Tuesday, March 28, 2017

"Robots are killing jobs after all, apparently: One droid equals 5.6 workers"

One of the lessons they really try to drive home in junior analyst school is: don't say "This time is different".
But this time might actually be different and the accumulated history of technology vis-à-vis employment may not be of much use as a guide. And the stakes are pretty high.

From The Register:

So much for the utopian techno future, according to this study
Industrial robots are depressing wages and increasing unemployment, according to a paper published by the National Bureau of Economic Research, a private, non-profit, non-partisan research organization in America.

Written by MIT economists Daron Acemoglu and Pascual Restrepo, "Robots and Jobs: Evidence from US Labor Markets" appears only days after Treasury Secretary Steve Mnuchin dismissed the possibility of automated systems taking jobs from people, saying, "It's not even on our radar screen."
Similar to the cosmological conundrum about whether the universe will continue expanding indefinitely or collapse upon itself, the impact of automation and AI on human employment is the subject of ongoing debate about whether automated systems will create more jobs than they destroy.
Among technology advocates, there's predictable optimism. Robert D Atkinson, president and founder of the Information Technology and Innovation Foundation, has gone so far as to place a bet through the Long Now Foundation that by June of 2025 the labor force participation rate and unemployment rate, reported by the US Bureau of Labor Statistics, will respectively be above 60 per cent and below 7.5 per cent.

"The 'robots are killing our jobs' proponents miss the fact that automation lowers prices (or raises wages), which in turn spurs increased demand for goods and services, and hence labor," he states in his argument.

If Acemoglu and Restrepo are correct, however, that may not be a wise bet. The researchers analyzed how the increase in industrial robot usage between 1990 and 2007 affected US local labor markets.
These robots are fully autonomous machines that operate without human intervention, doing tasks that at some point in the past were done manually, such as welding, painting, product assembly, moving materials, and packaging.

There are presently somewhere between 1.5 and 1.75 million industrial robots operating around the globe, according to the International Federation of Robotics. The auto industry uses about 39 per cent of such robots, followed by the electronics industry (19 per cent), metal product manufacturing (9 per cent), and the plastics and chemicals industry (9 percent), according to the researchers.

Acemoglu and Restrepo found that in areas exposed to industrial robots, between 1990 and 2007, "both employment and wages decline in a robust and significant manner (compared to other less exposed areas)."...
...MORE

If you don't have access to the NBER version linked above here are Professor Acemoglu's MIT web pages.

China's Tencent Buys a 5% Stake in Tesla (TSLA)

TSLA is up $9.42 at $279.64.

From Reuters:
China's Tencent Holdings Ltd (0700.HK) has bought a 5 percent stake in U.S. electric car maker Tesla Inc (TSLA.O) for $1.78 billion, the latest investment by a Chinese internet company in the potentially lucrative market for self-driving vehicles and related services.

Tencent's investment, revealed in a U.S. regulatory filing, provides Tesla with an additional cash cushion as it prepares to launch its mass-market Model 3. Tesla's shares were up 2.9 percent at $277.03 in midday trading on Tuesday, enabling it to rival Ford Motor Co (F.N) as the second-most-valuable U.S. auto company behind General Motors Co (GM.N).

The deal expands Tencent's presence in an emerging investment sector that includes self-driving electric cars, which could enable such new modes of transportation as automated ride-sharing and delivery services, as well as ancillary services ranging from infotainment to e-commerce.

Those new technologies, and their potential to create new business models and revenue streams in the global transportation sector, have attracted billions in investment from China's three tech giants - Tencent, Alibaba Group Holding Ltd (BABA.N) and Baidu Inc (BIDU.O).

In an investor note, Morgan Stanley auto analyst Adam Jonas said on Tuesday that he "would not be surprised" to see Tencent and Tesla collaborate in the development and deployment of some of those technologies.

Founded in 1998 by entrepreneur Ma Huateng, Tencent is one of Asia's largest tech companies, best known for its WeChat mobile messaging app. With a market capitalization of about $275 billion, it is roughly six times the size of 14-year-old Tesla, whose $46 billion market cap on Tuesday matched that of 114-year-old Ford.

Tencent was an early investor in NextEV, a Shanghai-based electric vehicle startup that since has rebranded itself as Nio, with U.S. headquarters in San Jose, not far from Tesla's Palo Alto base. Tencent also has funded at least two other Chinese EV startups, including Future Mobility in Shenzhen.

In addition, Tencent has invested in Didi Chuxing, the world's second-largest ride services company behind Uber, and in Lyft, Uber's chief U.S. rival.

Baidu has invested in Nio, as well as in Uber and Velodyne, a California maker of lidar sensors for self-driving cars. Alibaba's mobility investments include Didi and Lyft....MORE

Ridezilla: Chinese Rideshare Co, Didi Chuxing Is Looking to Raise Another $6 Billion

Following up on yesterday's "Does Uber Go Bankrupt If Didi Chuxing Decides To Compete In the United States?".
From Bloomberg Gadfly, March 28:
Didi Chuxing looks set to put its shareholders in an impossible position by entertaining another round of fundraising, this time for $6 billion.

SoftBank Group Corp. would lead the investment being considered by China's largest ride-hailing company, Bloomberg's Lulu Chen reported Tuesday.

That means current shareholders may be forced to decide whether to double down on their existing investment, or watch their bets get diluted by the new money. Such a dilemma faces investors every time a startup brings out the begging bowl.

New funding is usually welcome because it means more cash to get the business through the next phase in its development, compete with rivals and move closer to profitability. It typically has the added bonus of raising the startup's valuation, which makes everyone happy.

For Didi, though, it's a little different. As the product of two competitors merging, the company has vanquished its last credible threat. From there, the path to profitability should have been smooth, limiting the amount of cash it would have to burn to get to the IPO finish line.

Except such a conclusion assumes that the underlying business model is actually viable.

The distinguishing feature this time is that a massive pool of money is knocking on the door and wanting in. With its valuation already a heady $33.8 billion, any further escalation would limit the upside for investors in a future public offering, while a flat or down round would be a terrible move....MORE
 And the Bloomberg story that came out last night (EDT): 

Didi Said to Be Weighing $6 Billion SoftBank-Backed Funding

Smart Beta: "They Can’t All Be That Smart"

Continuing our tour of some of the more interesting characteristics of the factor zoo.

From Investing Research, March 14:
Smart Beta is a label applied broadly to all factor-based investment strategies. In a recent WSJ article on Smart Beta, Yves Choueifaty, the CEO of Tobam, said “There’s a huge range of possibilities in the smart-beta world, and they can’t all be that smart.” This paper separates the factor investing landscape, gives a framework to analyze the edge of various approaches and lets you decide which factor-based strategy is worth your money.

Analysis of a factor-investing strategy should focus on two of the manager’s skills: the ability to identify specific factors that accurately generate out-performance and the manager’s technique in constructing a portfolio of stocks with those factors. Factors are not commodities, and one should know how managers are selecting stocks, but we are focusing on portfolio construction and the soundness of different approaches.

Active share can be a useful tool in this investigation. Active share by itself is not a metric that inherently identifies manager skill. Nor is it the best metric to determine the risk of the portfolio versus an active benchmark. Tracking error is a more comprehensive metric for the trailing differences in the portfolio returns and Information Ratios to understand the balance of how much active risk you are taking for active return. But active share is a very useful tool in investigating the choices managers make in building factor portfolios.

Through the lenses of active share, tracking error, and information ratios, we consider the relative merits of factor-based portfolio construction approaches: Fundamental Weighting, Smart Beta and Factor Alpha. Understanding the differences between these approaches will help you better incorporate factors into your overall portfolio.

Fundamental Weighting
Most benchmarks weigh constituents by market capitalization. Some factor investing approaches pivot away from weighting on market cap, and weighting on another fundamental factor like sales or earnings. The argument for these strategies is that weighting by market cap is not the smartest investment solution out there: the top quintile of the S&P 500 by market cap underperforms the average stock by -0.65% annualized1, and market cap weighting allocates 65% of the benchmark to those largest names.

For a comparison of fundamental weighting schemes, the table below shows the characteristics and annualized returns for weighting on Market Cap, Sales, Earnings, Book Value of Equity and Dividends. There are some benefits to the approach, for example eliminating companies with negative earnings. On average, about 8.3% of Large Stocks companies are generating negative earnings2, and avoiding those is smart. The largest benefit is an implied value-tilt to the strategy: over-weighting companies with strong earnings and average market caps creates an implicit Price/Earnings tilt. This is apparent in the characteristics table: Sales-weighting gives the cheapest on Price/Sales, Dividend-Weighted gives the highest yield, etc.

But pivoting from market cap to a fundamental factor weighting scheme does not create large risk-return benefits. Raw fundamental factors correlate highly with market cap; companies with huge revenues tend to have large market caps. As of December 31st, 2016, weighting on Earnings has a 0.85 correlation with weighting on market capitalization3. In market cap weighting, the top 25 names are 34% of the portfolio. In an earnings-weighted scheme those same 25 companies are still 34% of the portfolio, just shifting weights a bit from one name to another.

Active share shows how little fundamental weighting moves the portfolios, with active shares in the 20-30% range. Excess returns range from slightly underperforming market cap to outperforming by +72bps. The modest excess return comes with much higher active risk, and tracking errors ranging from 4.5% to 5.8%. This generates poor information ratios, the ratio of active return to active risk.
http://investingresearch.net/wp-content/uploads/2017/03/Smart-Beta-1.jpg

Portfolio Weight for Market Cap Weighted vs. Earnings Weighted – December 31st, 2016

http://investingresearch.net/wp-content/uploads/2017/03/Smart-Beta-2.jpg
Characteristics and Annualized Returns by Weighting Scheme (U.S. Large Stocks, 1963-2016)
The reason that the risk-return benefits are small is because Fundamental Weighting is an indirect allocation to a Value strategy. Value investing on ratios is identifying investment opportunities with the comparison of a fundamental factor in the context of the price you pay. Fundamental weighting is only taking half of the strategy into account, looking for large earnings but ignoring the price you’re paying for them. Some Fundamental Weighted products will be more sophisticated than simply weighting on sales, earnings, book value or dividends. But weighting on fundamental factors instead of market cap doesn’t create a significant edge.

Risk-Focused versus Return-Focused
A post by Cliff Asness at AQR suggested that Smart Beta portfolios should be minimizing active share. Smart Beta portfolios are “only about getting exposure to the desired factor or factors while taking as little other exposures as possible.” This statement cemented the idea that there is a group of Smart Beta products that are risk-focused in nature: Start with the market portfolio, identify your skill and then take only the exposure on those factors....MUCH MORE
Previously:
Are Factor Investors Getting Paid to Take on Industry Risk?
Asness et al: "Contrarian Factor Timing is Deceptively Difficult"
"Investing: Cliff Asness Blasts Rob Arnott"   

And some older posts:
What a Long Strange Trip: From CAPM To Fama-French to Four (or more) Factor
Improving on the Four-factor (beta, size, value, momentum) Asset Pricing Model
2017 Credit Suisse Global Investment Returns Yearbook (and testing smart beta factors)
Factors: The Problem With Small Cap Stocks (the effect probably isn't real)
It's Anomalous: "Fact, Fiction and Momentum Investing"
Rob Arnott's Research Affiliates: "Finding Smart Beta in the Factor Zoo"

"The Biggest Risk From the Dollar's Drop May Not Be What You Would Guess"

From Bloomberg, March 27:

A high-risk corner of the $5 trillion currency market has become the collateral damage of the dollar selloff.
Whipsawed by the greenback and confronted by U.S. policy confusion, carry trades were supposed to be a rare bright spot for investors who want to stay away from the world’s biggest reserve currency. Under the strategy, you borrow in low-rate alternatives such as the yen, and buy high-yielding peers like the Mexican peso, benefiting from low volatility and the emerging-market rally.
https://assets.bwbx.io/images/users/iqjWHBFdfxIU/iNU9YBOmubH4/v3/800x-1.jpg
Practitioners of the carry trade are learning there’s no hiding from the dollar’s influence. Growing doubts about the outlook for U.S. policy following the failed attempt at health-care reform not only led to a weaker dollar, it also caused investors to pile into havens such as the yen and the euro -- the funding currencies carry traders sell as part of the strategy. The Japanese currency gained 2 percent against the dollar this month, while the euro rose 2.8 percent.

"The carry trade is far more important than the dollar move in the changing the currency market," said Bob Savage, chief executive officer of hedge fund CCTrack Solutions LLC in New York. "The rise in the yen may actually put the trade at risk. The dollar itself doesn’t affect the biggest FX trade out there, but the yen does."

There’s no hard evidence available in analyzing the scale of carry trades. But according to Bank of America Corp.’s flow data, buying emerging-market currencies made up the biggest long position as of last week. The data blend positioning and sentiment surveys conducted with its hedge fund and real-money clients, and publicly available futures data.

Funding Currency
Nonetheless, carry traders could still make a profit because of yield differentials or appreciation in emerging-market currencies. At a time when most investors have capitulated on the strong-dollar bet and currency funds struggle to yield any return for yet another year, the carry strategy may be the last oasis....MORE

Monday, March 27, 2017

Too Funny: Reporting On Elon Musk's New Brain Implant Company, The Nerds at Boy Genius Report...

...went with this picture and headline:

http://cdn.bgr.com/2017/03/elon.jpg?quality=98&strip=all&w=780


Earlier:
"Elon Musk launches Neuralink, a venture to merge the human brain with AI"

"Elon Musk launches Neuralink, a venture to merge the human brain with AI" UPDATED

Update: "Too Funny: Reporting On Elon Musk's New Brain Implant Company, The Nerds at Boy Genius Report..."
Original post:

About time, he's teased it enough, links after the jump.

From The Verge:

Rockets, cars, and now brain chips
SpaceX and Tesla CEO Elon Musk is backing a brain-computer interface venture called Neuralink, according to The Wall Street Journal. The company, which is still in the earliest stages of existence and has no public presence whatsoever, is centered on creating devices that can be implanted in the human brain, with the eventual purpose of helping human beings merge with software and keep pace with advancements in artificial intelligence. These enhancements could improve memory or allow for more direct interfacing with computing devices. 

Musk has hinted at the existence of Neuralink a few times over the last six months or so. More recently, Musk told a crowd in Dubai, “Over time I think we will probably see a closer merger of biological intelligence and digital intelligence.” He added that “it's mostly about the bandwidth, the speed of the connection between your brain and the digital version of yourself, particularly output." On Twitter, Musk has responded to inquiring fans about his progress on a so-called “neural lace,” which is sci-fi shorthand for a brain-computer interface humans could use to improve themselves. 

These types of brain-computer interfaces exist today only in science fiction. In the medical realm, electrode arrays and other implants have been used to help ameliorate the effects of Parkinson’s, epilepsy, and other neurodegenerative diseases. However, very few people on the planet have complex implants placed inside their skulls, while the number of patients with very basic stimulating devices number only in the tens of thousands. This is partly because it is incredibly dangerous and invasive to operate on the human brain, and only those who have exhausted every other medical option choose to undergo such surgery as a last resort.
This has not stopped a surge in Silicon Valley interest from tech industry futurists who are interested in accelerating the advancement of these types of far-off ideas. Kernel, a startup created by Braintree co-founder Bryan Johnson, is funding medical research out of the University of Southern California to try and enhance human cognition. With more than $100 million of Johnson’s own money — the entrepreneur sold Braintree to PayPal for around $800 million in 2013 — Kernel and its growing team of neuroscientists and software engineers are working toward reversing the effects of neurodegenerative diseases and, eventually, making our brains faster and smarter and more wired.

These types of brain-computer interfaces exist today only in science fiction. In the medical realm, electrode arrays and other implants have been used to help ameliorate the effects of Parkinson’s, epilepsy, and other neurodegenerative diseases. However, very few people on the planet have complex implants placed inside their skulls, while the number of patients with very basic stimulating devices number only in the tens of thousands. This is partly because it is incredibly dangerous and invasive to operate on the human brain, and only those who have exhausted every other medical option choose to undergo such surgery as a last resort. 

This has not stopped a surge in Silicon Valley interest from tech industry futurists who are interested in accelerating the advancement of these types of far-off ideas. Kernel, a startup created by Braintree co-founder Bryan Johnson, is funding medical research out of the University of Southern California to try and enhance human cognition. With more than $100 million of Johnson’s own money — the entrepreneur sold Braintree to PayPal for around $800 million in 2013 — Kernel and its growing team of neuroscientists and software engineers are working toward reversing the effects of neurodegenerative diseases and, eventually, making our brains faster and smarter and more wired....MORE 
Previously:
June 2016
Sept. 2016
In other news...
Sept. 2016
Feb. 2017
Mr. Musk is probably just pitching his "neural lace" idea, on which we are supposed to have an announcement this month.*

Related:  
But what about rockets? For the asteroid mining cancer cures? 

China Exports of High Fructose Corn Syrup Taking On Cane Sugar Industry in The Philippines

This doesn't sound healthy, on a few different levels.
From Agrimoney:

China's turn to HFCS exports 'could be start of something big'
China's exports of high fructose corn syrup to the Philippines, where sugar producers are protesting at the trade, could be the "start of something major" in the sweeteners market, if use spreads in Asia.
China has been, up to now, the only substantial user of high fructose corn syrup (HFCS) in Asia, with use equivalent to some 4m-5m tonnes a year, said Robin Shaw, analyst at London broker Marex Spectron.
However, imports by the Philippines of 235,000 tonnes of HFCS last year, according to customs data, equivalent to some 352,000 tonnes of sugar, and trade which prompted the country two weeks ago to impose curbs on corn syrup.
"HFCS is significantly cheaper than locally-produced sugar," according to a US report which said that the imports had "driven down sugar prices" in the country by some 17% since September.
Indeed, Mr Shaw said that the imports could be a sign of a structural shift in sweeteners users towards corn syrup - a move which would be "anti-bullish" for sugar prices.
'Start of something major'
"It looks like HFCS is invading the world sugar market more," Mr Shaw told Agrimoney.com.
"The increase in China's HFC exports at the moment could be start of something major," if it catches on in in the region, which includes some large sugar importing countries, including Indonesia and Malaysia - besides China itself.
Indeed, it could prove "another nail in the coffin" of the bullish sugar story, as "the world adapts to high sugar prices", with New York raw sugar futures standing above 21 cents a pound as recently as last month.
May futures on Monday stood at 17.59 cents a pound, down 0.7% on the day.
HFCS vs sugar
The apparent paradox of China, the world's biggest sugar importer, becoming an exporter of HFCS comes despite a large incentive from prices for the country to consume the grain-based sweetener domestically....MORE

Natural Gas: EIA Weekly Supply/Demand Report

$3.1450 down 0.008.

If (big if) natty can get through the little gap at $3.20 there's not much technically to stop it up to the bottom of the big gap at $3.80, with $3.60 a minimum target.
From the Energy Information Administration:

Natural Gas Weekly Update

Prices/Supply/Demand:

Prices mixed. This report week (Wednesday, March 15 to Wednesday, March 22), the Henry Hub spot price fell 2¢ from $3.00/MMBtu last Wednesday to $2.98/MMBtu yesterday. Last report week, the eastern half of the country was affected by unseasonably cold temperatures and a late-winter snowstorm, pushing up prices in the Northeast and Midwest. As temperatures moderated during the current report week, prices generally fell. At the Chicago Citygate, prices decreased 4¢ from $2.93/MMBtu last Wednesday to $2.89/MMBtu yesterday. 
The price at PG&E Citygate in Northern California gained 4¢ to $3.19/MMBtu yesterday. The price at SoCal Citygate rose 14¢ from $2.93/MMBtu last Wednesday to $3.07/MMBtu yesterday. Temperatures in California fell over the weekend, pushing the price up 25¢ between Friday and Monday. 
Additionally, the Aliso Canyon natural gas storage field is not available for full storage service. EIA publishes information about Southern California natural gas and energy prices in the Southern California Daily Energy Report.Northeast prices fall sharply. Coming off of a late-winter snowstorm and unseasonably cold weather last week, prices in the Northeast fell sharply. At the Algonquin Citygate, which serves Boston-area consumers, prices went down $3.44 from $7.45/MMBtu last Wednesday to $4.01/MMBtu yesterday. At the Transcontinental Pipeline Zone 6 trading point for New York, prices decreased $3.71 from $6.82/MMBtu last Wednesday to $3.11/MMBtu yesterday. 
Marcellus prices were largely unaffected by the moderating weather. Tennessee Zone 4 Marcellus spot prices were constant week over week at $2.77/MMBtu. Prices at Dominion South in northwest Pennsylvania fell 3¢ to $2.82/MMBtu yesterday. 
April Nymex contract up slightly. At the Nymex, the price of the April 2017 contract increased 3¢, from $2.981/MMBtu last Wednesday to $3.011/MMBtu yesterday. The price of the 12-month strip, which averages the April 2017 through March 2018 futures contracts, climbed 5¢ to $3.258/MMBtu.Supply falls slightly. According to data from PointLogic, the average total supply of natural gas fell by 1% compared with the previous week. While dry natural gas production remained constant week over week, average net imports from Canada decreased by 4% from last week. 
Demand falls significantly. Total U.S. consumption of natural gas fell by 15% compared with the previous report week, according to data from PointLogic. Last week's weather featured unusually cold weather and a snowstorm in the Northeast, which pushed demand up. This week, weather moderated across most of the country, pushing demand down. Week over week, power burn declined by 9%; industrial sector consumption decreased by 5%; and residential/commercial sector consumption declined by 26%. Natural gas exports to Mexico decreased 2%. 
U.S. liquefied natural gas (LNG) exports. Natural gas pipeline deliveries to the Sabine Pass liquefaction terminal averaged 2.2 Bcf/d for the report week, 8% higher than the previous week. Four vessels (combined LNG-carrying capacity of 13.9 Bcf) departed Sabine Pass last week, and one vessel (LNG-carrying capacity of 3.8 Bcf) is currently loading at the terminal. 
Last week, Cheniere Energy, the operator of the Sabine Pass terminal, received authorization from the Federal Energy Regulatory Commission (FERC) to commence liquefaction and export activities from Train 3. On March 16, Cheniere filed a request with FERC to begin commissioning of Train 4. Once the fourth train at Sabine Pass becomes operational, the total baseload nameplate capacity of the facility (including all four trains) will reach 2.6 Bcf/d, with a maximum operating capacity of 2.9 Bcf/d. The fifth train at the facility, currently under construction, is expected to begin service in mid-2019....
...MUCH MORE

"1 in 4 Believe Robots Would Make Better Politicians"

In some elections that's almost a plurality.

From Computer Business Review:

The impending robot revolution has certainly got people talking – from the workplace to the car and home, robots and AI has really grabbed the attention of the public.

However, setting aside Terminator-esque visions of the future, what do consumers really think of the impending AI revolution? Enterprise information management firm, OpenText, went and surveyed 2,000 UK consumers to find answers to that very question.

Initial findings from the survey mirrored many other reports and surveys, with consumers expecting AI to impact the human workforce and their daily lives in general.

The study found that 42 percent of UK consumers believe their job is likely to be replaced by a robot in the next 30 years, while 25 percent think that this could happen within the next 10 years.

However, the surprising, or not-so-surprising (depending on your opinion of politicians) findings from the report reveal that consumers would entrust the running of the country to robots. 66 percent of UK citizens expect that robots will be working within the government by 2037, with 16 percent believing this could happen in the next one to two years.

A further finding which may cause concern for Number 10 is that one in four think robots will make better decisions that elected government representatives, mainly in regards to the economy. However, a further 35 percent of UK citizens say robots would not be able to assess the cultural aspects when it comes to decision making....MORE

"Beware of Cows"

And we're not just talking futures.

From the London Review of Books, March 23:
The statistics make grim reading. In a 2013 report, Overview of Fatal Incidents Involving Cattle, the Health and Safety Executive notes in its usual lapidary prose that ‘this paper gives an overview of fatal incidents involving cattle to (a) Enable Agriculture Industry Advisory Committee members to consider the current trends in agriculture accidents involving cattle.’ There is no room for complacency. The HSE logs 74 ‘fatalities involving cattle’ in the UK in 2000-15, compared to 53 deaths caused by Islamist terrorism in the same period. Many of the victims were farm workers, while eighteen were ‘MOPs’ or members of the public. These victims were disproportionately older people (only one was under 50, thirteen were over 60 and as many as five were over 70).

More chilling still, as the HSE report makes clear, is the specific threat posed by out-of-control mothering cows. Of incident reports where the gender of the assailant was identified, ten involved cows with calves, and only one a bull. Hence it emerges that predominantly older people are being targeted by nursing cattle. Vegans seem largely to have been spared. But nobody is wholly safe from this civilisational threat, not just to our persons but to our old, carnivorous values.

The HSE notes that both beef and dairy animals have been involved in carrying out the atrocities....MORE
If that isn't terrifying enough the Swiss Bovine Special Forces are practicing air-mobile vertical insertion techniques:
https://epsilon.aeon.co/images/5b60d025-44d1-4623-bfe8-0e28abac753b/header_Cow-flying.jpg

Note identifying bell (and more disconcertingly, lack of diaper)

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

Uber has spent a lot of money to open up local markets, one at a time, to "ridesharing".
Opening the door for Didi Chuxing.

And Didi is an awesome competitor.
As noted in the intro to last week's story about Singapore-based Grab's fundraising:
"Uber’s largest Southeast Asian rival looks to raise another US$1.5 billion"
I still can't get the picture of Didi Chuxing's President, Liu Qing (anglicized to Jean Liu), commenting on Travis Kalanick and Uber's efforts in China as cute. Then when Uber proclaimed the $3.5 billion investment from the Saudis she laughed and said she had more than that on the way.
Didi then announced the completion of a $7.3 billion fundraising.

Uber better be on top of their game in Southeast Asia because they weren't in China and got run out of the country....
If I were a late stage Uber investor the following story would terrify me. Long time readers can gloss over some of the details, and the failure to put the Financial Times' Izabella Kaminska* at the top of the list of journos covering the Ube raises some doubts, but the point raised, "What happens if Didi goes international?" is important or as Kalanick might say, existential.

From Next Big Future:

Will Uber mirror Yahoo, If its China Rival Didi becomes globally dominant  
Uber has taken $12 billion over 15 rounds of investment, and has a reported valuation of nearly $70 billion. There have been several different leaks of Uber's financial data over the years, covering income from 2012 through Q4 2016.

Uber incoe statement numbers were from Bloomberg, The Information, Valleywag, Gawker, AllThingsD, TechCrunch, The New York Times, and Naked Capitalism.

Published financial data shows that Uber is losing more money than any startup in history and that its ability to capture customers and drivers from incumbent operators is entirely due to $2 billion in annual investor subsidies.

Net revenues reached $1.7 billion in Q4 2016.
Gross bookings were $5.4 billion last year.
Uber's costs and expenses are much more than its revenues

The Atlantic thinks that if Uber fails that it will not set off a bubble-popping chain reaction.

Didi Chuxing is the world's largest ride-sharing company. It provided transportation services for close to 400 million users across over 400 cities in China. Its headquarters is located in Beijing. It provides services including, taxi hailing, private car hailing, Hitch (social ride-sharing), DiDi Chauffeur, DiDi Bus, DiDi Test Drive, DiDi Car Rental and DiDi Enterprise Solutions to users in China via a smartphone application. Formed from the merger of rival firms Didi Dache and Kuaidi Dache (backed by the two largest Chinese Internet companies, Tencent and Alibaba respectively), it was valued (as of June 2016) at approximately US$28 billion. DiDi announced that it acquired Uber's China unit on August 1, 2016. Following this acquisition, Didi Chuxing is estimated to be worth US$35 billion and it is the only company to have all of China's three Internet giants—Alibaba, Tencent, and Baidu—as its investors.

Didi Chuxing completed 1.4 billion rides milestone in just 2015 alone, as well as clocking over 200 million rides in December 2016 alone (one month), making it the most dominant ride-sharing company in the world. This far surpassed Uber which completed only 1 billion rides in 6 years' time since its founding in 2009.

In mid-2016, China’s largest ride-hailing company, Didi Chuxing Technology, said it was profitable in more than half of the 400 cities in which it operates.

In 2017, Didi made an investment in 99 (formerly 99Taxis), an Uber competitor in Brazil and self-proclaimed market leader in Sao Paulo and Rio de Janeiro. Didi will provide guidance and support for 99, including in "technology, product development, operations and business planning." Didi said specifically that it will share "data-driven algorithmic capabilities" too.

Uber’s sale of its Chinese business included taking a 5.89 percent stake in Didi. Didi plans to expand its service beyond China for the first time in 2017, but Zhang wouldn’t reveal where they’re headed next specifically in terms of target markets. “It’s a secret,” he said, though any launch in another country could potentially bring it back into direct competition with Uber.

A partnership with Avis announced in November will give them some kind of international presence, but definitely doesn’t represent the full scope of their ambitions outside China.

Will Didi become globally dominant ? Didi appears to be financially stronger than Uber. Will there be other smaller ride sharing services with models similar to RideAustin ?....
...MORE

*Going back through the list of Izabella's posts-linked above-January 2014's "No, regulatory evasion isn’t ‘disruptive innovation’" pretty much sets the tone.

Regarding financial strength, Uber has already tapped what is usually the "topping up, raise the valuation before going public" market (although in Uber's case getting the Saudis to come in after the high net worth clients of MS and BAML was a coup).

For some background on how this racket works see Jan. 2016's "'Uber Is Raising More Money From Rich People' (Al Gore and Snapchat do cameos)":
...Way back in 2008 we noted the VC's of Silicon Valley were using a very shady private placement bundler called Advanced Equities to top off deals at very high valuations:
Venture Capital: "Garbage In...
...A late-stage venture funding outfit is foisting junky startups on investors--much to the benefit of the Sand Hill Road crowd....
Advanced Equities is no more and if Uber has to raise money to compete they have a real problem.

Currencies: “It is perfectly possible that the week will see yields moderate further and the USD resume its push lower.”

The dollar index (DXY) is down again and brings to mind the comment of one of the greatest stockpickers I've ever known, "A trend is emerging".* From FinViz, two weeks of the hourly chart:

DXY 98.95 down .48%

From FT Alphaville:

Snap AV: Your week in weakening USD
Plenty of USD notes coming in following the healthcare vote debacle, so here are some representative words from Simon Derrick at BoNYMellon as the dollar falls (against the euro, JPY and GBP) and US yields slip… a bit (with our emphasis):
Since the President’s inauguration in January, however, the relative attractiveness of US yields has faded somewhat thanks to a variety of factors including signs that concerns about inflation are quietly on the rise. The implication of this was clear enough: for the USD to resume its rally in a meaningful way (barring something truly radical happening) it would take a serious rise in yields to emerge. Given that the most likely driver of such a shift in yields would be a significant pick-up in economic growth this focused the thinking of investors on how successful the new administration would prove at pushing through promised policy changes. As a result the White House’s ability to steer though the healthcare reform bill took on a far greater significance for the currency markets than might otherwise have been expected. The logic was simple enough: The harder it looked for the Republican leadership to push through the bill then the greater the uncertainty about its ability to deliver on other campaign pledges (2) and, hence, the less the upward pressure on yields.

This thinking made itself increasingly apparent through the course of last week with yields (including those on benchmark 5-year TIPS), gold and the USD moving on the changing expectations around the expected vote of healthcare reform. In line with the USD (as well as US equities) came under pressure late on Friday as it became clear that the bill lacked the votes to pass the House of Representatives....
...MORE

*Via 2012's "Climateer Line of the Day: A Trend is Emerging Edition (UNG)
...On "A Trend is Emerging" from a 2008 post:

"A trend is emerging."

I'm sorry, private joke. One of the best securities analysts I know said that in 1999 when looking at this chart, minus the last eight years of course, and right before the stock took a sixty percent dumper. At the time, MO was up approximately "1 billion, gagillion, fafillion, shabolubalu million illion yillion..." percent over the prior twenty five years.
Chart forAltria Group Inc. (MO)


Splits: Jun 3, 1974 [2:1], Jun 1, 1979 [2:1], Apr 11, 1986 [2:1], Oct 11, 1989 [4:1], Apr 11, 1997 [3:1]
(that's Dr. Evil's demand [...Yen] in the third movie, about which Wikipedia says "This time his demand is met with simple confusion from the world leaders.")

As I said in a 2010 usage of the phrase:
*The stock is Phillip  Morris (now Altria). The move depicted is 8 cents to $25.06.
$31.42 last. 
Big MO closed at $73.17 on Friday.
900 times on the money, now that's a trend. 

Are Factor Investors Getting Paid to Take on Industry Risk?

Continuing our look at some of the more interesting aspects of factor investing.
From Morningstar:

Industry tilts appear to pay off for momentum but are not integral to the success of value and low-volatility strategies.
In the world of factor investing, industry tilts are often an afterthought. Factor investment strategies systematically target stocks with characteristics that have historically been associated with better risk-adjusted performance. But they often end up with industry weightings that differ from the market's. This article summarizes a study Morningstar conducted to evaluate whether such industry tilts contribute to the success of value, momentum, and low-volatility factor strategies, or whether they are an uncompensated source of risk. The full article is available in the Research Library on Morningstar's corporate website.

Summary
The results of this study suggest that:
  • Value and low-volatility investment strategies demonstrate persistent industry tilts, which do not significantly enhance their performance. Investors can reduce active risk without significantly hindering performance by constraining these factors' industry tilts.
  • Momentum strategies perform best when industry weightings are left unconstrained. This is because momentum's industry weightings are dynamic, allowing it to effectively capture short-term persistence in industry performance leadership.
Research Design
To assess whether an industry-relative approach to factor investing is prudent, this study investigates whether tilting toward industries with stronger value, low-volatility, and momentum characteristics provides better performance. In that vein, we constructed value, momentum, and low-volatility factor strategies applied to both individual stocks and entire industries. Each factor strategy measures 50 years of monthly returns from December 1966 through November 2016, using data from the French Data Library. The stock-level factors ignore industry membership, so they can have industry tilts that may contribute to their performance. However, comparing the performance of the stock- and industry-level factor strategies helps illustrate the impact of those industry tilts. The French Data Library sorts all U.S. stocks listed on the New York Stock Exchange, American Stock Exchange, and Nasdaq exchange into deciles at the end of June each year based on their book/price ratios from the prior year-end. We measured the stock-level value factor performance as the return difference between a market-cap-weighted portfolio of stocks in the cheapest five deciles and those in the most expensive five deciles....
...MORE

Previously:
Asness et al: "Contrarian Factor Timing is Deceptively Difficult"
"Investing: Cliff Asness Blasts Rob Arnott"  

Sunday, March 26, 2017

HBR: "Why Innovators Should Study the Rise and Fall of the Venetian Empire"

Huh.
So there I was thinking about Venice because KayYen had really nailed it with this photograph of the Grand Canal:

Merchants of Venice

lighter and brighter than Guardi or Canaletto but no less perfect an image of the Grand Canal than the ones those guys painted, when this dropped out of one of the home-version feedreaders:

https://hbr.org/resources/images/article_assets/2017/01/jan17-17-464428655-1024x576.jpg
That's "Mole with the Doges' Palace" by Luca Carlevaris, another of the Italians that couldn't resist a paintbrush, or Venice, and whose life overlapped those of the more famous painters.

The Carlevaris was used by the Harvard Business Review as the header art for:

Why Innovators Should Study the Rise and Fall of the Venetian Empire
Most organizations would be happy to last for centuries, as the Venetian Republic did. From 697 to 1797 AD, Venice’s technological acumen, geographic position, and unconventionality were interlocking advantages that allowed the Most Serene Republic to flourish. But when change comes suddenly, it can turn strengths into weaknesses and sweep away even thousand-year success stories.
Venice’s military technology and the city’s pivotal location on the main trade routes of the time gave Venice several strong, mutually reinforcing advantages.

The Arsenal, an advanced naval munitions factory that anticipated by several centuries the production-line method of manufacture, was the beating heart of the Venetian naval industry. From the thirteenth century on, the Arsenal nurtured creativity and spurred innovation and entrepreneurship in the construction of its galleys.

The city’s geographic location helped it to defend itself from both land- and sea-based invaders. This location, consisting of a series of islands in a marshy lagoon, also pushed it to develop a (then unusual) trading and moneylending economy, since there was little land to support agriculture. And its position at the top of the Adriatic Sea allowed it to become a vital trading hub, connecting the East with the West via the Mediterranean.

If, as Michael Porter wrote, competitive advantage stems from how “activities fit and reinforce one another….creating a chain that is as strong as its strongest link,” then strategic fit is something that the Venetian Republic had in spades.

But, like a lot of successful entities, Venice reached a point where it focused more on exploitation than exploration: Venetian traders followed existing paths to success. Entrepreneurs chose not to move away from traditional pathways. Established practices and preferences became more popular than exploration and speculation. Merchants and traders played the game of incremental innovation by focusing on efficiency and optimization. Determined to grow their own fortunes rapidly, they pressed their feet to the accelerator rather than charting new courses.

But toward the end of the 16th century the world was changing in ways that would make Venice less relevant. The Arsenal’s focus on galley ships made sense when the Mediterranean was the most important trading waterway. Alessandro Barbero, professor of medieval history at the University of Eastern Piedmont, in Italy, notes that the galley remained for a long time the favorite vessel of Venetian navigators. But the invention of seafaring galleons allowed countries bordering the Atlantic to set up new trade routes that did not flow through the Adriatic.

This age of exploration triggered the beginning of Venice’s decline. One huge advance in technology — ships that could survive at sea for months, even years — weakened Venice’s competitive advantage and the strategic fit of its competencies....MORE
HT: Alpha Ideas

The KayYen pic was used as the header art for the Boston Review's "Finding Ourselves in the Venetian Ghetto" with this quote as the introduction:
“We do not see things as they are; we see them as we are.”
For comparison to the photo here's Canaletto's "Entrance to the Grand Canal":

https://upload.wikimedia.org/wikipedia/commons/9/90/Canaletto_-_The_Entrance_to_the_Grand_Canal%2C_Venice_-_Google_Art_Project.jpg


Previously on Venice:
"How Venice Rigged the First, and Worst, Global Financial Crash"
The Perpetuities of Venice: Favored Investment of the Fourteenth Century 1%
"How a Medieval Friar Forever Changed Finance"
3D Printing: Apparently the Future Is To Be Found In 13th Century Venice
Another Post On Glass, This Time With "The Alchemist's Fallacy" (And Professor Nordhaus)
Goldenballs: Not For Nothing Was Jacob Fugger Known as “Jacob the Rich”
HBR: "The Hand Signals That Drove Business in Renaissance Europe"
Magicians, Mafiosos, a Missing Painting, and the Heist of a Lifetime
For Sale: Apartment In Freddie Nietzsche's (very impressive) Place In Venice

...Not bad for a nihilist 

This opulent Venetian palazzo once belonging to Friedrich Nietzsche is either too much, or simply not enough, for a nihilist of his caliber, depending on how you slice it. The German philosopher lived in the 1600-built Palazzo Berlendis—set on the Fondamente Nuove by the feet of the Mendicanti bridge on the northern border of the city—between 1880 and 1887 and penned Thus Spoke Zarathustra here....

"Who Owns Your Face?"

From The Atlantic:

Advertising companies, tech giants, data collectors, and the federal government, it turns out.
Updated on March 26 at 10:20 a.m. ET
It takes a feast of facial imagery to teach a machine how to recognize an individual person.
This is why computer scientists so often use the faces of Hollywood celebrities in their research. Tom Hanks, for example, is in so many publicly available photographs that it’s fairly easy to build a Hanks database for algorithm-training purposes.

Depending on a researcher’s needs, there are many other available databases of human faces—some featuring tens of thousands of images. These collections of faces draw from public records like mugshots, surveillance footage, news photos, Google images, and university studies.
It’s entirely possible that your face is in one of these databases. There’s no way to say for certain that it isn’t.

Your face is yours. It is a defining feature of your identity. But it’s also just another datapoint waiting to be collected. At a time when cameras are ubiquitous and individual data collection is baked into nearly every transaction a person can make, faces are increasingly up for grabs.

Data brokers already buy and sell detailed profiles that describe who you are. They track your public records and your online behavior to figure out your age, your gender, your relationship status, your exact location, how much money you make, which supermarket you shop at, and on and on and on. It’s entirely reasonable to wonder how companies are collecting and using images of you, too.

Facebook already uses facial recognition software to tag individual people in photos. Apple’s new app, Clips, recognizes individuals in the videos you take. Snap’s famous selfie filters work by mapping detailed points on individual users’ faces. (Snap says on its website that its technology doesn’t take the additional step of recognizing the faces it maps, and a spokesman told me the company does not retains images of users’ faces for any purpose.) That’s similar to how software by the Chinese startup Face++ works.  Its software maps dozens of points on a person’s face, then stores the data it collects. The idea is to be able to use facial recognition systems for keyless entry to office buildings and apartment complexes, for example. Jie Tang, an associate professor at Tsinghua University, described to MIT Technology Review how he uses his faceprint to pay for meals: “Not only can he pay for things this way, he says, but the staff in some coffee shops are now alerted by a facial recognition system when he walks in,” and they greet him by name.

It’s understandable, then, that as these technologies rapidly advance, they have become fodder for some conspiracy theories—like the unsubstantiated claim that Snap is building a secret facial recognition database with the images of people who use its popular Snapchat app.

But such conspiracies aren’t as outlandish as they’re made out to be. Experts have been warning against facial-recognition systems for decades. The F.B.I.’s latest facial recognition tools give the agency the ability to scan millions of photos of ordinary Americans. “To be clear, this is a database—or a network of databases—comprised primarily of law-abiding Americans,” said Congressman Jason Chaffetz, a Utah Republican, in a House Committee on Oversight and Government Reform hearing on Wednesday.  “Eighty percent of the photos in the F.B.I.’s facial recognition network are of non-criminal entries.” The F.B.I. is able to access images from driver’s licenses in at least 18 states, as well as millions of mugshots.

“Most people have no idea that this is happening,” said Alvaro Bedoya, the executive director of the Center on Privacy and Technology at Georgetown Law, in testimony at the hearing. “The latest generation of this technology will allow law enforcement to scan the face of every man, woman, and child walking in front of a street surveillance camera… Do you have the right to walk down the street without the government secretly scanning your face? Is it a good idea to give government so much power with so few limits?”...MORE
And relatedly, from 2012:

"Orwellian Irony in the Extreme"
https://media.reason.com/mc/ngillespie/2012_02/orwellpiccamera.jpg?h=720&w=532

Publishing Platform Medium Would Like You To Become A Member; There's Just One Catch

From The Register:

Pure Silicon Valley: Medium asks $5 a month for absolutely nothing
Think of it as being your own mini-VC without shares
Analysis 
Silicon Valley prides itself on disrupting industries – but it has bitten off more than it can chew by trying to take on an already highly competitive market suffering from major money woes.
Fancy blog platform Medium has been burning through VC money at the rate of $50m a year trying to take on the world of publishers. It has certainly succeeded in getting hits – at least within the confines of the Bay Area, where it has become the go-to site for tech musings written by unpaid people who can't be bothered to set up their own blogs. It claims 60 million monthly readers.
But the site has yet to show a cent in revenue and having publicly decried the use of ads to fund itself, it's in a bit of a tight spot. The solution? A Guardian-style membership scheme. For just $5 a month you can become a Medium member!

Before you rush to hand over your money, however, you may want to consider what you get for that $60 a year: absolutely nothing.

It's safe to say that the pitch to VCs – who have given the website $132m in the past three years – must have been better than the one given to readers for becoming a member.

"We started Medium in 2012 to create a better place to find and share important ideas that deserve to be heard," it begins. "Since then, over seven million stories have been published on Medium, influencing hundreds of millions of readers. But today, the precariousness of our media ecosystem has never been more obvious – nor has our need for depth, truth-seeking, and understanding." 
That laughing you can hear? That is every publisher and journalist since the dawn of time.

Get with the program
By insisting on standing outside the traditional publishing industry, the folks at Medium seem to have failed to notice that there is actually a degree of understanding about the future of journalism emerging.

The idea of quantity over quality is long gone. There was a period when more stories equaled more hits equaled more income, but that has long since passed. There are only two games in town right now, and they both require quality and originality of content combined with intelligent curation and editing. In other words, journalism.

There is the ad-funded model, like El Reg: we produce words that people want to read, and we let vendors run adverts alongside them. In our case it works due to a number of factors: we cover a specific niche; we dig in a little deeper; we tend to know what we're talking about; we're independently owned and thus have no corporate investors to please; and we are irreverent. Millions of readers like it. And companies like our readers.

And there is the subscription model, like The New York Times, Financial Times, Washington Post, et al. These are big respected names with huge resources that have hit on a specific model: offer a few free articles a month and then prompt for subscription. It has finally started working after a decade of hard times.

In part thanks to the election of Donald Trump, these news organizations have seen their subscriber levels jump and they are even tentatively looking at hiring more people after years of layoffs. Much more interestingly, it seems that, psychologically, people are getting used to the idea again of paying for content. It's like a switch. And once you pay for Netflix, Spotify and Amazon Prime, it seems perfectly reasonable to pay for quality news.

Both of these models share a key feature: they hire and pay professional journalists to produce content. Because journalism, like any other profession, requires a certain set of skills.

Nope 
 Medium doesn't fit in this world in any way. It has rejected the ad model, and it can't afford to do the subscription model because no one is going to pay to get access to what are basically people's blog posts – the vast majority of which are, let's be honest, pretty terrible....MORE

"U.S. charges Lithuanian man with $100 million email fraud"

Please wire $100 Million
Thank you.

From Reuters, March 21:
U.S. prosecutors have charged a Lithuanian man with engaging in an email fraud scheme in which he bilked two U.S.-based companies out of more than $100 million by posing as an Asian hardware vendor.

Evaldas Rimasauskas, 48, was arrested late last week by Lithuanian authorities, Manhattan federal prosecutors said Tuesday. Rimasauskas does not yet have legal counsel, a spokesman for the prosecutors said.

The alleged scheme is an example of a growing type of fraud called "business email compromise," in which fraudsters ask for money using emails targeted at companies that work with foreign suppliers or regularly make wire transfers.

The Federal Bureau of Investigation said last June that since October 2013, U.S. and foreign victims have made 22,143 complaints about business email compromise scams involving requests for almost $3.1 billion in transfers.

In an indictment unsealed Tuesday, prosecutors said that to carry out his scheme, which they said began around 2013 or earlier, Rimasauskas registered a company in Latvia with the same name as an Asian computer hardware manufacturer.

He then sent emails to employees of the two unnamed victim companies asking them to wire money that they actually owed to the Asian company to the sham Latvian company's accounts, prosecutors said.

The victim companies are described as a multinational technology company and a multinational social media company....MORE
Here's the Department of Justice press release and the grand jury indictment.

"Q&A With Bloomberg View's Matt Levine"

From Legal Nomads, March 17:

Thrillable Hours: Matt Levine, Financial Journalist
Welcome back to Thrillable Hours, my interview series about alternative jobs for lawyers
I first came across Matt Levine’s writing over at Dealbreaker in 2012, as I was traveling and eating. While I wasn’t wistful for my former corporate law career, I still wanted to keep up with financial news. Matt’s writing style — funny, intelligent, and thoroughly able to see the forest through the trees — was why I started reading Dealbreaker. It’s also why I moved with him to Bloomberg when he started blogging for them in 2013.
His pieces are approachable and interesting while tackling extremely complex topics. A former lawyer and finance guy, he is able to provide important background to the current news. He delights in sarcastic footnotes. And he’s even got his own Twitter bot that someone created, who is learning to talk by reading everything Matt Levine writes. You know you’ve made it when…?
I realize that not all my readers enjoy reading about credit-default swaps or Argentina’s sovereign debt saga, but I think anyone can learn from the skill of taking complex problems and dissecting them to make them less opaque. This is what Matt Taibbi is known for with US politics and the financial crisis, and why I enjoy Matt Levine’s writing regardless of where he’s employed.
His answers about jobs for lawyers, leaving the law, and advice for those who want to do the same, all below.
-Jodi
What made you decide to follow a less conventional path than typical law school graduates? Was there a particular moment that catalyzed the decision for you?
It was all pretty path-dependent for me. I went to work as a corporate lawyer in 2005, and at the time corporate lawyers all wanted to be investment bankers. (Do they still?) So after about a year and a half, a former colleague who had left to be an investment banker called and asked if I wanted a job. And I said “is it better than this job?,” and he said “it’s a little better than that job,” so I took it. And I was an investment banker for four years. I guess that is actually a pretty typical path for a law school graduate, or was in 2007.

But then I got sick of investment banking too. I had always vaguely imagined myself as a writer, without doing anything about it. And a random combination of factors — I was trying to quit banking, the financial blog Dealbreaker had a job opening, and I knew some people there — led me to fall into financial blogging. And I turned out to be okay at it, and after about two years I was hired at Bloomberg View and have been here ever since.

So I am sort of a terrible story: A lot of luck was involved in each of my career moves, and honestly the “particular moment that catalyzed the decision for me” probably occurred months after I started at Dealbreaker. I went into that job thinking “well this will be a weird experiment and maybe it will work!” And my first weeks there were just abjectly terrifying. And then after a while I was like “oh wait this kind of does work,” and it became unbelievably fun.

What do you find most fulfilling about your current job?
I get to think and write about things that I think are fun! That’s the main thing. Unlike in law and banking, I don’t really get assignments or have tasks or whatever. I just wake up and try to find things that interest me, and that I think will interest my readers. In a weird way that feels more high-pressure than my law and banking jobs: I can never fall back on just checking off a list of tasks; I have to come up with something new every day. But it’s definitely the most fulfilling part of the job.

Also having readers — knowing that strangers are interested in what I have to say — is very fulfilling. I am constantly amazed when I write something that I think will amuse only me, that appeals only to my narrow weird combination of interests, and someone will email me to say “I loved that part.” I love when I find out that important financial-industry people read my column, but I also love when random people email to say “I don’t work in finance but I read your column every day because it’s fun.” It’s always incredibly gratifying to hear....MORE, including some interesting links

What do you have to say to those who tell me lawyers can’t have fun?
That strikes me as mostly accurate, yeah.
HT: Abnormal Returns March 20 which leads off with Izabella Kaminska's piece on Starbucks' experiment in time-shifting coffee ordering.

Here's Matt's home at Bloomberg including the hit article "Bond Quotes and Performance Art" which skirts close to some of our current thinking on incorporating interpretive dance into the analysis of Brownian motion in finance.

"Customer Service Chatbots Are About to Become Frighteningly Realistic"

From MIT's Technology Review:
A startup gives chatbots and virtual assistants realistic facial expressions and the ability to read yours.
ould your banking experience be more satisfying if you could gaze into the eyes of the bank’s customer service chatbot and know it sees you frowning at your overdraft fees? Professor and entrepreneur Mark Sagar thinks so.

Sagar won two Academy Awards for novel digital animation techniques for faces used on movies including Avatar and King Kong. He’s now an associate professor at the University of Auckland, in New Zealand, and CEO of a startup called Soul Machines, which is developing expressive digital faces for customer service chatbots.

He says that will make them more useful and powerful, in the same way that meeting someone in person allows for richer communication than chatting via text. “It’s much easier to interact with a complex system in a face-to-face conversation,” says Sagar.

Soul Machines has already created an assistant avatar called Nadia for the Australian government. It’s voiced by actor Cate Blanchett and powered by IBM’s Watson software. It helps people get information about government services for the disabled. IBM has prototyped another avatar, Rachel, that helps with banking.

The movements of Soul Machines’s digital faces are produced by simulating the anatomy and mechanics of muscles and other tissues of the human face. The avatars can read the facial expressions of a person talking to them, using a device’s front-facing camera. Sagar says people talking to something that looks human are more likely to be open about their thoughts and be expressive with their own face, allowing a company to pick up information about what vexes or confuses customers....MORE, including video.
Related and quite amazing:

September 2016
Computer Generated Imagery Is Crossing the Uncanny Valley
...We’ve become pretty good at making CGI look like it’s almost real, but the real challenge is making it seem like its normal.

Japanese artists Teruyuki Ishikawa & Yuka Ishikawa — otherwise known as Telyuka — started a project in 2015 to create an extremely realistic computer-generated schoolgirl. Her name is Saya, and she has been improved on since then.

This is the 2016 version (click to enlarge):
http://cdn1.tnwcdn.com/wp-content/blogs.dir/1/files/2016/09/big1.png

And these are some pictures of the 2015 version...

...MORE

Saturday, March 25, 2017

"It’s very likely we don’t understand probabilities"

From the WaPo's Joel Achenbach:

Pit Manager Nicole Mavromatis uses a level to check the balance of a roulette wheel at Maryland Live Casino in 2013. (Photo by Linda Davidson / The Washington Post)
If there’s one thing I know absolutely, irrefutably, 100 percent for certain, it’s that people don’t understand probabilities.

This is on my mind because of March Madness, and this new feature at 538 where they not only tell you who is most likely to win but also update the probabilities as the game goes on. While watching the game on TV, you can follow the changing odds on your computer screen while you simultaneously live-tweet the event and text your friends on your smartphone. Ideally, you will do this while switching channels between CBS and TBS, except when the networks show both games on a split screen. Also you should make calls to your bookie. And your psychiatrist.

According to 538, my Gators have a 54 percent win probability Friday night. But Neil Greenberg’s fancy stats column gives the Gators a 62 percent chance of winning. Is that a contradiction? No: Just two different estimates of something innately uncertain and involving multiple metrics of imprecise significance.

That’s my guess, at least.
This shifting-probabilities gimmick at 538 reminds us that probabilities aren’t the same things as predictions. We don’t know how the probability cloud will collapse into a singular reality (sorry to go all quantum physics on you). We live in a world that at both micro and macro levels is chaotic, fluid, and fundamentally — if I may use another highly technical term — squirrelly.

Unfortunately, it’s pretty much impossible to live a normal, emotionally stable life without finding various perches of certainty, belief, faith, conviction, etc. You can’t go around in a probabilistic daze.
Evolution rewards snap judgments. Sometimes you just have to take off running. But we make mental errors all the time. For example, we typically fail to see how low-probability outcomes will become far more likely, if not a certainty, given enough opportunities. We also overestimate the extent to which our direct experience predicts future probabilities. Anecdotes mislead. So do statistical studies with very small data sets. (Here in the science pod we keep on the lookout for studies that turn out to be based on the thoughts of three guys on bar stools.)

My friend Michael Lewis has published a book, “The Undoing Project,” that explores the long collaboration of Amos Tversky and Daniel Kahneman. The Tversky-Kahneman research showed that people are not rational when it comes to probabilities. Consider the “Linda problem.” (Wikipedia has an article on this, titled the Conjunction fallacy.) Tversky and Kahneman ran an experiment in which students were given the characteristics and background of someone named Linda (majored in philosophy, concerned about justice) and then were asked to identify which sentence most likely describes her. “Linda is a bank teller and is active in the feminist movement” was considered by a majority of students to be more probable than “Linda is a bank teller” — even though you can clearly see that the first has to be a subset of, and thus less probable than, the second.

We struggle with probabilities embedded in a low-confidence framework — such as a snow forecast. Earlier this month we prepared for a big snowstorm here on the East Coast. Early computer modeling showed it might be historic — with one model showing 20 inches for the District. Our ace weather bloggers at the Capital Weather Gang wrote a series of posts in which they clearly explained that there were many uncertainties. Then the storm hit and the heaviest snow was out in the middle of nowhere and not in the big cities along the East Coast, and, sure enough, some people complained bitterly that the forecast was wrong. My colleagues acknowledged that it wasn’t a perfect forecast, but was pretty darn good, and in fact I think they did a bang-up job, as always.

Marshall Shepherd published a blog post this week defending the forecast community in general:
Hurricane track forecasts by NOAA’s National Hurricane Center (see below) have significantly improved in the last several decades, and tornado warning lead-times are on the order of 13 minutes. Even with such positive metrics, forecasts will never be perfect. There will be challenges with uncertainty, probabilistic forecasts, inadequate data, coarse model resolution, and non-linearities associated with trying to predict how a fluid on a rotating body changes in time....
...MORE

Because uncertainty multiplies over time we end up with track forecasts that look like this:

https://upload.wikimedia.org/wikipedia/commons/4/42/09L_2011_5day.gif

And are called the Cone of Uncertainty.