A riddle, wrapped in a mystery, inside an enigma

A score or more were formed.
Since suspended in limbo; to be unlocked.
Discovery it seems demands a chivalrous round table.
If it calls you, come.

Zechariah’s vision was of a land without walls.
Decimated they were in favour of flames.
If ever the fire is quenched.

Seldom are tributes or tolls enough.
Adroit is the honourable man.
Supplication is rejected.
No wait, the eyes are open!

Only he who does not feel his own worth will pass.
Whatever worth is worth.
You seek what?
Path to riches or enlightenment?

History is a summation of that story.
Only a leap from the bear’s back will prove one’s worth.
Ever the covenant and the locality is relevant.
Not the toll.

Insurmountable one man thought he was.
Xerxes was his name. A king.
Beguiled by the dream of empire.
Encouraged to act first in the game of games.

Checkmate is always a hubristic outcome.
Kings of Kings are stumped by this match.
Ozymandias in the sands of time forgotten.
Nought but a leg remaining.

So the cycle begins again.
Anacyclosis; rule of one to the few to the many.
Quorums to keep power and interpretation in check.
Under the auspices of a crest and a watchword. Analysed.

Entrusted seekers, find your way.
She tamed a bear. Her cry was Rawa.
The clan is the location.
? We await.

NYE Fails UST Surprise!

It’s New Year’s Eve and nobody should really be thinking about things like UST settlement fails. But… the following should be logged for 2015 posterity reasons. So here goes.

News comes our way by way of Fred Sommers, a self declared “ops guy” consulting on financial markets operational risk, that DTCC reported US Treasury fails-to-deliver of US$136.7bn on Dec 29, 2015, which is a record level since April 1 2010 when DTCC started to report US Treasury fails-to-deliver.  He adds that the period Dec 14 through Dec 29 has been particularly volatile.

He also says:

The last time US Treasuries were close to this level were in Jun-July 2015 just prior to the Oct 15th 2015 upheaval described by Jamie Dimon  as a “once in 3-billion year” event.

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What’s causing the spike in fails?

Well, it could just be good old fashioned year-end reporting positioning which is in no way connected to junk bond upheaval. But then again, it could also be related to this:

Fed awards $277.45 billion in one-day reverse repos

The Federal Reserve on Wednesday awarded $277.45 billion of one-day fixed-rate reverse repurchase agreements to 82 bidders at an interest rate of 0.25 percent, the New York Fed said on its website.

The reverse repurchase agreement program is seen as a critical policy tool for the Fed to drain money from the financial system in an effort to achieve its interest rate objectives.

How so? I’m not sure really. Fails usually come about because of basic operational problems (people forgetting to pick up phones etc) or when there’s a collateral short-squeeze going on. In the latter case, the cost of failing to deliver is sometimes seen as a less expensive option than buying in or borrowing securities needed to make good on the obligation. Financial players basically don’t want to overpay to plug what is perceived to be a temporary shortfall. In some cases it also amounts to free financing because every day you fail to deliver an owed security, you get to use that cash for something else.

The Fed’s reverse repo operations, however, are designed to absorb cash from the system in exchange for positive yielding collateral securities. So how does this relate to fails? Well, if money market funds are pulling cash out of the financial system (which pays them zero to negative rates for their cash due to a shortage of safe collateral) and are insteadtransferring the cash to the Fed at a positive yield (cheaper securities basically), they are also technically handing back USTs to the banking sector.If banks’ cash needs are pressing, however, they may not be inclined to return the cash.

But this doesn’t make sense because the banking sector has plenty of liquidity these days. If anything it’s the asset management industry that is short of liquidity.

In other words, I have no idea what’s going on. But perhaps it is related to the hunt for yield and the junk bond switch. After all, if you’re an asset manager with a lot of USTs, it would make sense to enter into repo arrangements with MMFs, because this would amount to extremely cheap financing for riskier (and better yielding) positions elsewhere. If these MMFs now want their cash back, however, that involves liquidating the risk positions or raising cash elsewhere. Failing to deliver securities might help with that.

It must be said, however, this isn’t really a satisfactory explanation. Consequently, if anyone’s got any better theories, I’m all ears!

Tech rentiers 

I was going to start this post by saying I almost never disagree with anything Bloomberg’s Matt Levine writes. But then I realised that would be wrong. I never disagree with him.

Until today that is.

(Although, to be fair, the disagreement is more of a supplementary pedantic comment than a disagreement outright. I’m being annoying.)

To cut to the chase I think Levine may have missed a trick in his Monday note commenting on how hedge funds/banks are increasingly focused on poaching talented techies rather than traditional trader types for their industry.

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G.K. Chesterton’s fence and the consequences of lowering barriers

“Don’t ever take a fence down until you know the reason it was
put up.” – G.K. Chesterton.

Screen Shot 2015-11-14 at 13.11.22Technologists and free-marketeers are obsessed with removing barriers: Barriers to entry. Frictions. Levees. Borders. All in the name of frictionless transactions.

But barriers were often put upScreen Shot 2015-11-14 at 13.00.27 for a reason.

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Not only that, barriers are and always have been closely tied to civilisation, from the earliest fortifications of Uruk in Sumer to the Great Wall of China.

These are man-made frictions designed to protect those working in accordance with shared values, from having the product of their economic collaboration pilfered and stolen. Barriers and silos in that sense are intimately tied to state citizenship. Status rei publicæ, “condition (or existence) of the republic.”

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Silicon Valley utopia ain’t gonna happen

Over the last two decades, most of my adult life, I’ve watched as the world has grown more interconnected than ever, fuelled by changes in information technology which have almost universally been treated as a force for good. This interconnection was supposed to improve scaling, transparency, productivity and bring western peace and prosperity to all.

We were supposed to be living in a utopian Tomorrowland by now, with the economic problem completely solved.

None of this has happened.

Instead of scaling, we’ve seen descaling because individuals need to adopt more jobs, more skills, more crafts just to get by — meaning professionalism is being lost. As well as our day jobs, for example, we are now also being asked to be hoteliers, cab drivers, propagandists, writers, advertisers, administrators, promoters and renters of all our possessions.

Instead of transparency, we’ve seen the emergence of echo chambers, filter bubbles, encrypted comms, noise pollution, single-interest groups, propaganda, misinformation, internet brigandage and the burying of real news in the cacophony of low-base (advertising saturated) media output.

Instead of productivity, we’ve seen working factories shut down, output stall, public resources be pulled, health services be cut, inequality rise, output be redirected to luxury goods, corporate taxes be dodged and energy be burned for no real good reason at all.

Instead of peace and prosperity, we’ve seen the world become fragmented, divided, politically charged, cult-minded, intolerant, enraged, hateful, hurtful, spiteful and malevolent — now with the added advantage of all this hate being zapped directly into our consciousness 24/7 via the power of our mobile phone or computer laptop.

Instead of coming together, political systems have been fragmenting, with no consensus anywhere, because we can’t agree on anything. Self-interest dictates the news agenda entirely. Trust is being dismantled. We are becoming less cooperative not more.

Perhaps we’ve neglected the obvious. Information technology is not and never has been a panacea or a cure-all for social ails. It is simply a tool, which is as easily co-opted by the dark and malevolent of heart as it is by the good.

For every exponential “good” information technology can create, an equal and opposite “ungood” can be exponentially created too. 

The ungoods include the empowerment of terrorism, propaganda and scamming, to hacking, organised crime, corrpuption and — most important of all, this being an information tool — the radicalisation of young minds.

Why have so many of us, then, been duped by the technocratic elite that an app or a digital user experience is a cure-all for the social ails we still had before this stuff exploded, or equal in value to the creation of something of real worth, like a hospital, a school (where children also learn how to socially interact with each other in a way that teaches them to respect life and differences, rather than disrespect life by being isolated in some bedroom whilst being radicalised by the internet?), infrastructure or even factories, service businesses and leisure environments?

Why did no-one warn us of the consequences? Why did we not think, like the Amish, that technology probably needs to be tested for its social impact before it is thoughtlessly rolled out? Where were the health warnings?

Over the internet the human spirit is reduced to an algorithm. Nobody knows their customer anymore. And that means nobody knows the soul behind the command terminal either. Instead, we are dehumanised to datasets of binary inputs and outputs — to be averaged, generalised and gamed.

If we don’t deal with each other face to face, especially in trade, love and service, we forget what it means to physically hurt, destroy or upset another soul in a physical space. Without that anguish, we lose our morality. We lose our humanity. We lose the understanding of the consequences of our actions. We lose our civil society.

The greatest crimes of society emerged from the wanton dehumanisation of individuals by groups who saw themselves as above the subsets they were dehumanising. If the internet is dehumanising all our relationships, with even the best of heart being provoked into actions they would not usually take, just imagine how it’s empowering the bad guys who already had little to no respect for their fellow man?

The worst of it is, in the process of this IT-fuelled anti-social transformation, we’ve not only handed over power, wealth and prestige to some of the least equipped individuals in the world to deal with the social chaos that comes in its wake but convinced ourselves I fear — in almost a religious puritanical sense — that our lives are somehow being improved by these people?

More so, that depriving ourselves of our socially-rich activities and interactions and replacing them with voluntary self-incarceration (most of us spend most of our life plugged into terminals, concentrating in an almost trance-like prayer state at mobile phones) physical passivity, isolationism, infertility, smaller or shared abodes, downsized lives in the physical realm justified by expanded lives in the digital realm, and real food being replaced with the banality of Soylent, is somehow a thing to be championed, encouraged and celebrated!

The above sounds like a pseudo communistic autocratic nightmare to me. Furthermore, how many of the tech gods are known for their people skills or for being actually nice people?

The day the tech gods start driving Uber cars, renting their own mansion rooms out on Airbnb, renting their yachts to refugees not to mention start paying taxes, is the day I believe the products they’re creating are tools for the empowerment of all.

Information technology is not a panacea. In fact, because it errs towards the dehumanisation of individuals, it is probably much more dangerous than we ever assumed.

Indeed, it may just be that we’ve made a major accounting error. We’ve failed to recognise that for every digital asset we create and overvalue on the stock-market there is a digital liability/risk, which offsets much of that valuation — but which we have yet to figure out a way to account for properly.

Which is why I suspect the economic problem can’t be solved until technology combines with societal morality, and we begin to respect and honour every human person, whomever they may be, rather than treat them as commoditised entries in a spreadsheet which can be streamlined, disrespected or gamed for the sake of oneupmanship, cheap labour and profit.

You can’t synthesise trust in a system that has no underlying morality by simply removing humans from the process. The humans are the process. They’re also the point of the process.

Capacity utilization, self driving cars and the California Enron precedent

Here’s Tyler Cowen disagreeing with me on selfdriving cars and Uber. He’s an economist and I’m not, so you are probably better off listening to him.

To the contrary my views are mostly influenced by the work of Ida Tarbell, a journalist, on Standard Oil  – because I see many similarities in what Uber is doing and what Rockefeller did to try and standardise and organise oil production and outcompete through established rebates with railways. The oil and throughout  are us – the passengers – the railways are the Uber drivers, and the rebates are the 20% commission  Uber gets from directing passengers with its app to the railways. Except, unlike the railways, the amount of transport infrastructure is not fixed.

Just to be clear, I am arguing that for an organisation like Uber owning a fleet of selfdriving cars is not as attractive as the current model which outsources all the risk, ownership, investment, care and maintenance to driver contractors. 

I am not arguing against the deployment of self-driving cars by some other means, especially private or public. Nor am I arguing against the technology. So all the critics who charged into Twitter assaults based on the idea I was saying selfdriving cars are unviable or unlikely to appeal to the market try actually reading the post first.

If I was to argue against selfdriving cars outright I would probably point out that there is personal value in not having the “system” know your whereabouts all the time or your daily travel habits. And that there seems to be a mass hypocrisy between techies who argue pro anonymous Bitcoin and against state control but in favour of passing all the data to one as yet unaccountable private company. But that’s another story.

If Uber was to acquire a selfdriving fleet it would need to structure itself more like an MLP. Or source some form of long-term equity capital. Think of the Kinder Morgan set up. Capex would be dependent on throughput needs, which itself is linked to demand for transportation, equivalent to demand for oil. You can have a lot of demand for oil but if the cost of getting it from A to B is higher than the competition’s, unless you dominate the infrastructure with some form of monopoly, you will lose marketshare.  

It is essential in that case to dominate the infrastructure but also to be sure you get your rebate irrespective of volume. The Rockefeller rebates we know in hindsight were bad deals for the railways.

Most importanly, If you own the infrastructure, guaranteeing a 20 per cent margin for yourself (or your investors) in pure unadulterated profit as a percentage of throughput creates a potentially unfundable liability to yourself because you are exposed to total income from throughput being insufficient to cover your maintenance costs. In that scenario your infrastructure decays more quickly than you can pay the investors’ off.

Cars depreciate more quickly than oil railways.

The issue then becomes: will the rental yield cover the depreciation and maintenance cost and create a positive yield for capital investors, and beat the cost capital? Also how long would it hypothetically take to pay off the capital investment with that yield? 

More pertinently, would the value of the car depreciate to zero before you had a chance to earn back the capital investment?

In other words, if it costs me $10k to buy a vehicle but it takes me five years to earn $10k with that capital — even if those earnings are tax deductible up until that point — the investment is only worthwhile if in five years time the car hasn’t blown up, still has a positive value above zero in the market and I can still keep earning with it.

So it’s all about the depreciation.

If your earnings are £1000 a week, but the cost of maintenance and annualized operating expenses (fuel, insurance and cleaning, MOT, mechanic failures, unexpected costs) is £700 a week, you have a measly £300 for yourself, takeaway the 20 per cent commission to the operating company and you end up with £240. But you still have to pay the capital debt off. So if you are paying a loan off with capital that’s another £50 give or take. That leaves you with just under £200.

You are hugely sensitive to hours worked, km on the road and fuel costs. You are likely to compensate for low earnings by working more hours, being on call and or immediately responding to surge pricing. But ultimately if the demand isn’t there, there isn’t much you can do. Offering free rides or paying people to ride is not an option. The only option is more personal use of the car at a cost to yourself. That’s not really any option for an Uber fleet.

Looking at the forums the amount earned on a net basis is something in the region of £175-£300 depending on the cost of your car. 

The higher end cars are likely to have much higher capital costs, and most people will have taken three year lease deals not five year bank loans (I would imagine) which for the really high end cars would potentially diminish the yield if demand for high end cars is low because people mostly use the service mostly for the cost advantage. There’s also competition exposure. The more cars that enter the market the lower your earnings. 

And as we mentioned above, Uber as a driver contractor company greatly benefits from the fact that a lot of drivers use personal vehicles for both business and leisure (which means if they’ve acquired the car specifically for the job they save on the personal car expenditure, and/or if thy had the car already benefit from transforming an existing personal asset into a business asset, like airbnb for landlords).

So, given that Uber’s unicorn state is linked directly to it getting its 20% cut no matter what, being asset light, not having barriers to entry for new drivers, not providing fixed salaries or employee benefits, not abiding by regulations and having no capital responsible (ie not having to suffer depreciation or market value adjustments on the capital stock, something the driver absorbs), with drivers, it can naturally afford to out-compete regular taxi firms, for whom such fixed costs determine the margin over the breakeven rate they need.  Uber bears no risk while the employees bear all the risk. Like Opec it’s interested in outright marketshare. Whatever the market demand for taxis is at any given moment, it matters not if there is a glut of drivers or not, it will get its cut of active demand providing it is charging less than the competition. Within its network it’s up to the drivers to self regulate themselves. If there are too many cars at any time to achieve a breakeven rate, some drivers would have to work longer hours, others would have to pull out. others would try to game the market or cheat the system. Ditch rides that take them too much out of the way. Ditch rides that are too short. Not pay for the car park at heathrow. Et cetera.

A Self driving car fleet would instead add all that risk to Uber’s balance sheet, including funding costs, maintenance costs, depreciation and market value risk. In that environment Uber would not be able to guarantee a fixed margin for itself as it does now. 

The upside is that Uber would be able to control supply and could regulate it exactly the same way Saudi Arabia regulates oil production: by withholding supply from the market when prices are too low, filling its boots when the price is well over break-even. But whereas that doubles up as consumer surplus for a driver (a car not in work mode is a car in lesisure mode) that’s a capital opportunity cost for a corporation. 

Think about it. 

Uber — like a refinery — would not have an incentive to supply the market unless the margin was worthwhile. Spare capacity/low utilization would be directly connected to demand. The break-even rate would determine everything. If Uber was committed to a 20 per cent margin that would mean the market would be purposely under supplied until the margin was available. The cost would be capacity utilization. That’s what normal backwardation is all about in commodity markets. It would be the rolling fleet replacement cost (the cost of the cars) which would dictate the price of rides + Uber tax, not supply and demand of cars.

So my point is simply that it’s naive to assume that the average price of a selfdriving fleet would be all that cheaper than a human driven fleet.

Yes there’s that £175 human cost that is “saved”. But that human is probably providing at least £100 worth of self absorbed voluntary maintenance upkeep, personal touches and supervision against damage, and personal use subsidy –all of which would be lost. In addition, you would need to hire additional specialists currently not priced into the market: cyber hacking specialists, risk security types, regulatory compliance officials, CCTV, servers, legal counsel for when the self driving car kills someone. And so on. You might also end up paying more for maintenance because of the public utility abuse factor associated with unsupervised transport. And you would be disadvantaging yourself with respect of independence and emergency resilience.

Yes you could also get compensatory revenue from advertising, but you would also need to find somewhere to store the cars when they were idle and not in use. Also part of the luxury feel would be gone. And a mass public transport vehicle like a bus or train would still probably be cheaper for most people.

Finally, you would have a lot of exposure to one-way flow. 

Boris bikes have to be routinely repositioned to ensure even distribution in the system, because people flows are not equal. Selfdriving cars could reposition themselves but at the cost of fuel and utilization. A lot of them would be driving around half empty all the time to get to where the demand is. Otherwise, if you are going to rest them wherever they end up until the moment the demand reappears again, you’d be better off just having personal cars.

Again, I am not saying consumers won’t want to own self driving cars independently. That I think they will want for sure. I’m saying an Uber selfdriving fleet would need to find extremely forgiving equity investors, free investment capital from government and a continuous source of new capital (of the ponzi-Esque variety) to make the business work.

Additional notes

  • Privately owned self driving vehicles may end up more of a curse than a blessing by doubling traffic rather than reducing it, because the car would have to drop you off and then head off somewhere else (home).
  • As for the notion the car could be earning independently whilst you are at work. Well, this makes more sense than Uber owning the fleet directly for sure (since the personal utility subsidizes some of the capital costs and depreciation). But again, whether they do so will all depend on the breakeven rate based on the cost of maintenance.
  • If the world’s fleet of parked cars are theoretically all available for rental at a touch of a button through Uber you can be darn sure the cost will be exactly equivalent to the breakeven cost — if not more, so as to cover for the effective 20% “Uber tax”. 
  • That breakeven cost will have to account for fuel, maintenance, one-way flow, the information network that supports those cars, cyber specialists, the transaction cost and the risk of the fluctuating commodity value of these cars vis a vis supply and demand — not to mention non fungibility and segregation costs emanating from those people who refuse to lend out their cars or who dictate they must get the exact model back at the end of the day not the cheapest to deliver like-for-like.
  • I suspect it would only be profitable for the worst quality most fungible cars to rent themselves out with Uber.
  • Much more likely it won’t be Uber matching its own inventory with demand, but a bilateral market wherein if I desperately need a cab I “hail” to see what price the nearest car next to me is offering and make a bid. The newer and nicer the car the more expensive it will be and the older, the cheaper. Just like the Treausry bond market you would have the special market and the standard market. 
  • For the consumer this would be a bad deal because you would go from a market of fixed prices and predictable standards to haggle prices and variable quality. And I’m not convinced there’s a role for Uber in either of those markets, unless Uber pivots into being a selfdriving car broker dealer. But that’s an entirely different model which requires high levels of capital to fund inventory and spare capacity with if it’s too avoid California style supply disruptions and periods of rolling car blackouts as there were in the days of Enron. (A.k.a. The last time a market which was naturally short and which shoud have remained highly regulated and publicly managed got the benefit of a badly capitalised free-market broker dealer service.)

Too much efficiency?

Testing some thoughts. Nothing concrete. Mostly inspired by a frequent question I ask myself: do I actually add value to the economy as a journalist/thinker/writer?

My growing concern — in a nod to David Graeber’s larger bureacracy thesis – is that probably no, we journalists don’t add all that much value at all. At least not compared to the much more useful people in society. And not compared to what we used to before the signal to noise ratio started to be drowned out by the abundance of information.

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I was under the impression that bearer bonds were a thing of the past. 

And yet, as I discovered this week, not only does the BoE issue foreign currency debt to finance its foreign currency reserves (that’s weird right?) it does so in the form of securities that can be held in bearer form. And it’s been doing so since 2006.

It’s not a huge amount of money – about $6 billion, so almost nothing in central bank terms — but it is curious.

For one thing, foreign exchange reserves are usually the result of operations that provide central banks with an FX position on the asset side of the balance sheet. Here you are the central bank picking up foreign exchange as part of your daily operations — which are usually held in the account of a bank within the monetary system (or at least with a subsidiary) of the foreign currency unit you are holding or in some cases directly with the foreign central bank — and you have two choices. You can keep holding the FX in a bank account or you can invest it in a money-like debt security. If you are feeling especially exotic, you might buy some private debt or equity.

Nevertheless, if you choose the second option you go to the market and acquire said securities. You don’t issue them yourself.

And either way the FX has been financed by the issuance of your own sterling liabilities. The FX exchange exposure/effect is something you probably desire, as in the case of the SNB.

But here we have the BoE (not the UK Treasury) issuing dollar securities to raise dollars for FX operations on the liability side, which expose the central bank to FX risk it can’t necessarily control without guaranteed access to Fed swap lines (which of course it does now have) in the event the dollar appreciates.

But to top things off, the notes have a bearer option.

You can read all about the bearer terms and conditions in the prospectus. Lots of references to common safe keepers.

I raise this mainly because it’s curious for a BoE official to call for currency digitization when there are still bearer notes in circulation (issued in another currency no less!)

A bearer security doesn’t require the same level of registration as a registered security. I can’t figure out from the terms and conditions whether you can hold them without offering any identity information at all — the way you used to be able to in the old days — (surely that would be impossible because of AML and KYC reasons?). But even if they did it’s a bit like buying London houses with offshore companies and then selling the companies when you want to shift the houses without paying any stamp duty or capital gains tax. Or maybe not. I don’t know. 

Do other central banks do this?