Macworld 2014 Rounds Up Apple Fans And Tech Stars

My first computer was an Apple Macintosh I bought in 1995.  I kept it for as long as I could until I had to switch to a Windows laptop in 2000.  I rarely revisit Macintosh tech unless some high-profile event entices me.  Enter Alfidi Capital into Macworld / iWorld 2014 at Moscone North last week in San Francisco.  I had to go to see if I could score free food at the afterparties.  Seriously, I went to see cutting-edge tech.

My free expo pass didn't get me into any of the supercharged intellectual conference sessions.  Sooner or later the people running high-profile conferences are bound to recognize my extreme genius and put me on their speaking calendars.  I shall prowl their expo floors and free sessions until those salad days arrive.  The coolest thing I saw on this year's expo floor was the FLIR ONE infrared attachment for the iPhone.  I asked the booth dude to take my picture with it, and the result is below.

I must admit that I look quite handsome even when I'm only visible on the infrared part of the spectrum.  Women can't resist an infrared version of Yours Truly.  I look like the enlightened Buddha or something similarly transformational.  I first noticed FLIR ONE in some news report from the last CES in Las Vegas.  I'm impressed that FLIR is branching out from the defense market.  Now everyone can take infrared pics of their household pets and post them to Instagram.  They'll all look the same and no one will care because yokels love novelties.  The product may actually have some commercial uses besides physical security.

The "makers" on one of the free stages discovered some things that got me thinking about how quickly a manufacturing renaissance can happen.  Form factors matter so much that third party accessory makers must have good OEM specs so their components properly fit those major items.  The best synergies for smartphones, AI, and robots right now will come from routine tasks managed remotely (think Roomba).  Ordering but not shipping keeps customers in limbo, but some makers think they can get away with such poor service.  If it happens deliberately, consumers have a case for the Federal Trade Commission to investigate.  Good companies constantly model demand versus their capacity, and plan expansion to meet demand.

The live Vector podcast from iMore was very much for hard core tech fans who think Wall Street tries to push Apple into doing bad things.  I'm no fan of Wall Street either.  Developers are passionate about Apple keeping its acquisition strategy focused on buying small companies that add to its tech base.  They would be aghast if Apple ever pulled a headline-grabbing stunt like Facebook and Google's typical billion-dollar acquisitions.  One panelist was skeptical about the total addressable market (TAM) for virtual reality (VR).  He may have a point some humans naturally resisting immersive environments due to phobias and the limits of physiology.  I think the TAM for VR will prove to be small but lucrative for niche players.  A whole nerd subculture has grown up around gaming and they spend serious coin on tech.

The Macworld interview with Dr. Jeffrey Smith, CEO and founder of Smule, turned out to be a huge eye-opener.  He figured out how to make apps that mimic piano chords and wind instrument effects.  His most important discovery is the value of music as a shared activity.  People are very happy to collaborate on musical performances over long distances.  Smule apps make money when people share their music online.  I first noticed the power of online musical collaboration when I saw a YouTube clip of Eric Whitacre's Virtual Choir singing "Sleep" a couple of years ago  The choir shares Smule's philosophy of democratizing musical performance.  Latency constraints degrade long-distance live performances but they are no problem in recorded performances.  Dr. Smith's description of digital archives that collect millions of recorded music performances gave me a brainstorm.  I am convinced that Big Data sets of amateur musicians now present a disruptive opportunity in the music industry.  Data mining these performances for talent establishes a "Moneyball for music" set of baselines that can estimate a performer's marketability.  This disintermediation of music from recording studios and performers' unions is the ultimate free-market end run around the music industry's traditional gatekeepers.  You're going to hear more about this concept as I develop it in future blog posts.  Thank you, Dr. Jeff Smith.

Live podcasts proliferated at Macworld.  TechHive's Clockwise podcast discussed what home appliance Apple would make if it could.  I vote for a clock radio, since Apple already knows how to put timekeeping on the iPhone and music in an iPod.  Macworld's Pundit Showdown Live podcast featured the very attractive Susie Ochs of TechHive, who did cute dances in her chair whenever the host played some theme music.  The pundits need me on their next podcast because I offer more than nerd references to Ars Technica.  Tech I hate?  Bitcoin.  Myth I'd dispel?  The need for all of us to learn coding.  I got the vibe that the DECE consortium's UltraViolet digital library has a bad rap among Apple's fan base.

One panel of longtime Apple watchers debated the company's past, present and future.  I think early adopters would love Apple wearables based on these guys' chatter.  I grokked a consensus from several panels like this one that Apple doesn't pursue niche markets like gaming.  I can't understand why they would cede the huge gaming market to Microsoft and Sony.  Apple may be happy to grow its share of the desktop PC market by default as people turn away from Windows PCs and adopt tablets.  Mobile isn't going to completely destroy desktops no matter what tech gurus like to say.  Knowledge workers must still perform word processing and data analysis using the keyboard/mouse interface, so desktops and laptops have a future.

One of the last free sessions I could attend at Macworld 2014 was a Bitcoin Meetup.  Yeah, right, I know what you're thinking, I went there just to stir things up, right?  Well, I behaved myself except for the few loud snickers I uttered in the back of the room.  These Bitcoiners repeatedly contradicted themselves.  They claimed Bitcoin couldn't be destroyed by any government, but then said a few coders could change the algorithm to make it do something completely different.  I spoke with a few of them afterwards to test their intellectual abilities.  I told them that the IRS's recent ruling on Bitcoin meant that everyone who mined it since 2009 would have to file amended returns to report that mining as income.  The scofflaws among them claimed that wasn't necessary.  I then reminded them that the blockchain is publicly visible and FINCEN won't have much difficulty tracing Bitcoin owners through that chain so the IRS can gather a list of its tax evaders.  My logic opened the eyes of a few curious people in the room who had not drunk the crypto-hogwash.  These people were mostly schmucks disguised as coders.  One guy was pitching some open-source contraption that was supposed to be a Bitcoin ATM running Raspberry Pi.  It looked ridiculous.  Someone would have to be really stupid to stick their ATM card in something that looks like a toolbox.  These people are tools.  Stupid tools love Bitcoin.

I'll end on a high note.  I went back to the expo floor where one of the audio techs working the second stage's soundboard recognized me from other conferences.  I didn't recognize him but I take this as a sign my reputation in Silicon Valley is growing if even the show floor operators know me by sight.  He mentioned his desire to get involved in this whole startup scene himself.  I related the story of David Choe, an artist who painted murals on Facebook's corporate walls in exchange for shares.  His Facebook shares later proved to be worth a fortune.  You don't need to be a software engineer or financier to strike it rich in Silicon Valley.  The very first corporate treasurer, HR director, and night shift security supervisor at Yahoo, Google, and Facebook probably made out like bandits if they had stock options.  Anybody who shows up at enough Meetups, seminars, pitchfests, and conferences with their specialty in hand stands a chance of landing a gig at a VC-backed startup.  Bring your thing anywhere, even to Macworld 2014.  

Changing Low-Earner Behavior With Low-Information Incentives

A bunch of finance apps innovators shared their tips for changing behavior at last week's Meetup.  I attended because I'm always on the hunt for new control mechanisms that the ruling class can implement.  The open-source fin-tech community is always a big help.

One entrepreneur mentioned Startuponomics, a behavioral economics event that informs some of the business models percolating through fin-tech.  Irrational Labs puts on that show.  I don't pay to attend pricey events so they'd better invite me to speak.  Startups learn things like the importance of word choices in prompting debtors to honor their promises to pay, and this apparently drives improved debt repayment rates.

"Persuasive design" is a subset of persuasive technology that drives humans to make appropriate financial decisions.  It is the natural evolution of Edward Bernays' ad techniques into an all-encompassing environment for driving human behavior.  Action-oriented verbiage, emotionally warm color tones, and gamification that rewards prompt repayment with expanded borrowing limits are all persuasive tools.

I actually think it would be beneficial to use video and animation that talks down to low-information consumers.  Low-IQ people respond well to emotional appeals and celebrity endorsements in focus groups.  The imagery should be as condescending as possible to be effective.  Animated walk-through visual tours of a financial service encourage adoption because the vast majority of humans want to be told what to do in life.  Behavioral finance works well on stupid people.  The poor really should respond well to cartoon animal mascots telling them how to save, invest, and borrow.

A couple of the startups mentioned their reliance on electronic bill payments, and how vendors caught them off guard by accepting only paper checks.  Anyone who only deals in paper checks is way behind the times.  I pay as many bills as possible electronically.  Shame on those sloths who are unwilling to deposit checks in a timely manner.  Their poor cash management practices will be a death knell in a hyperinflationary economy.

My descriptions above reflect more than just a Jonathan Swift-like modest proposal to drive financial technology.  I truly believe that the lowest social classes want and need benevolent guidance from elites.  Fin-tech startups really do want to empower the poor to make better financial choices.  Bringing them inside the capitalist system from the fringes makes everyone better off.  Society becomes more stable, the poor become responsible customers, and the rich remain in power.  The best revolutions are the ones that leave elites entrenched while everyone else is better off.  Behavioral finance will change lives.

Nota bene:  I redacted one paragraph from this article on April 1, 2014.  I decided upon reflection that it was over the top and just plain unnecessary.  I go pretty far out there sometimes, but when I go too far I know when to pull back.  

Financial Sarcasm Roundup for 03/31/14

March is almost over and the "ides" passed without incident from either lions or lambs.  Calendar idioms aren't very useful in sarcasm.  Financial topics are a lot more useful.

The IPCC is raising the alarm about the climate change threat to the world economy.  I hope they put enough qualifications about probabilities in their report this time.  Critics need to read the footnotes carefully.  The bright side of climate change is that previously frozen tundra will make great farmland.  Just think of the lucrative eco-tourist opportunities that will be available when inland flooding turns previously inhabited floodplains into marshes.

US stock markets are rigged to favor HFT funds.  No kidding.  I've been saying that since like, what, 2008 or so right here on this blog.  Individual investors, traditional mutual funds, and even index funds are getting nickel-and-dimed to death by hedge funds that pay for special access to trade information.  Making new platforms to route around HFT won't matter for long.  HFTs will sign up for those platforms and start gaming them all over again.  The manipulation will persist until a market crash destroys hedge funds with margin calls and rising interest rates remove cheap leverage from those hedge funds that remain.

China wants to make life easier for foreign institutions in its QFII program.  The hidden agenda here is obvious.  China knows it can't bail out all of the shadow banking WMP instruments that are in danger of popping.  Making QFII participation more attractive allows foreign suckers to buy into these things before they collapse.  Let's see if foreign banks rush in fast enough to get sucked into a shadow bailout of the shadow banking system.

I'll be down in Silicon Valley this week seeking out technical wisdom.  Who knows what new innovations lurk there.  

The Limerick of Finance for 03/30/14

Day traders are wasting their time
Charting random noise that does not rhyme
Put away all those sticks
Study deep value picks
Stock prices can turn on a dime

Box Dev 2014 Flew Drone Cam For Cloud Enterprise

Box held their first ever developer conference last week.  I dutifully attended Box Dev 2014 thanks to a hot ticket from Angel Launch.  My favorite people always hook me up with multiple blessings.  The free food was of course a major incentive.  Breakfast bagels, Off the Grid lunch trucks, and spicy dinner entrees were enough to get me excited about hanging with cloud enterprise developers.

I sat very near the front for the early talks and I checked out the folks at the so-called "media" tables.  They didn't look like they were banging out too many articles on the event or even taking notes.  That's why I take these events seriously.  Silicon Valley can always count on Alfidi Capital to pay attention when everyone else is falling down on the job.  Slackers checking email and Facebook can hang out somewhere besides the media table.

The CEO of Box is quite a charming fellow.  His cloudy socks and bright sneakers reminded me of Marc Benioff's fancy high-tops at Dreamforce 2013.  Cloud entrepreneurs have a thing for wild wardrobes.  Box is convinced that the addressable market for mobile information workers is larger than the market for people chained to a desktop.  They have tailored their cloud enterprise offerings accordingly.  I think Dropbox is an obvious competitor, but when I heard Dropbox's CEO discuss his company with Marc Benioff at Dreamforce 2013 I don't recall whether he spent a lot of time emphasizing mobile.  These two box-related companies are going to fight it out over enterprise sharing.

Entrepreneurs also have a thing for wild stunts.  Box's SVP for development came out to chat up their ability to connect the enterprise to all kinds of things.  Lo and behold, Skycatch flew a drone out to the strains of Darth Vader's theme music and took a digital image of the audience.  Drones now have an undeniable cool factor.  The drone is in the photo just above.  I was impressed that it could navigate the confined space of those curtains adjoining the stage without becoming unstable.  Photos come with metadata that Box aims to capture.  Image metadata has obvious uses in GIS for identifying frequent locations of system failures, sales calls, and other things that will drive enterprise revenue and costs.

Entrepreneurs can capture a few more lessons from Box's success than the implications of image metadata in GIS.  Sales is still the most important traction metric, but efforts to grow a startup's numbers of third party developers, API downloads, and SDK uses are worth doing if they drive some buzz.  Even page loads and white paper downloads generate metrics for startups desperate to hang their hat on something.  Cloud platform providers should also think about having more than one pricing model.  Pay per user (accommodates seat count changes), pay per time (accommodates seasonal surges), and pay per capacity (accommodates an expanding enterprise) all have their place somewhere.

The fireside chat with legendary tech star Ben Horowitz gifted the audience a free copy of his book The Hard Thing About Hard Things.  I have to love a show that gives me both free food and free books.  Ben liked Intel's approach to growing its market beyond memory.  I did not know that the "cloud" term came from Bell Labs' technical descriptions of telecom connections.  I thought some marketing pros dreamed it up.  Ben's favored technique for a package software company (read Microsoft) to turn itself into a cloud service company (read Salesforce) is to acquire a cloud startup and promote that startup's founder to CEO of the acquirer.  I don't know of any case where that succeeded, which is probably why Ben thinks such a transformation is so hard.  I was very disappointed to hear that Ben was bullish on Bitcoin.  His VC firm Andreessen Horowitz is making big bets on Bitcoin.  I'm pretty sure they're going to lose it all, but I won't guess about the timetable.

Palantir's founder got some stage time with one of the hottest female tech journalists I've ever seen.  War stories about PayPal are part of Silicon Valley's lore.  I was more intrigued by the guy's pro-market opposition to rent control and desire to unskew the asymmetrically high compensation in the finance sector.  This wasn't the first time I've heard entrepreneurs warn that large firms use regulatory capture to make business hard for startups.  I wish I could get as excited as him about AI and VR but those things have been five years away for the last twenty years.  The hype about AI and VR reminds me of the perpetual hype for nuclear fusion.  It keeps the research money spigot stuck in the on position with no commercial success stories.

The VC panel tried to make some five year predictions for mobile, VR, and other enterprise tech but I don't think they got any farther into probable successes than the Palantir guy.  They did make a worthwhile observation about how SaaS contracts favor short-duration pilot terms with cancellation options.  That goes back to my own thoughts above about having a diverse pricing model.  One client that cancels a short contract is welcome to consider a surge capacity contract.  These VCs claimed that some startup types cluster in certain cities.  That's true in niche sectors like agriculture, which is so far clustered in Northern California.  I've noticed that many mobile and social startups pop up in all the big cities.

I don't think these VCs have many blind spots.  They ought to see the disruption potential in capital-intensive verticals with long sales cycles.  Startups can capture that by breaking up SaaS sales packages into piecemeal iterations.  Salesforce did that with functional modules.  Go back to my pricing model notes above and figure out where to start.  The "grow fast" go-to-market strategy of consumer SaaS is not the same as the enterprise SaaS strategy of proving speed and agility in overcoming friction.  The panelist VCs know this and startups should know it before they design for one market at the exclusion of another.  The VCs measure the density of a SaaS solution's network connections by stickiness, virality, symmetry, and intraenterprise strength.  In plain English, that means enterprise SaaS is more likely succeed with very dense connections that encourage KM collaboration.  Know your monthly recurring revenue (MRR) and its churn before you pitch a VC, and don't pitch standing up when the VC asks for a sit-down conversation.  The venture investing community can be finicky.  I know they read my blog.

The CIO panel repeated a lot of things I've heard before at tech conferences.  Every IT leader wants to jump on the innovation bandwagon because running a cost center is a career dead end.  I did not know that the security landscape is evolving faster than the rest of the tech sector.  Maybe all of the warnings about app security are finally turning into action.  This poses good career opportunities for white hat hackers who can find and plug security holes.

Jerry Yang moderated the CEO panel.  The other CEOs on the panel sounded like they really grok CustDev.  They should get along well with the earlier CIOs who said they like startups that solve problems.  These CEOs admonished the crowd not to sell something they don't already have; apparently a lot of techies need to be told that only established companies can announce vaporware.  Their descriptions of reward systems that incentivize adherence to company values reminded me of things I've blogged before about corporate cultures.  Folks need to know that the CEO's personality and the HR compensation structure will determine everything.  That's Alfidi Capital wisdom.  I agree with the CEOs that their job is to tell employees they're doing a good job, and that no one will tell the CEO whether they're effective.  That is why KPIs tell CEOs whether they're succeeding.

I gave Jerry Yang a thumbs up as he walked out of the Fort Mason Pavilion after his panel.  He's the one on the left in the photo above.  I will always be grateful for his second stint running Yahoo because his resistance to Microsoft's buyout offer in 2008 opened a decent arbitrage opportunity for me.  I made some money on the differential between the two companies' short-duration options even though the merger deal wasn't consummated.  Thanks, Jerry.

The final fireside chat between legends Phil Libin and Steven Sinofsky was the stuff of legend.  Techie culture supposedly encourages internal teams to borrow each others' ideas during the SDLC, but I wonder how many companies practice what they preach.  Phil said in no uncertain terms that Evernote employees who make PowerPoint slides are unwelcome.  That is stunning, and awesome.  He correctly places slides in their sales role because he wants a higher cognitive model for engaging teamwork.  His vision for workflows that transition seamlessly between mobile and desktop is the kind of sea change forcing packaged software sellers to move their products to the cloud.  I do not agree with his prediction that the touchscreen interface will replace the keyboard/mouse setup simply because it's more comfortable for natural human hand movements.  Knowledge workers still need to input data somehow and touchpad reticles can't do the whole job.  Let me summarize this conversation's brilliant closer, driven by Facebook's acquisition of Oculus Rift:  "Oculus is something you put on your FACE.  It was bought by a company called FACE-book.  We'll see thing like Box-FACE in the future."  That had the audience rolling.  Great stuff.  You had to be there to see tech genius at work.

I have no idea what Box's platform does for clients.  They put on a really high-powered developer conference where I scored free food and wisdom.  Their CEO can mount a stage at a running leap, so maybe he ran track in high school.  They should hold a hackathon at their next conference to motivate developers to build Box stuff.  I'm impressed enough with everything to return next time.  

The Haiku of Finance for 03/29/14

Adjusting swap price
Mark to market and disclose
Complicated math

Using And Misusing XVA Swap Pricing Adjustments

Welcome to the world of swap pricing.  I have never touched swaps in the real world.  Studying their construction during my MBA program was certainly intriguing.  Institutions using swaps in moderation can hedge their exposure to swings in interest rates, commodities, and currencies.  Pricing them realistically means adjusting for the possibility of counterparty defaults.  Adjustments used to be confined to credit valuation adjustments (CVAs) but now encompass a whole family of "XVA" alternatives.  Risk Magazine in 2013 recognized the key role that banks play in using XVAs to price derivatives.

Capital markets quants have choices to make among XVAs.  The original CVA and debit valuation adjustment (DVA) formulations were mirror images of each other.  They balanced a swap's accounting on the mark-to-market exposure statements of both swap counterparties.  Adding a cost adjustment to the DVA builds a funding valuation adjustment (FVA) that provides further clarity on how lending costs for an uncollateralized transaction affect swap exposures.  This very detailed Shearman and Sterling article describes how the legal treatment of these FVAs under Basel capital requirements may differ between US and EU regulatory regimes.

The FVA takes derivative game-playing to a whole new level.  The concept's creators explain it in this Risk Magazine article, "Funding strategies, funding costs."  I don't see the point in adding a second layer of complexity to an already complex process for adjusting derivative prices.  More complex systems are more fragile.  We learned that the hard way in 2008 when investment banks underestimated their own weaknesses.  Adding a replacement valuation adjustment (RVA) to the other layers makes things even more complex, although I can see the usefulness of using it as the only adjustment layer for swaps that have downgrade triggers.

FASB 159 allows corporations to use XVAs to adjust their financial statements.  This takes the debate over smoothing earnings to a whole new level of unreality.  Analysts need to look at MD&A footnotes more closely to see whether systemically important financial institutions (SIFIs) use XVAs to play games with their numbers.  CME Group has an excellent KPMG white paper on principles for managing CVAs.  It is silent on how credit support annexes (CSAs) should net out exposure.  Mark-to-market accounting leaves banks vulnerable to swings in swap valuation that XVAs cannot mitigate.  This makes it imperative for central counterparties (CCPs) displaying derivatives to disclose CSA details.  The CSAs set boundary conditions within which XVAs adjust; disclosure shows the world where mark-to-market accounting will cause a swap to breach its boundary.

Some institutions forget moderation and fall for investment banks' wild pitches.  The i-banks' quants are supposed to use XVAs to think through the market's effects on swap pricing.  They should not use these adjustments to gouge unsophisticated clients out of a few more basis points.  Industry bodies need to pitch in.  The Global Financial Markets Association (GFMA) and the International Capital Market Association (ICMA) should work out some robust guidelines for financial institutions that employ XVAs.  Applying the same guidelines across derivatives markets for interest rates, commodities, and currencies gives the "law of one price" stronger meaning for global investors.  It will also keep bank trading desks within their Basel limits and internal risk appetites.  

The Haiku of Finance for 03/28/14

A big pile of cash
Awaiting contrarians
Who buy in a trough

The Haiku of Finance for 03/27/14

Issue high yield debt
Credit rating must be low
Piling risk on risk

The Haiku of Finance for 03/26/14

Personal spending
Economy foundation
Running on credit

The Haiku of Finance for 03/25/14

Bitcoin tax treatment
Not currency after all
Fiat still matters

IRS Ruling Destroys Bitcoin's Usefulness As Currency

The IRS has ruled that Bitcoin is an asset, not a currency.  Thank a government agency for some much-needed common sense.  The sound you hear right now is the crying of thousands of techie wanna-bes who thought their precious sets of digits were legal tender.  They'll be better off using seashells as payment.

The description of a Bitcoin transaction for coffee from that Bloomberg article says everything about how inefficient and stupid Bitcoin would be as a currency.  Anyone using dollars to buy coffee - or any other good or service in the real economy - would never have to pay a capital gains tax.  Using Bitcoin means realizing a gain or loss for part of one's Bitcoin holdings.  No one outside of a primitive barter economy or a hyperinflating modern economy would exchange an asset for an asset but that's what Bitcoiners will have to do in the US.

Hard asset hedges against hyperinflation must be liquid and immediately verifiable in value to be useful.  Bitcoin does not pass either of those tests with this ruling.  This ruling does not in any way entice me to consider Bitcoin as a hard asset on par with other commodities like metals or energy.  The difference with Bitcoin is that sharp coders can duplicate it in the blockchain.  This renders its authenticity questionable.  No one can duplicate oil in the ground, metal in a mine, timber in a forest, or inventory in a warehouse.

The clarification of Bitcoin mining as an income-producing activity is an awesome slap in the face to nerds who thought they could get rich for free.  Taxing this "income" at the value of Bitcoin when it was mined means miners may suffer losses if the price of Bitcoin declines in dollar terms.  Let me repeat that so nobody misses it.  Bitcoin mining income is the only type of ordinary earned income that could potentially be subject to a loss greater than its earned value.  Think about how this would destroy a nerd's wealth if the price of Bitcoin crashed.  Tax accountants are going to laugh when a Bitcoin client shows them a mining record worth $600, producing a tax liability of around $150, and the remaining Bitcoin turns out to be worth a couple of bucks.  Miners are going through a lot of effort creating Bitcoins at a peak price just to incur tax liabilities they won't be able to pay with their remaining loot.

The ruling will obviously create demand for an ecosystem that can record and verify crypto-currency transactions independent of a blockchain.  Accountants won't sign off on a Bitcoin client's tax forms unless they can file something like a 1099 verifying its value.  This destroys the libertarian fantasy of an unregulated anonymous economy but that's the only way Bitcoin users can stay out of tax trouble.

Bitcoin is now just another digital asset.  Other digital assets like marketing data and intellectual property have real value because they can produce a tangible benefit for their owners.  Bitcoin confers no such value.  It is just another conveyance.  The effort to produce it will be a nuisance at best and a tax loss at worst.  Real currencies are so much more useful.  

The Haiku of Finance for 03/24/14

Revolving debt door
Rolling short-term payday loans
Escalating fees

Gullibility, Distractibility, And Availability In Undue Influence

Dr. Patrick O’Reilly, author of Undue Influence: Cons, Scams and Mind Control, shared his wisdom today at the Commonwealth Club.  I learned enough about three major definitions - gullibility, distractibility, and the availability heuristic - to reduce my own chances of getting ripped off.

Gullibility is our natural state during periods of emotional vulnerability.  We accept presented information less critically when we are weakened by stress or trauma.  Distractibility from noise, crowds, and everyday details diverts our attention from critical thinking.  The availability heuristic is the human tendency to accept vivid imagery that has an emotional impact.  These biases combine with other forces to enable con artists to rip people off.  Read Undue Influence for more details on fallacies and traps.  

This line of work is relevant to me for a couple of reasons.  I first encountered multilevel marketing (MLM) scams during my active duty military service in the mid-1990s.  I knew enough about how these schemes worked from the junk mail I used to receive in college.  Several fellow officers pitched me MLM ideas of various stripes, all of which I rejected once I realized what they were.  I was very disappointed that people who pledged to live honorable lives were trying to prey on people junior to them in rank.  I was very polite and professional when I declined all further contact with these losers.  

My most severe encounter with fraud came a few years ago in San Francisco.  One very charming but disgusting veteran wore falsified valorous decorations on his uniform while defrauding donors who supported veterans organizations.  American Legion Post 911 in San Francisco was the vehicle for this scam.  That post's continued existence brings shame to the veterans' community of San Francisco.  The victims and incurious dupes who continue to enable the primary con artist's fraud don't strike me as particularly vulnerable or easily distracted.  They are mostly accomplished professionals, making their continued collaboration with a scammer all the more inexplicable.  Social proof probably plays a role among people who can't bring themselves to admit being hoodwinked over cocktails at their private club.  I accept that they don't want to explain themselves to me.  They will eventually have to explain themselves in court.

Bernard Madoff's Ponzi scheme proved that even successful investors fail to perform due diligence when someone in an affinity group possesses asymmetric information.  That's the best explanation I can find for high-profile fraud among the elite.  Extraordinary claims of fantastic results may seem completely plausible to high achievers who are accustomed to obtaining extraordinary results themselves.  It takes a Herculean effort to show them the truth.  I'm up to that challenge and I have facts on my side.  Bring on the "Mickey Mouse" opposition.  

Financial Sarcasm Roundup for 03/24/14

I'm typing this roundup while listening to a web conference on some opportunity.  Further analysis will tell whether that opportunity is worth my time.  Sarcasm is always worth my time.

Exporting US energy is becoming a hot issue once again.  The oil shocks of the 1970s scared America into keeping its dwindling petroleum supplies onshore.  Now technology lets us tap huge shale deposits and America has plenty of hydrocarbons.  Everyone ignores the steep decline rates of shale oil and gas wells.  The push for exports will probably succeed just in time to see shale production flatten out.  Shale wells will produce tiny amounts of product for decades after their decline cliffs.  That means we can expect to sell a couple of barrels per day to Europe just after these multi-billion dollar LNG terminals on the Gulf Coast are ready.

China doesn't want the Fed to raise interest rates.  Beijing's rationale is simple.  Rising US interest rates would cause the value of the US Treasuries in China's foreign reserves to fall.  China needs that financial reserve to backstop the wealth management products that are starting to blow up its shadow banking system.  I don't think the Fed is geopolitically savvy enough to use its interest rate power as a bargaining chip.  They're supposed to be politically independent while the Treasury Department handles the heavy lifting with other countries.

Mme. Lagarde wants the US to show more support for the IMF's reforms.  I interpret this as a veiled request for the US to stay engaged with the IMF's efforts in Europe while Ukraine is in play.  The IMF's funding of the European troika's bailouts would mean little without US backing (and presumably the Fed's extension of dollar swap lines to the ECB).  The troika cannot afford any distractions while its shock therapy for the PIIGS is under attack from civil unrest and its rescue of Ukraine has just begun.  BTW, I'll bet Mme. Lagarde was really hot when she was younger.

The web conference is over and so is this blog article.