties with anyone so I can discuss this subject from all angles.  The regulatory notice reminds advisers that products in a 401(k) may be more appropriate for a client's goals and risk tolerance than products available in an IRA.  I'm reminded of target date funds that automatically adjust portfolios as clients age, and those funds may not be available outside of a 401(k).  Positioning clients to accept comparable arrangements with products in IRAs may harm their best interests if management fees and transaction costs would increase.

FINRA's regulatory workarounds preserve the independence of retirement plan sponsors who offer diverse options within 401(k)s.  The remaining problems for 401(k) investors go beyond the choice of whether to rollover assets into other retirement accounts.  I can think of quite a few problems off the top of my head, based on years of studying finance.

A 401(k) contains a lot of actively managed products.  Actively managed funds carry more fees and tend to underperform passively managed products (i.e., indexed funds).  Even target date funds contain actively managed funds, layering another set of fees on top of the active managers' fees.  This Yale study by Ian Ayres and Quinn Curtis shows how active management and plan fees hurt 401(k) investors.

Multiple 401(k) options confuse investors.  Plan sponsors do not all perform thorough educational roles for their plan participants.  The best education is probably oriented toward construction of simple plans to avoid overwhelming low-information investors with poor choices.  It is unfortunate to see plan sponsors mimic brokerages by stuffing flavor-of-the-year mutual funds into 401(k) choices but that's what they are allowed to do to entice interest from their participating employees.

Investors borrow from 401(k) accounts.  Allowing investors to borrow from their own retirement accounts is IMHO one of the dumbest loopholes in American tax law.  Those loans must be repaid with interest to ensure the investor catches up to where their retirement account balance should be if they had never taken out a loan.  Oh BTW, the interest on a 401(k) loan is NOT entitled to the same tax deductibility as a home mortgage loan, so it's a pretty stupid way to fund a home purchase for people who don't qualify for a mortgage.

I would much prefer that the US scrap its entire tax-advantaged retirement system and start over from scratch.  The replacement regime should be very simple.  It should NOT at all resemble Theresa Ghilarducci's Guaranteed Retirement Account plan.  I've criticized that idea before because it's just another way of funding persistent federal budget deficits.  Investors forced to accept such a plan will eventually be prohibited from investing in anything other than government bonds.  Those bonds will eventually pay below-market interest rates and will lose purchasing power after inflation.

My preferred solution would resemble Australia's superannuation accounts system.  A simple system would be the best system.  Investors would be able to put as much of their income as they like into one tax-advantaged account with exactly one product:  a target date fund.  The fund would be structured like the federal government's Thrift Savings Plan and contain only index funds to minimize fees.  Limiting the number of fund components to a handful would still allow for allocations to equities, fixed income, and hard assets (and I'll include real estate and infrastructure among hard assets).  Investors would be prohibited from taking out loans from their superannuation account.  My plan has exactly zero chance of ever being enacted in America because it's too easy to understand.  The national political climate favors complicated solutions that are amenable to financial sector lobbying.  The plan would also completely replace Social Security because it could not be used as an entitlement program or as an accounting gimmick to mask deficit spending.  That definitely isn't going to fly in Washington, DC.  We'll just have to watch our government's entitlement programs collapse during hyperinflation before we see real reform.

I was a financial adviser years ago, and I was very circumspect when I discussed the characteristics of an IRA rollover with prospective clients.  I outlined the advantages, disadvantages, and consequences for their particular situations.  That's precisely why no one wanted to entrust an IRA rollover to my care.  Sharing my knowledge and concern really turned people off.  Human beings won't listen to detailed descriptions of consequences.  They prefer the excitement of wish fulfillment and will trust liars who promise the moon.  Financial advisers who "succeed" in obtaining business from investors doing rollovers are likely to ignore details and lie about consequences; they are human and they pitch to humans.  They tend to use action words like "must, should, ought" to manipulate a prospect into thinking there is only one choice.  This is why I have contempt for most financial advisers and most individual investors.  I find manipulation to be disgusting and I believe FINRA would agree with me.

Nota bene:  Nothing I wrote here constitutes investment advice.  I need to state that clearly in case a bunch of idiots claim I give financial or investment advice.  I do no such thing.  I don't give advice because I don't give a hoot what other people do with their money.  

The Haiku of Finance for 12/30/13

Bitcoin nerd network

Mining digits from nothing

No way to cash out

Academic Journals and Authors' Conflicts of Interest

I cited an article today in my financial sarcasm roundup about the conflicts of interest some academic researchers face in their work.  Industry pays some academics quite well to endorse their activities and I am concerned that such endorsement may color their scholarly research.  Disclosure is one way to manage conflicts of interest that occur in professional life.  Let's see what some academic journals in business have to say about disclosing conflicts of interest for submitted research papers.

The American Economic Association has a disclosure policy that requires authors to reveal any beneficial business relationships connected to their work.  That's very good.

The International Journal of Disclosure and Governance has an ethics policy that focuses on the originality of work but is silent on influential business relationships.  That's a problem.

The Journal of Economics and International Finance has publication ethics that mention conflicts of interest, but I don't see any specifics on outside business relationships.  They do mention the COPE standards below, which is good.

The Committee on Publication Ethics (COPE) has codes of conduct for journal editors and publishers.  The codes specifically mention avoiding undue business influence on publishing, managing conflicts of interest, and other funding-related ideas.  These guidelines are general enough to apply to any academic discipline.  Ooh, looky, COPE has flowcharts for addressing suspected misconduct.  Those aren't as funny as my own flowcharts but that's forgivable in academia.

Here's a reality check from outside the business world.  The journal Nature has a solid discussion of the role commercial financing can play in research.  Commercial interests and objective study aren't mutually exclusive but authors, editors, and readers must see where the lines are drawn.  The academic sources serving the finance sector can take a cue from the NIH's US National Library of Medicine MEDLINE disclosure fact sheet and the ICMJE's recommended conduct.  Lives are at stake in science and medicine and those sectors' compliance reporting regimes should be tight.  Finance can gain respectability by tightening up its own ship.

This is one of my more boring articles but I want it to be a public record.  I'd prefer to liven it up with pictures of attractive women but that's not going to happen today.  Peer-reviewed journals should take conflicts of interest in sponsored research more seriously.  I've relied on scholarly works for my entire career in finance and especially since I started putting my own thoughts into Alfidi Capital.  I refer to textbooks and other sources because I want to start any analysis with as much objectivity as possible.  I would hate to think that some of the ideas I use have their origins in agenda-driven apologetics.  I had enough of that nonsense at Notre Dame in my theology courses.  I don't need nonsense informing my own decisions with money.  

Financial Sarcasm Roundup for 12/30/13

This is probably my last chance to be sarcastic before 2014 rings in a whole new year of Alfidi Capital  sarcasm.  I shall make the most of it.

US Treasury yields are on the rise again.  Lots of hedge fund managers and other assorted dummies are still buying stocks.  That's okay with me.  I'll laugh when rising yields force up the borrowing costs of those companies using stock repurchases to support their share price.  I'll laugh even harder when banks that aren't supposed to be prop trading anymore start losing on yield arbitrage trading.

Oh goody, here's another big non-surprise for everyone who isn't paying attention.  Academic researchers who bend over for Wall Street with baloney theories get financial rewards.  Remember that the next time a financial advisor tells you the efficient markets hypothesis works.  Academics' public statements aren't the only parts of their careers that face conflicts of interest.  Major funders can skew peer-reviewed research, as the Fed knows darn well.  The pointy heads in ivory towers are just now getting around to filing disclosure statements with their universities.  Contrast this with longstanding requirements for public company insiders to file Form 4 to see how far behind these so-called cutting-edge researchers are in transparency.  On the other hand, it's good work if you can get it.  I don't accept sponsored posts on either of my blogs and I don't publish sponsored work on my website.  My attitude toward disclosure is in my AL-FAQ-DI and my Legalistic Disclaimerism.

China's premier is pledging to keep the liquidity spigot open.  He can't afford not to do so in light of the Fed's continued ZIRP.  China and the US face the near-term prospect of competitive currency devaluations.  That race is a steady marathon right now but it could easily become a sprint that immediately exhausts both competitors' central banks.  The people claiming China had unofficially shifted to tighter monetary policy need to do a double-take.  The PBOC got spooked when it temporarily lost control of intraday lending rates this month and now knows it can't let that happen again.  Spiking rates would destroy that country's shadow banking system.

All right, that does it for now.  Tonight I'm going downtown to see what's going on around the shopping meccas at Market and Powell.  I'm not going anywhere tomorrow night because the drunks will be out in force.  The dumbest people in San Francisco like to run around and get blasted on New Year's Eve.  I can't relate to those idiots.  This has been a very sarcastic year.

The Haiku of Finance for 12/29/13

Safer cell phone use
Study effects on humans
Read the label first

Health Risks of Cell Phones and Wearable Devices

The mobile tech revolution has moved so fast that health and safety risks are playing catch-up.  I attended a public forum earlier this month at the Commonwealth Club that opened my eyes to unassessed risks in mobile devices.  The bottom line is that cellular devices operate on low-power microwave frequencies.  Extended exposure to low-power microwaves may have human health consequences, which suggests the precautionary principle for technology use while research develops more definitive conclusions.

The scientists and medical experts on that panel presented evidence that a cell phone's intermittent pulse and wavelength variation are the source potential hazards.  These hazards may persist even when the device is at low power.  I took special note of one statistic presented on "digital dementia" diagnosed in South Korean children.  South Korea is the most saturated mobile market on the planet, according to every tech conference I've attended in 2013.  Putting a mobile device into the hands of everyone in emerging markets may magnify health risks.

The panelists weren't the only ones doing their homework.  WHO's IARC published a monograph this year (Volume 102) on the possibility of carcinogenic risk from cell phones' radiofrequency (RF) electromagnetic fields.  The UC Berkeley Center for Family and Community Health published a meta-analysis in 2009 on the risk of tumors from cell phone use.

Early regulation of cell phone risks has mostly fallen on deaf ears (pun intended).  San Francisco's "Cell Phone Right to Know" ordinance lost a court challenge in 2012.  The FCC does mandate specific absorption rate (SAR) guidelines for cell phones, but it still mentions the further precautions of holding the phone away from the human body and using accessories.  The federal government does not at this time speak with a unified voice on RF radiation, although FCC guidelines on wireless exposure purport to include guidance from the EPA, FDA, and OSHA.  Those other agencies have slightly different approaches.  The FDA has wireless standards for medical devices that IMHO can be adapted for cell phones and other devices used outside the human body.  OSHA defers to the FCC by restating the absence of a federal RF exposure standard but nonetheless provides a good summary of scientific literature on RF exposure.  The trouble with implementing more stringent guidelines at this stage is the lack of independent research on dose-response relationships.  Industry-funded research tends to minimize the hazards while independent research has begun to confirm hazards.  More funding for research means better knowledge of how to manage risk.

The implications of these risks for IoT devices and wearables are huge.  Google Glass, FitBit, and wireless chargers are designed to be next to the human body all day long!  Where's the Consumer Product Safety Commission in this controversy?  If the telecom industry and phone makers don't voluntarily dial down the radiation from their products, they won't like it when the CPSC hammers them later.  It's better for industry to get out in front of this now before they face multi-billion dollar class action lawsuits from cancer victims.  Who holds the patents for low-radiation phones and antennas?  Those innovations may prove to be very valuable if carriers and makers bring them to market.  The evolution of mobile phone standards offers industry a way to reduce RF exposure.  GSM is the most widely adopted standard for 1G and 2G networks but it may generate higher RF exposures than CDMA for 3G and later networks.  I think GSMA and CDG should have a chat about public-interest solutions before lawyers start trolling through cancer cases.

Civilization needs mobile tech, so to keep it we need to manage its risks.  The Environmental Health Trust has developed a knowledge base on the safe use of cell phones.  The International Institute for Building Biology and Ecology wants us to read the instructions and labels on our wireless devices.  The National Cancer Institute has a fact sheet on the cancer risk from cell phones.  The National Consumer Advocacy Commission maintains a cell phone safety website that mostly covers accident prevention, although it does admit the need for further research on RF health hazards.

The experts at the CW Club also advocated some simple rules for minimizing exposure that I'll repeat here.  Use earpieces and speakerphones whenever possible.  Don't use a cell phone in areas with weak signals because it must work harder to generate more power.  Use the phone's "airplane mode" to turn off microwave signaling.  Don't keep a cell phone directly on your body.  That last one matters very much for women, because there is evidence showing that women who keep cell phones in their bras experience increased risk of breast cancer.  I keep my own powered off when it's in my jacket pocket.

Technology marches on and so must human health.  I believe there is a role for institutional investors to play in this debate by pushing publicly traded tech companies to raise the bar on safety.  Cell phone RF risk is a perfect test case for applying corporate social responsibility policies.  Risk demands regulation, but regulation needs data.  If government agencies can't or won't fund research on RF health hazards, there's an entrepreneurial opportunity for tech companies that market safer devices.  This has been your public health message for the day from Alfidi Capital.  

The Limerick of Finance for 12/29/13

France passes a millionaire tax
Collecting it will not be lax
The rich will depart
Some have made a head start
Those who authored this should watch their backs

Alfidi Capital Endorses Stanley Fischer for Vice Chair of the Federal Reserve

The ascension of Janet Yellen to the chair of the Federal Reserve's Board of Governors is just about settled, with only formalities remaining.  This leaves an immediate need for a highly competent vice chair.  I can think of no better candidate than Stanley Fischer, former governor of the Bank of Israel.

My first introduction to Dr. Fischer's work was his textbook Macroeconomics (with co-authors) that I used in my undergraduate business studies.  The writing was clear and brilliant.  I still refer to this textbook sometimes, along with my graduate school textbooks, when I need to revisit an economic concept for my blog.  I'm a genius but I do learn from geniuses like Dr. Fischer once in a while.

Dr. Fischer's credentials as an economist are impeccable.  This WaPo article shows how he was able to bridge the divide between competing academic trends.  He was the number two person at the IMF through the Asian currency crisis of the late 1990s and the world came out just fine.  His skillful stewardship of the Israeli economy during the 2008 global financial crisis helped that country avoid the troubles that caught the rest of the world in a bind.

Stanley Fischer added his expertise to the world consensus advocating containment of Iran's nuclear ambitions.  He noted in 2012 that sanctions would exert political pressure on Iran to moderate its behavior.  Sure enough, Tehran eventually came around to negotiations.  The diplomatic agreement governing Iran's use of uranium isn't perfect but its finalization vindicated Dr. Fischer's opinion.

This guy would serve as a much-needed counterpoint to Janet Yellen at the Fed.  His intellectual flexibility in academia means he is open to policy innovations that can help the Fed extricate itself from its enormous balance sheet and ZIRP.  He has an enviable track record of successful crisis management at central banks, transnational institutions, and the private sector.  He's the ideal candidate to restore the Fed to sane policy.

I searched for open source discussions of his record and I was dismayed to find anti-Semitism in the financial blogosphere.  That is disgusting.  This man is a success and yet losers throw hatred around the Internet.  I'll remind these fools that the US has the right to favor those nations that share its democratic values.  Israel is a stable, free society that is open to immigration.  It has long been one of America's best friends in the Middle East.  The US also has a long tradition of granting dual citizenship to Americans who share their personal histories with our closest allies.  All of these are factors in Dr. Fischer's favor.

Dr. Fischer comes highly recommended by the power centers that matter - CFR, Bilderberg, and all the rest.  They're my kind of crowd and that's good enough for me.  Go Stan!  

The Haiku of Finance for 12/28/13

Publishing haiku
Spicing up a finance blog
Wall Street can't touch it

Ebenezer Scrooge Among America's Modern Plutocracy

I saw ACT's performance of "A Christmas Carol" last night.  This is a long-standing habit in my holiday repertoire and the holidays aren't over for me until I've witnessed my usual circuit of performing arts events.  The performers tended to stay in character for the curtain call, typical of those live performances intended for family audiences.  Most children aren't mature enough to understand that actors are allowed to acknowledge the audience in their true identities after a show.  Retaining their guise as characters makes a morality tale just a little bit more real for the youngsters.

Ebenezer Scrooge is the focus of the show's moral lesson.  We are all supposed to surrender greed and selfishness once we see their dire consequences.  Morality tales are a form of cultural programming.  The programs run while the programmers remain as invisible to the audience as the stage director and producer for "Carol."  Charles Dickens wrote the original story with his audience and patrons in mind.

Cultural programming exists to instruct the masses on pro-social behavior.  A mass audience is attuned to emotional cues that signify behavioral turning points.  Lighting, special effects, an actor's raised voice or pained expression, and dramatic music all show us what we should believe.  Hollywood and Madison Avenue learned the lessons of drama honed over thousands of years of live theater.  These lessons program mass behavior.  Most cultural elites are resistant to these lessons.  After all, they are sufficiently cognizant of these techniques that they can recognize when they're being played.  Carroll Quigley described the plutocrats' institutional structure, Leo Strauss defined their ideology, and Edward Bernays updated their control techniques.

Thomas Malthus' opinions on demography would have been known in Charles Dickens' time when he wrote A Christmas Carol.  He ensures the Scrooge character hears his complaint about "surplus population" thrown back in his face by one of his haunting spirits.  A mass audience is gratified at this illusion.  An elite audience in America today would just chuckle that such a conversion would resonate with the powerless.  Lesson transmitted, emotions triggered, agitation neutralized, revolution prevented, mission accomplished.  We fooled the proles once again into thinking they don't need a regime change as long as we demonstrate a change of heart.  Jeeves, another glass of cognac, please, while we carry this sales pitch's tie-in through the new year.

Let me tell you about the very rich, said F. Scott Fitzgerald in "The Rich Boy," because they are very different from you and me.  Readers in the middle and lower classes get to watch a plutocrat transform into a benefactor in Dickens' Carol.  The real world isn't so fanciful.  Today's American plutocrats are more likely to exhibit brazen ethical deficiencies than other classes.  The lack of criminal punishment for Wall Street's financial crimes in the 2008 crisis has not gone unnoticed.  We all see this behavior and the cultural programming begins to lose its instructive power in the face of obvious injustice.  Even the unschooled experience cognitive dissonance.  Our country's lower classes are now addicted to EBT cards and unemployment benefits because our plutocracy fears their unrest.  The wealthy watch YouTube like the rest of us.  Videos of EBT cardholders ransacking Wal-Mart and low-income shoppers rioting over athletic shoes make our ruling class ponder alterations to the message.

Changing the message won't suffice this time.  Information technology has empowered the lower classes with real-time intelligence on the ruling class's actions.  The Occupy movement, despite its obviously contrived origins, figured this out and that's why its revival in another economic crisis can get out of hand.  The revolution won't just be televised, it will be webcast and Tweeted.  "Anonymous" hackers aren't all government plants; some of them mean business and can penetrate proprietary systems.  The tinder box of class warfare awaits its lit fuse.  Any macroeconomic Black Swan - a market crash, an EBT payment failure, an oil supply shock, a sovereign default, a hyperinflationary neat idea from "Calamity Jane" Yellen at the Fed - will send our system farther south than it traveled in late 2008 and early 2009.  The plutocracy risks being unable to stabilize the system in time to prevent social unrest.  I don't think they want to witness a Dickensian nightmare come true.

Dickens' story is very much in the tradition of noblesse oblige that cemented the ruling class to other classes in Anglo-American culture.  It should be more than a meme useful in elite-sponsored programming.  Generosity is good in and of itself.  Warren Buffett and Bill Gates made The Giving Pledge widely known.  High-profile giving is of course another form of programming.  Recipients steer business to donors because, as some say on Wall Street, money never sleeps.  The Wall Street Journal admits that today's grasping, vicious ruling class is far less talented in governance than the WASPs of yesteryear.  The revival of noblesse oblige by the meritocrats behind The Giving Pledge may be some hope for social stability in an America no longer governed by hereditary WASPs.

My readers know that I believe military service is a worthwhile rite of passage for a civilization's leadership cadre.  Our post-WASP plutocrats no longer endorse this sentiment.  They need to wake the heck up.  Civilizations have looked to military leaders for salvation throughout history because nothing is more determinant of a nation's fate than success or failure in war.  Veterans embody the spirit of generosity that Dickens celebrated in Carol.  Writing a blank check to Uncle Sam, payable with one's life, is a donation even Scrooge couldn't manage.

The conventional view of Charles Dickens' writing emphasizes his sympathy for the poor and his skepticism of class privilege in capitalism.  There's nothing wrong with the message of Carol at all.  There is something wrong with a ruling class that doesn't practice its own preaching.  Only America's plutocrats can make this right.  If they elect not to make a course correction, they are welcome to enjoy the sad fate that Scrooge avoided in Carol.  

The Haiku of Finance for 12/27/13

Asset bubble doom
Ride the Fed all the way down
Hard mean reversion

Alfidi Capital Publishes New Venn Diagrams On The Bernanke-Yellen Asset Bubble

I've published my first ever professional use of the Venn diagram.  Check out the Alfidi Capital free flowcharts page and find the last link.  That's my "Bernanke-Yellen Asset Bubble Venn Diagrams" impression of what the Fed's monetary stimulus is doing to asset markets.  The circles are not drawn to scale because this arrangement depicts impressionistic relationships and not statistical ones.  The point of this report is to understand that investors riding the Fed's coattails are hopeless idiots.  Professional investment managers are even more hopeless than retail investors.  Anyone hedging outside the main asset classes, like me, is assuming that central banks cannot pump markets forever.

Please note that I'm trying a different digital architecture with this particular document.  I've displayed it in Google Docs instead of uploading it to my business site.  I will probably migrate all of my existing reports to Google's cloud service in the next few weeks because I'm considering a redesign of the site.  I don't want my work to get lost after I launch a revised site.  I've been writing about the cloud long enough to know that it's secure and reliable.  If you have difficulty viewing my reports, keep trying.  Hit the reload button if necessary. 

The Haiku of Finance for 12/26/13

Sale after Christmas
Markdowns clear inventory
Massive bargain hunt

New Alfidi Capital Flowchart: Launching a Hedge Fund

I've published a new flowchart satirizing the process of launching a new hedge fund.  Check it out at the Alfidi Capital page on free flowcharts.  It's the one called "Launching a Hedge Fund" in case you can't figure it out.  This one took me about three years to complete.  I kept starting it and redoing it because I wasn't satisfied that I had captured the spirit of the typical hedge fund manager.

I believe this flowchart summarizes the most important steps that hedge fund managers perform when launching some new way to gamble with other people's money.  My regular readers know that I have always taken a very negative view of hedge funds.  They are costly ways to underperform passive index investing using very questionable strategies.  That is not how I would ever try to generate alpha.  This flowchart gives the hedge fund sector the satirical review it deserves.

Hedge funds do a poor job of delivering value to their investors.  My flow chart does an excellent job of giving investors a peek inside a hedge fund manager's mind.  

Christmas Wishes and Baloney

There's an old saying that compares the substance of a wish in one hand to something else in the other hand.  I'll let that something else be a fistful of baloney because I run a family-rated show at Alfidi Capital.  Today is the day that spoiled children all over the Anglo-Saxon world discover whether Santa Claus has granted their Christmas wishes.  Actually, since there's no such thing as Santa, it's really the day that grown adults discover how much of their disposable income they must deplete to fool their kids into thinking they're loved.  Whatever.  Remember kiddies, Santa loves rich kids more.  That's why they get more stuff than you.

 This blog doesn't grant wishes.  I seldom notice the wishes other people leave for me on blog comment lists, message boards, and emails.  Most are boring but some are amusing.  I'll note them in rare moments like this because I'm a gregarious, giving soul and I acknowledge my inferiors on a holiday dedicated to the spirit of giving.  Here are the wishes that numerous mental defectives have for me, along with my decisions to grant them or not.

You wish I would shut up.  Not on your lives, losers.  I will run my big mouth until the day I die and then I'll be running it from the afterlife.

You wish I would hire you to work for me.  No chance.  There will never be any position vacancies at Alfidi Capital.  I can't stand other human beings stealing credit for my work.

You wish I would get some brains.  LOL, I recognize what psychologists call "projection" when I see it.  My IQ tested over genius level in my teens and I've grown my intellect since then by leaps and bounds.  I already have more than enough brains to out-think all of my detractors combined and still have enough left over to run their lives for them.

You wish I would invest in your half-baked business plan.  Nope.  I'm very selective about where I commit my time and money.  I have a handful of commitments and I will make more at times of my choosing, not yours.  Numbskulls like to send me their crayon scribblings and waste my time at event receptions.  Get a life, suckers.

You wish I would lay off the pursuit of a local Stolen Valor fraud.  NO!  I've sent everything I have to the relevant investigators and I'll be in the courtroom watching when one particular phony is indicted for the harm he has done to veterans.  His accomplices will be shocked when they also go down hard for aiding his criminality.

You wish I would publish your guest blog article on my own blog.  Nuh-uh.  My blog is for my voice only.  Get your own gall-dang blog.

You can all plainly see just how generous I am with granting wishes.  Merry freakin' Christmas, stupid losers.   I made my list and checked it twice, but I'm way more accurate than Santa.  I celebrate the natural turning of the seasons because I don't need any imaginary supernatural parent granting my requests.  I stopped making wishes as a child.  I'd rather make plans like an adult and then execute them with full force and enthusiasm.

I would have celebrated today's holiday in one of San Francisco's finer adult establishments but I was too lazy to make the trek up to Columbus and Broadway to see if they were open.  Bah, humbug.  Plenty of attractive women seek out my company anyway, which is more than I can say for my critics.  Their wishes for me are a bunch of baloney.

The Haiku of Finance for 12/25/13

Water, energy
Mutually dependent
Both demand money

Water-Energy Nexus Can Drive Infrastructure Investment

I heard an oblique mention of the water-energy nexus at one of the many public events I attend.  These two resources are indispensable to civilization and we can't obtain one without using the other.  There's money to be made in the green infrastructure that countries must build to get access to both.  

The IEA incorporates the water-energy nexus into its World Energy Outlook.  One simple lesson is the effect of climate change on energy availability.  Delayed monsoons and droughts decrease the amount of runoff available to hydropower production.  Other energy sources must then substitute for lost hydropower, including fossil fuel power plants.

Sandia National Labs studies this nexus.  Their multi-lab committee published a final report in early 2007 but I'm not clear on whether the US has made progress developing the technologies the report says we need.  The NSTC's CENRS Subcommittee on Water Availability and Quality (SWAQ) was supposed to pick up where this report left off.  Those of us familiar with Uncle Sam's interagency process know how hard it is to make progress with something this broad.  State government coordination isn't much better; the NCSL hasn't updated its water-energy nexus legislation tracker since 2009.  America can't wait for a government-directed solution.  I see pain points that entrepreneurs can disrupt.

Pain Point 1:  Advanced cooling systems in power plants.  The report is clear on the tradeoff between wet cooling and other systems.  Wet cooling uses more water but is more efficient for energy production.  Dry cooling is less efficient but saves water.  There is obviously room for disruption with hybrid systems that improve the efficiency of water management in power plants.  I believe energy utilities would pay for tech that reduces water consumption while maintaining a plan't efficiency.  

Pain Point 2:  Water use in shale and biofuel energy production.  I've blogged before about how water wars over shale oil and gas formations will probably crowd out the concerns of agribusiness and environmentalists.  Energy companies have the money to win any water war but legal delays will be costly.  Alternatives to the high water requirement in shale injection would be very lucrative if energy companies can avoid the legal and regulatory delays of fighting water wars.  The US government subsidizes biofuel at extremely high cost.  Ethanol production on land that is irrigated and fertilized exacerbates the waste of water and energy but this is politically popular in Corn Belt states.  Water innovation will thus need to start somewhere other than the Midwest.  The GAO has prepared several reports on water management in both shale and biofuel production.  

Pain Point 3:  Urban development.  New technologies can alleviate waste of energy and water in urban areas.  I do not know whether the ARRA stimulus building program took this into account before it dumped billions of dollars into shovel-ready projects.  Building materials for roads and sidewalks can now return more rainwater to soil, thus capturing more freshwater locally and reducing stress on urban wastewater systems.  Federal and state governments aren't expected to vet the materials in every infrastructure project but they can specify energy and water impacts in the environmental impact statements (EIS) they must approve.  It follows that builders using green materials will fulfill EIS criteria and stand a better chance of winning those project bids.  

I do not know the market opportunities for these pain points because they each intersect more than one vertical.  Multiple technologies can apply to solutions and projects will differ in size, capability, and geography within the US.  I'm optimistic that the convergence of Big Data with utilities' smart grids will reveal inefficiencies in water and energy use that demand optimization.  Black and Veatch's 2013 Water Utility Report shows huge demand among water utilities for energy efficient solutions.  The US EPA knows that green infrastructure is a big opportunity and it will not disappear.  California's CPUC has a very detailed approach to the nexus that utilities can use.  Like I said up at the top, there's money to be made.  

The Haiku of Finance for 12/24/13

Bitcoin is a joke
Invisible digit stash
Not as good as cash

The Serious Disadvantages of Bitcoin

You've all heard about Bitcoin.  No one knows who created it, although some writers have made very educated guesses about the identity of the pseudonymous creator.  I have sometimes wondered whether Bitcoin is the product of some transnational criminal organization or rogue state that wants to undermine developed economies by casting their payment systems into doubt.  I am less concerned with Bitcoin's origin than with its flaws.  I shall enumerate those flaws forthwith.

Bitcoin enables fraud and other criminal activities.  This is absolutely the single most salient feature of Bitcoin's anonymity.  Conventional currencies are indeed subject to laundering and counterfeit.  There is probably no way to eliminate those risks completely.  Bitcoin magnifies those risks because it can only be exchanged anonymously.  It dominates dark networks that have been known to traffic in narcotics.  Law enforcement efforts to shut those networks down will terminate the ability of any financial actor to transact in Bitcoins even for legitimate reasons.  When the network is down, your Bitcoins are gone.  Conventional currency doesn't work that way in real transactions.  Banks and brokerages have offsite business continuity backups.  Securities exchanges and central banks maintain counterparty records.  These mechanisms lack Bitcoin's anonymity but make up for that in resiliency and trustworthiness.

Digital QR codes make it vulnerable to theft.  One Bloomberg TV anchor learned this the hard way.  Transmuting digital Bitcoins into a paper medium means the QR code reveals their underlying location.  Scanning that QR code means anyone can anonymously steal Bitcoins.  That's the bad part about anonymizing a currency.  Masking ownership means no audit trail to recover a thief's digital fingerprints.

Mining Bitcoins is a health hazard and energy sink.  People run obsolete hardware just because the video cards can process random digits into raw Bitcoins.  This is a kind of "mining" that's unlike the real-world mining I've studied for years, because it transforms nothing into an encrypted version of nothing.  Nerds who run multiple machines overnight to mine Bitcoin risk heat stroke from the machines.  If you don't believe me, do a Google search of "Bitcoin heat" and note all of the cooling problems Bitcoin miners discuss amongst themselves, with the real world watching them fry.  Crypto-nerds advocate data furnaces as an economic solution to waste heat generation from Bitcoin mining.  Gimme a break already.  There is no way a distributed network of Bitcoin mining operations could ever be a backbone for currency transactions or an alternate energy grid.  No cloud provider in its right mind will ever farm out data storage needs to distributed servers with zero physical security.  Bitcoin's so-called solutions just multiply its problems.

There is no central bank for Bitcoin.  Indeed, there never will be one, because Bitcoin's evasion of central control appeals to its users.  The Federal Reserve, for all of its flaws, has enabled the US to withstand financial panics because it could manage a unified national currency.  A central bank manages fractional reserve lending that allows a national economy to expand.  The supply of crypto-currency is limited by algorithmic design, so an economy running on Bitcoin cannot expand to accommodate a larger population or natural resource base.  A Bitcoin economy cannot grow because it cannot deploy excess capital for innovation.

Minting copycat currencies is easy.  Run through the gamut of crypto-currencies like Litecoin, Dogecoin, Namecoin, Peercoin, and others to see how unserious most crypto-currency enthusiasts are about money.  Dogecoin in particular is obviously a joke based on an Internet meme.  Using a currency named after memes doesn't impress me.  Imagine someone in the early 20th Century printing a dollar with Mickey Mouse's smiling visage and convincing others to take it seriously.  The US economy tolerated decentralized currency minting for some of its history until the settlement of the frontier demanded a nationally integrated economy.  Copycat currencies destroy the credibility of Bitcoin.

I am totally convinced that Bitcoin is at best a joke and at worst a fraud.  Hi-tech startups should be be radical, disruptive, transformational, chaotic, revolutionary, and all that but those are not the characteristics of a currency.  People who use currencies as a medium of exchange and store of value need them to have conservative characteristics, so that one unit today has pretty much the same value next year.  Stability enables consumption and investment in reliable amounts at acceptable intervals among counterparties.  Bitcoin does not accomplish these purposes.

Bitcoin is baloney.  I'm waiting for some jokester to create Baloneycoin that will evaporate when minted and play some funny animation.  Look up "Cosbycoin" for an early attempt at turning this idea into a joke.  The parody site that features Cosbycoin is hilarious but the real joke is on anyone who takes Bitcoin seriously as an investment.  I do not use Bitcoin, nor will I do business with anyone who wants to transact in Bitcoin.  I may be a nerd but I'm far too intelligent to use something as stupid as Bitcoin.  

The Haiku of Finance for 12/23/13

Health care enrollment
Extend deadline by one day
Let's see who signs up

Financial Sarcasm Roundup for 12/23/13

It's been too long since I published a financial sarcasm roundup.  It's not for lack of sarcastic things to say.  I just had to find decent LOL pictures to accompany the text.  That problem is now solved.  I was not satisfied with commonly available LOL pics.  Many of them are governed by copyright law because of their proprietary origins.  Getting permission for each use would be expensive and burdensome.  Free stock photos also usually come with caveats about acknowledging credit to the creators.  I decided to take my own photos.  No one deserves any credit except me.  Get ready for genuine original Alfidi Capital LOL photos.

Congress will negotiate its final spending allocations behind closed doors.  The lobbyists for the major sectors mentioned in the article pretty much know what they'll get, so there won't be many surprises.  They don't know that pork spending sprees can't continue forever.  Uncle Sam will have a hard time doling out research grants and child care subsidies after hyperinflation begins.  Meanwhile, let the catfights begin.

China is trying very hard to prevent a run on the yuan.  Note the discrepancy of over 300 basis points between the opening quotes on seven-day repos and that rate's mid-morning weighted average.  The PBOC is not injecting enough liquidity into the Chinese banking system to stop the rate from rising.  If real estate prices collapse, so will the shadow banking system, and then the run on the yuan will become very real.  I'm so glad I am no longer exposed to China in my portfolio.

The IMF is bullish on the US's prospects for growth next year.  It is no coincidence that Mme. Lagarde said this very close to the FOMC's taper announcement.  Central bankers and monetary authorities coordinate their actions and announcements to foster stability.  The IMF, as part of the European troika lending to the crippled PIIGS, knows darn well what the Fed's support means to the ECB.  I don't think she's realistic about the US's prospects but I'm one of the few analysts who lives in the real world.  She needs to know that corporate earnings are still at twice their historic norm as a portion of GDP, and when they revert to mean they'll take equities down with them.

Alrighty, then.  There's your fix of LOL pic sarcasm.  Expect more lulz now that I have a collection of my own meme photos to use.  

Happy 100th Birthday to the Federal Reserve!

The central bank of the United States is one hundred years old today.  I'll bet the Board of Governors is having a blast celebrating the Federal Reserve's long history of achievement.  Let's review the Fed's more notable achievements.

Here's a CPI chart showing how the Fed has degraded consumers' purchasing power since World War II by managing inflation.  The Fed kept inflation artificially high after the war to make it easier for the US government to repay its war debt.  Patriotic Americans who bought war bonds got ripped off in later years as inflation eroded the purchasing power of the bonds' principal at maturity.  Oh BTW, the Fed learned this inflation war-funding trick in World War I according to the Mises Institute.

Here's what the NBER had to say about the Fed's ability to control inflation during World War II.  Economic legends Milton Friedman and Anna Jacobsen Schwaartz saw the Fed's expanded balance sheet as a plus, if only the Fed had sold securities to control inflation.  The implications for Fed's huge balance sheet today are obvious.  If the Fed begins to reduce its balance sheet by selling the agency paper it has acquired through QE, the deflationary effects on our economy will destroy the stock and bond markets.  The Fed must really like inflation.  Remember that the next time you buy groceries or pay your energy bill.

The Fed's greatest hits aren't all in ancient history.  The hits keep on coming today.  Bloomberg's US bond data shows us what the Fed's ZIRP is doing to the short end of the yield curve.  Rates from three months to two years are at zero, so investors using bond ladders are forced to seek yield buying much longer termed bonds as their shorter maturities expire.  Those long bonds are much more sensitive to interest rate changes than short term bonds.  Rates at the long end have risen this year.  Prices have an inverse relationship to rates.  Fixed-income investors can thank the Fed for any unhappy birthdays to come as their bonds decline in value.

Hey, I just thought of something.  The Fed's periodic audits have not shown us physical proof of the system's gold reserves.  Who's watching that bullion?  I have an idea.  Here's an exclusive look inside the NYFRB's bullion vault courtesy of Alfidi Capital.

LOL, just kidding.  I've never been inside the Fed's vaults.  I think cats running the show would be an improvement over the current state of affairs.  Someone has to provide continuity while Helicopter Ben hands the baton to Calamity Jane.  They could always pick me for a vacant Fed BOG seat, as I have more qualifications than a LOLcat.

Central banks were once a great idea.  I'm not clear how they add value today.  They're supposed to stabilize our financial system but prolonged interventions give rise to instability.  Artificially suppressing interest rates leads to distortions in the cost of capital that investment managers and corporate project managers use to plan investments.  This places economic growth at risk.  Playing games with interest rates means foreign central banks can't trust the value of their dollar-denominated securities.  This places the dollar's world reserve status at risk.  The Fed had a role to play the United States' growth as a world power.  Its indefinite monetary stimulus is now risking our world power status.  Happy birthday, indeed.

Alpha-D Updates for 12/23/13

I do have some changes to report this month.  Just remember that no one should manage money the way I do and I don't give advice.  I enjoy running my mouth.

My short puts options under GDX in my IRA were exercised when the share price declined through the exercise price, so I had to increase my GDX position.  I have long maintained that GDX is part of my hard asset hedge against US dollar inflation so I don't mind acquiring some at such a low price.  How low is that?  It trades at just over $20, a level it hasn't seen since November 2008.  I believe GDX is not by any means a perfect hard asset hedge because it only covers one commodity - gold.  I'd prefer to see it sold away at some point so I can add other hard asset hedges, but buying it at a five-year low price is a choice I can tolerate.  Like I said last month, my time horizon in my retirement account is far longer than the horizon for my taxable account, so I can tolerate more risk there.

I decided to write covered calls against that GDX position because I believe the price of gold is not going up in value anytime soon.  Mining companies are going through serious margin compression and even the big miners in GDX can't escape.  Selling pressure from hedge funds and retail investor outflows from gold ETFs are acting as strong headwinds against any recovery in the price of gold bullion.  I noted the yield I collected in those covered call premiums on GDX and it reminded me of my best years several years ago when covered calls provided most of my portfolio gains.  Sectors experiencing bear markets are funny that way.

My GDX position in my taxable account remains unchanged, with no option positions.  I'm not going to monkey with that allocation until the price increases.  GDX is volatile and is somewhat uncorrelated with the larger equity market.

My covered calls over FXF in my IRA expired unexercised.  I renewed them for another month.  The Swiss have done a bang-up job stabilizing their currency.  It's another inflation hedge for me.

I remain long FXA and FXC in my taxable account.  The declines in price do not bother me because neither Australia nor Canada are destroying their currencies with fiscal and monetary insanity.  Oh yeah, they also have lots of mining and energy exposure in their economies.  I like that kind of arrangement.

I still have a long put position against FXE in my taxable account because I doubt the ability of the euro to survive in its present form for the long term.  I bought it cheaply.  I reserve the right to add more long puts.  Europe has not solved its problems despite the headlines I've read about the Greek stock market's recovery and plans for a multilateral bank resolution mechanism.

I'm sitting on my cash pile, waiting for some sort of breakdown.  I'll see that crash at the same time the rest of the world sees it.  I intend to buy while hedge funds and mutual funds are selling.  That's all for now.

The Limerick of Finance for 12/22/13

Hedge funds are abandoning gold

Big bullish positions were sold

Metal price heading down

Investors must frown

Buying in at the bottom is bold

South Boulder Mines and Eritrean Potash

South Boulder Mines (STB.AX / SMBSF) owns half of a potash project in Eritrea.  We can start off by noting that Eritrea ranks 160 out of 175 on Transparency International's corruption index and 173 out of 177 on the Heritage Foundation Index of Economic Freedom.  Good luck trusting the authorities in that country to safeguard an investment.  Oh yeah, it's also ranked 147 out of 155 on the World Bank's Logistics Performance Index.  The have a photo of the Massawa deep water port on the company website but I'd like to see photos of the road network from the project to that port.

Check out the management team.  The CEO is from a major mining company but he's not a geologist by training.  Their country manager is a geologist but they need people who've actually mined potash.

The Eritrea project was under development two years ago and is still under development.  They have MII resources but no 2P reserves.  The IRR and mine life are extremely impressive.  I just don't know how to interpret their published statements.  They have quarterly reports that look more like press releases than an audited financial statement, and their most recent one for October 31 says they have over A$13M in cash on hand.  That's nice to know but without seeing their net income (or loss) I can't figure their burn rate.

I first noted this company back in 2011 and I said nothing at the time because I wanted to see what they would do.  We can all see what they've done.  The stock has steadily declined for the past two years and is now in penny territory.  I had a feeling that would happen.  The world needs potash.  I won't be buying any potash from this project, or any stock of this company.

Full disclosure:  No position in South Boulder Mines, ever.

The Haiku of Finance for 12/21/13

Fed taper tip sheet
Poll sees measured cuts next year
Awaiting data

Montero Mining and Exploration . . . Isn't Producing

I found out about Montero Mining and Exploration (MON.V / MXTRF) two years ago at the height of the rare earths investing craze, and I promptly forgot about it.  Let's see if they're worth remembering.  They've got projects all over the place.

The CEO is a geologist.  That's cool, and I respect experience at Placer Dome.  They've only listed one project manager, on the team for their Tanzania rare earths project.  What about the South Africa phosphate project and the Quebec uranium project?  Well, the September 2011 43-101 report for the South Africa project describes a mineral resource and they published a PEA last year with a decent NPV.  I didn't see any 43-101 report for the Quebec project.  I have no idea what it will cost to bring to production.

Let me get back to that Tanzania project.  The 43-101 report from August 2011 recommends more drilling before issuing a PEA, at a cost of at least US$3.1M or as much as as $5.3M.  This is on top of the $2.6M Montero should have spent on its Phase 1 preliminary work.  That means this thing isn't even close to production.  We can determine whether they can afford to complete this work by reading their most recent financial statement dated November 29, 2013.  They were down to C$63K in cash and their burn rate is over $100K/month.  That means they're barely hanging on.  Their latest announced capital raise from December 3, 2013 is intended to pay off accounts payable rather than continue funding the estimated exploration budget.

Take a look at this stock's historical prices.  It has never traded for more than a few cents since inception and it's now under two pennies.  I am not going to pay the two cents per share to play in this company.

Full disclosure:  No position in Montero, ever.

Confronting Pajama Boy and Duck Dynasty

American culture has just transformed the holiday season into silly season.  Two ginormous memes from opposite ends of the political spectrum have inundated the punditocracy with a tidal wave of baloney.  The only thing missing is the wisdom of Alfidi Capital.  Prepare yourselves.

This week's first body blow to our country's ability to think critically came from the Right and aimed at the Left.  Those of you with not enough work to do have undoubtedly seen the "Pajama Boy" meme that originated in Organizing for Action's holiday health care media page.  Conservative commentators stirred up the pot by criticizing the ad's wimpy image and liberals fired back with insults to red-blooded manhood.  The ad itself says a little about what the Left finds appealing in modern men.  A man who is comfortable wearing a child's sleeping outfit and cradling a cocoa mug with two hands is a fitting image to sell a government entitlement program.  The response from the Right reveals enough insecurity to make me wonder how well conservatives raise their own families.  Get over it, dudes.  Americans grip their welfare state as tightly as that cocoa mug.  I'll believe conservatives are serious about self-reliance when the Tea Party learns to do the math on Medicare's insolvency and retired military lifers realize that the days of their unlimited health benefits are numbered.

I am morally obligated to post a visual counterpoint to the ACA sales campaign.

My legions of female admirers know manliness when they see it.  I have been known to drink cocoa but I don't need two hands to hold a drink, as you can all plainly see.  I often mix cocoa with multiple shots of coffee to fuel my blogging.  I also mix coffee with grown-up beverages because this is America and no one can tell me not to do it.  We have nothing to fear from cocoa.  Conservatives can make money from cocoa investments, unless we hit Peak Chocolate as I warned back in 2011.

Here's some full disclosure.  My own health care insurance is at present covered by the US Department of Veterans Affairs due to my Iraq service in 2009.  That policy is not of indefinite duration, and when it expires at some future date I must then enroll in an ACA-compliant plan.  This assumes that the ACA regime will still exist if it is not repealed.  Even I, the proprietor of the greatest financial website and analytical blogs the world has ever seen, cannot escape a legal mandate.  I look forward to the day when I may enroll in an affordable plan for a single male that does not contain wealth redistribution mechanisms.  I can't use maternity care, birth control pills, or endometriosis treatments but my government insists that I pay for these anyway out of fairness to the ladies who would rather date Pajama Boy than me.  They don't know what they're missing.

The second blow against common sense came from the Left and hit the Right.  Phil Robertson, patriarch of the "Duck Dynasty" reality TV clan, made some ungentlemanly comments to GQ magazine.  His network suspended him and liberal organizations are calling for intolerance of his intolerance.  Phil's tone in that article was one of bewilderment rather than hatred but that is no excuse for a major media star who should know better.  The Robertsons' comments on their religious faith reveal that they do not judge or condemn and they take the New Testament's messages of tolerance to heart.  Phil needs an understanding audience more than anything else but media professionals on either coast don't get his culture.  Most middle-class Americans are now far removed from our country's agrarian origins and don't recognize their own roots in rural society.  I think that explains the bi-coastal fascination with Duck Dynasty, along with our collective willingness to dismiss Phil's grumblings as hayseed bigotry.  Come on, people.  The guy raised a healthy, productive family and got them all involved in a very successful business.  I'm embarrassed that Americans don't see how American this story sounds.

Many Americans obviously agree with Phil because the LGBT equal rights argument hasn't touched them personally.  Let Phil do his short time in the woodshed and then bring him on The Ellen DeGeneres Show to prove he's tolerant.  I'll bet the A&E Network knows plenty of diverse people he could meet on his show.  Hey Phil, some gay folks like to hunt and a Google search reveals they even have their own outdoor sports clubs.  There's an untapped market for Duck Commander products if Phil reaches out to them and makes amends.

Americans have not made me proud this week.  We could have spent our time much more productively.  We missed important news on Islamist rebels seizing materiel the US government provided to the other rebels, you know, the ones we thought would win and bring Jeffersonian democracy to Syria.  We also missed the Fed's obscured admission in its QE taper announcement that ZIRP must keep the banking sector afloat.  Well, okay, you folks may have missed those items but I paid full attention.  Americans enjoy being stirred up with distractions.  Otto von Bismarck allegedly marveled at God's ability to watch over fools, drunkards, and the USA.  Did he really say that?  Maybe it was Winston Churchill, or someone else from Europe.  Americans won't care anyway.  Thoughtless controversy is way more important to our national conversation.  Bring on the memes.

Nota bene:  I changed one word to "responsibly" in that photo above and clarified "grown-up beverages" in the paragraph below the photo.  I enjoy personal responsibility and my adult readers should do the same.  Always comply with local laws and regulations.  Behave yourselves.

The Haiku of Finance for 12/19/13

Lab tech readiness
Innovation on the shelf
Needs some investment

Big Labs Have Advantages for Startups

Startups looking for research partners have plenty of options.  I've blogged before about the government's SBIR/STTR programs but that's just the tip of the iceberg.  Large labs offer other options.  I checked out a select few.

The Lawrence Livermore National Lab's Industrial Partnerships Office is in my neck of the woods here in the Bay Area.  I haven't used their services but they seem very willing to collaborate with business plan competitions.  I wish I had support like that when I wrote a business plan or a competition as an undergraduate.  The LLNL IPO monthly webinar showcases the tech they think is ready for a market and the audience is pre-screened for serious investors.  I know people from each of those investor groups and they are serious about finding good ideas.  Those of us who aren't members of prominent angel groups can always use the lab's i-GATE program to find tech and partners.

The Fraunhofer Center for Sustainable Energy is not one of the US government's national labs but their TechBridge promotes research with entrepreneurs.  Some startups in the Cleantech Open could really benefit by using Fraunhofer's testing facilities.  Too many startups try to create something technically infeasible from scratch.

PARC is another well-known private R&D shop.  I find their Big Data analytics test bed intriguing; maybe I should pay them a visit to see it in action.  I've blogged a lot about how Big Data open gaps in enterprise computing that startups can disrupt and exploit.

I did not know that SRI had a venture arm for spin-offs and licensing until I heard it from one of their representatives in person.  I think a startup would need some serious venture money backing it up to license tech from Stanford.  VCs won't just hand money to anybody to commercialize a Stanford idea.  Quite a few VCs have stated in public forums that they prefer to back startups with academic pedigrees from Stanford and UC Berkeley.  Graduates of the best Bay Area schools get first crack at funding for commercializing their own schools' research.  I would leverage my Notre Dame connections but they don't want anything to do with me.

Sandia National Laboratories has tons of partnering opportunities.  I like the flexibility of the Funds in Agreement options and it looks like they offer limited IP protection.  Once again, there's no free lunch and startups will likely have to come to the table with some funding of their own before they can think about seeking reimbursement.

The catch with the national labs is that inventors and entrepreneurs typically have to develop the lab's tech and not their own.  It's not like entrepreneurs get free workshop space for nothing.  The good news is that competing for these labs' award programs is one of those little paths to victory that can keep a startup team motivated through the long haul to commercialization.  Ideas ready for licensing can get visibility from the LES Foundation's competition.  Some labs will work with collaborative IP agreements but somewhere along the line a lab will expect upside participation in the resulting business.  SRI doesn't tout its billions of dollars in value creation for nothing.

I also wonder about untapped opportunities for tech transfer from USDA's ARS and the VA's TTP.  IMHO those are among the overlooked corners of the federal government's research network.  Startups working with newly discovered tech can expect a long haul to commercialization . . . about 15 years, according to one lab rep who addressed a Cleantech Open event I attended.  I'd prefer to work with tech that already has something on the shelf for a shorter timeline to commercialization.  Startups who want my attention need to show me something more than just an IP agreement from a big lab.  I want to see a team of serial entrepreneurs, a product/market fit with pain points to solve, and a path from traction to sales to scaling that's been validated by a venture-backed accelerator, the NSF Innovation Corps, or the Lean Startup process.  It sure sounds easy until you try it for real.  

Fed's Mild Taper Leaves ZIRP In Place

Well, I'm surprised that the FOMC decided to dial back its securities purchases by $10B per month.  I'm further surprised that US stock markets rallied on this news.  I did not expect them to change course.  Market analysts are taking that as a vote of confidence in the economy's health.  It's too bad they rely on rigged statistics to gauge the economy's health; they should read Shadow Government Statistics instead. The more significant news is that the Fed is leaving the target federal funds rate at zero.  That ensures that banks will still be able to borrow at almost no cost and hold Treasuries, maintaining their risk-free carry trade.  Perhaps the bond-buying program isn't as crucial to the economy as ZIRP.  It's still worth $75B each month and it's not ending all at once.

I wonder whether the inventory of agency MBS available from GSEs was a factor in the Fed's decision.  This May 2013 research paper from the Federal Reserve Bank of New York finds that the MBS market has plenty of liquidity.  The housing market's recovery (which in turn is driven by ZIRP making mortgages cheap) also means MBS look more attractive to institutions.  If that's really the case, the Fed won't have to work as hard to support MBS valuations.  Lots of banks and pension funds own MBSs, so the taper means the Fed seems less worried now about supporting bank balance sheets and keeping pension funds solvent.  The Mortgage News Daily MBS Dashboard shows that MBS prices fell slightly across the board today and Treasury yields rose slightly.  Less Fed demand for agency paper means the prices fall.  These price moves are a more relevant measure of the FOMC's taper decision.   

The Haiku of Finance for 12/18/13

New variable
Add value to equation
Update the spreadsheet

Making Climate Change Relevant

I was part of a focus group tonight for the Commonwealth Club's Climate One initiative.  My biggest takeaway was that those of us who attended the focus group and the rest of the Climate One talks are not thought leaders on the subject of climate change.  This program is well-regarded and ought to have national attention, but many attendees (including me) may come away without clear calls to action.  I can only wonder how a national audience reacts to the subject.  Remember that this is America, land of the provincial and home of the naive.

Albert Einstein is often quoted as saying that if he had one hour to save the world, he would spend almost all of that hour defining the problem and whatever remaining time finding the solution.  Some versions of that quote can't agree on how many minutes Einstein would commit to each phase.  Maybe that's why Harvard Business School says we shouldn't use Einstein's pithy sayings to guide innovation.  Let's instead start with first principles.  What problem do humans solve by exploring climate change?  If periodic climate change is a normal part of this planet's biosphere, then humans must adjust to it as they did during the Medieval Warm Period.  If human activity is measurably accelerating climate change, then humans must either reverse such activity or manage the consequences.  Either direction requires major changes in consumption patterns, lifestyle expectations, development incentives, and the resulting physical infrastructure humans erect on this planet's surface.

Most humans are incapable of acting on a problem unless they believe they will personally experience the consequences of inaction.  The logic of Pascal's Wager is relevant to framing this problem.  Acting to please a posited supreme being was Blaise Pascal's insurance policy in case such a being exists.  The teleological price to pay for mitigating climate change is moderate inconvenience for most people if climate change turns out to be overblown.  This is a small price to pay compared to the cost of being wrong and failing to prepare at all.  Scientific arguments do not resonate with pre-scientific thinkers, like those troglodytic Americans who prefer creationist cosmologies.  Religious arguments like Pascal's Wager will close the sale with them instead.  The role of elite classes in civilization is to instruct the masses in moderate behavior, with nods to Leo Strauss and Carroll Quigley.  Elites must get the climate change message out to the masses using religious imagery if that is what it takes.  The Alliance of Religions and Conservation and the Cornwall Alliance are appropriate vehicles for crafting a message.  The World Bank published a report on faiths and the environment, with helpful links to more marketing channels (ahem, faith-based organizations).

Environmental damage intersects economic development and technological progress.  The Rocky Mountain Institute thinks we can have it all and I totally agree.  This does not mean humans will have unlimited options.  Our choices are constrained by existing infrastructure, much of which is automobile-centric and crumbling from overuse by humans who believe easy motoring is a birthright.  Technocratic elites floated trial balloons this past decade of the hydrogen economy and the glucose economy, neither of which have materialized due to the high switching costs of existing petrochemical infrastructure.  Those two approaches may yet have boutique applications but they are not perfect replacements by themselves for a portfolio of approaches civilization will need.

Climate scientists need to clean up their own act to maintain credibility with a gullible public.  The IPCC Fourth Assessment Report was marred by errors that made climate change an easy target for skeptics.  The Fifth Assessment Report at Climate Change 2013 is in progress and the scientific conclusions do not give rise to alarmists' doomsday scenarios.  Radicals on either side plot their next move.  Scientists make room for uncertainty but a non-scientific audience does not think probabilistically.  This is why scientists need help from marketers in creating a salable product, namely a report that policymakers can use to form reasonable calls to action.

I maintain that the participation of the finance sector is indispensable to addressing climate change.  There's money to be made.  Investors like to buy Clean Renewable Energy Bonds (CREBs).  Wall Street likes to sell municipal bonds that back infrastructure projects, and soon renewable energy projects will be bundled in REITs.  I've mentored entrepreneurs in the Cleantech Open who are ready to get rich while they save the planet.  Once again, the enthusiasm of thought leaders in finance and business doesn't translate to the lumpen Americans who tremble when things change.  Elites must find ways to explain to ordinary Americans that renewable portfolio standards (RPS) will indeed raise the cost of new housing in exchange for enhancing the lifespan and resale value of the housing stock.  There is no easy way to explain carbon sequestration or emissions trading regimes unless Americans understand how much money they can make personally by participating in those markets.  Regulation does add costs to the economy but Americans must be told that it also opens up value-added jobs and makes room for entrepreneurial disruption.

It's very easy for enlightened San Franciscans to overlook the difficulty that car-fixated Californians will have in adjusting to climate change mitigation.  I don't think the California Alternate Rates for Energy (CARE) subsidies for low-income households are financially sustainable in this state, even with the ARB's cap-and-trade revenue.  That revenue will inevitably end up in the general fund as state politicians are tempted to close our persistent budget deficits.  It would be nice if it went to subsidize clean tech R&D but I won't hold my breath.  Low-income Californians will simply have to reduce consumption and live where they work, which will limit many families' upward mobility.  Energy use and automobile ownership may very well become upper class status symbols and California will become a test bed for this sea change in American culture.

I've said throughout this piece, in various ways, that climate change and its consequences for the ordering of human civilization must be explained to the low-information proletariat in terms they understand.  Most people won't lower their expectations in life voluntarily.  Messages that use fear and religion will work best in reaching the masses.  I believe Climate One can test drive those messages and find willing messengers.