Don’t Panic

Snip20160327_1OK, so the other week everyone who was anyone was banging on about the AlphaGo programme from The Google’s DeepMind that can, so far, beat humans at Go. Baruch’s understanding is that this was a different type of AI than we’ve seen with Deep Blue and Watson kicking human butt at chess and Jeopardy. Both of those deployed the main trump card that computers have against human minds — the ability to scan, prioritise, sort and rank huge databases extremely rapidly to come up with statistically likely solutions to well defined questions. All they needed to defeat the humans were mega amounts of computer processing, clever coders, a ludic fallacy and a large, cold room to keep the servers in.

DeepMind, so far as I am told, uses something more akin to analogy in its core processing, with a feedback loop that keeps the focus on a narrowly defined and therefore manageable number of moves. Words Baruch pretends to understand but probably doesn’t, like “neural networks” and “deep learning”have been bandied about. To play Go well, you clearly have to be able to program smart. That said, AlphaGo doesn’t seem terribly parsimonious in its use of processing grunt: a “mere” 2000 CPUs, as well as 280 high end GPUs using what we experts* call parallel processing, so perhaps it’s still just the typical thing of throwing Moore’s Law at something until you have enough computing power to make it work eventually. But it probably isn’t, in which case chapeau, DeepMind.

So overall, it’s mildly interesting, and at a more mercenary level, grist to Baruch’s mill. If the advances made by DeepMind bring us one step closer to the massive disruption digital automation is going to wreak on business and society, then I’m going to be quids in. My current project is about providing investors with an opportunity to take advantage of those transformations, so this can only encourage more people to want to invest when my idea finally goes live. Yay!

We all need to hedge against the coming AI whirlwind, and this is Baruch’s plan. However, his biggest worry is resistance is futile — that even his job as a fund manager is going be replaceable by machines, like all of yours will be. So imagine his horror when he saw this (HT Alphaville) in Wired from back in January.

LAST WEEK, BEN Goertzel and his company, Aidyia, turned on a hedge fund that makes all stock trades using artificial intelligence—no human intervention required.

Oh bollocks, he thought.

But at times like this I think of Douglas Adams, and have learned not to panic.

Continue reading “Don’t Panic”

Chinese plans for world technology domination foiled again. For now.


It all seems to be going wrong for Chinese-American relations when it comes to technology. Late last month Tsinghua University’s purchase of a minority stake in Western Digital was referred to CFUIS, the panel determining if global M&A involves a US national interest. This, contra lots of commentary at the time, wasn’t business as usual, rather the US government drawing a very thick red line around China and saying no nationally significant technology, in this case semiconductor memory, crosses this. And this week the US kicked the feelings of the Chinese People in the goolies by sticking it to ZTE, one of their national tech champions, for selling stuff to supposedly Bad Countries like Iran.

The net effect of this in the near term is bad news for much of the listed semiconductor equity in the US, as a potential purchaser of last resort is removed. Longer term, no-one knows, not even Baruch.

Continue reading “Chinese plans for world technology domination foiled again. For now.”

At times like this I’m happy I’m poor


Baruch, dear readers, has no money.

Don’t feel sorry for him. He’s rich in many other ways and is just trying to milk your sympathy. All he really means is at this very moment he doesn’t run any money. His brilliant strategic idea for reinventing himself is in progress, and boy, let him tell you, he has to beat the billionaires off with a stick. But as of yet no deal has been signed, so there’s no capital to deploy or protect. This means he can view the current market carnage with a certain amount of distance, mixed with a blob of sympathy for those less fortunate than he, i.e. the ones in the market right now.

As of now, US futures are predicting a bloody morning in the US (often the harbinger of a sunnier afternoon, however). What does Baruch think? At times like this, thoughts turn darker. Here are a few observations, in no particular order:

  • WTF is up with the VIX? Of all the indicators it’s the one I like best to time whooshy markets, and it’s not just not spiking, it’s narcoleptic. That’s a bit scary, telling me the selling is a bit more orderly than it should be. Probably not a good sign.
  • The fact that the growthiest of the growth stocks are being attacked isn’t great either. Growth is supposed to outperform in a rising rate environment. What we saw on Friday in Cloudy/Big Data-y growth looked terminal multiple related; if earning estimates in your out years didn’t get crushed, the multiple they’re willing to put on the out years just died. Tableau (DATA), Splunk (SPLK) and Salesforce (CRM) have been among the “new tech” darlings, and the reaction to DATA’s guide has been cruel, -50% or so, with widespread collateral damage. That one may take a few years to get back to its previous highs if it ever does*. 3 things going on in this space I think. Macro is biting, the Amazon, Azure and other cloud channels gaining more leverage and offering their own-label competing products, and in the case of Tableau and maybe a few others, IT managers have made the products available to desks, but are the people at the desks really using them? Migration might be slower than people think. Meanwhile, DATA’s management point to low visibility and onboarding too many lower productivity sales dudes. Could be true too.
  • Another way of saying “low visibility”, by the way, is “we haven’t got any sales at the moment”. Like “extending sales cycles” (or “they’re not buying anything anymore”) it’s one of those wonderful euphemisms we see so often in the business world to make something unpleasant sound nice. My favourite is still “upgrading staff” (or “firing people”).

Continue reading “At times like this I’m happy I’m poor”

Don’t call it a comeback. . . well, actually

Drum roll. . .

Baruch is back!! Yes, he has been out of commission these past few years. You may have been annoyed by his lack of any farewell, or any information as to what he was doing or why he had quit blogging. More likely you probably in fact don’t care, but I’m going to pretend that you do, OK?

So why DID he quit blogging? Was his true identity finally discovered by his Swiss gnome employer? Did he accept a secret mission from the Mossad that led him to disappear under deep cover for years? Was he in prison? Did he drop dead? Will he stop asking these pitiful rhetorical questions?

No, no, no, no, and yes: to be honest I got a bit messed up, and took a short break from the world of the markets. When I came back, despite the fact the markets hadn’t actually stopped, the urge to blog had dried up, the energy devoted to other desires, like watching Game of Thrones and most recently, playing World of Tanks. I also thought at the time, hang on, why am I telling all these barbarians* my amazing ideas and thoughts? I’m just showing off. Isn’t it better to keep them to myself? That’s what Spinoza would do. I’m mostly wrong anyway! It was strange, but oddly the most natural thing to do was just to stop this . . . hobby, I guess, which I had previously got lots of pleasure out of.

So then, why start again? Well that’s easy: I’m on the dole and haven’t got anything better to do. Baruch parted ways with his employer about a month and a bit ago in a difference of opinion about the appropriate period to measure performance. Admittedly that performance hadn’t been very good for a while, but there are good reasons for that, too, which I can go into later if you like. It’s OK, Baruch doesn’t consider himself the victim of a conspiracy.

The other thing is, I sort of feel I have something to say again. Over the past few years I’ve been thinking more and more about the long term role of technology in business, society and the economy, and what it means for investing. I’ve got some ideas about that. Yet another thing is, I can actually write substantially about these things, name names if you like, without fear of letting something slip I shouldn’t. I no longer have investors to inadvertently betray. I can’t get fired again, can I? And thirdly, it’s not beyond the bounds of possibility that someone will see these pearls of wisdom, Baruch’s Great Thoughts, and think, aye aye, there’s a clever chap, and give him a huge wodge of cash for him to do something or other with. Spend it on more cars, hopefully: in his absence from your screens, Baruch developed an unhealthy interest in unnecessarily powerful yet beautiful German sports cars. White ones. And they don’t pay for themselves.

So what’s been going on since I was “away”? Well things got better! And now seem to be getting worse. We’ve had arguably a bubble in bonds and may still be in it, Apple got boring, Amazon is now Skynet, China lost its mojo, crude is so cheap we could wash in it, and maybe above all the world has been swimming in free money for ages without any apparent increase in inflation, or growth, tiny dragons, or any of the things people actually predicted.

The Old Times Gang is still there though: Tadas plugging away at Abnormal Returns, Josh Brown still downtown but moving uptown, Felix ecoblogging after a fashion and no doubt recovering after another strenuous Davos. The Epicurean Dealmaker, Michael Jordan-like, keeps on retiring. And Tyler Durden, whoever he may be now, is as brilliantly batshit as ever. If anything HAS actually changed in the eco-blog firmament, Baruch will probably find out as his re-entry into blogging continues but feel free to point out what he’s missed in the comments. Hmmm. I wonder if there will BE any comments?

*That’s you, by the way. “Ultimi barbarorum” was uttered by Spinoza in the vocative tense.

Buy and hold no more?

Baruch has long held that the academic finance industry has produced nothing of lasting worth. Or at least nothing that has helped anyone make money consistently, which is, after all most of the point of the exercise, isn’t it? In fact the impact of the academics on markets has probably been on balance pernicious, contributing to overconfidence, instability and perdiodic crisis as much as it has shed light on the inner workings of anything. I’m thinking of course of Black and Scholes, portfolio insurance, hard Efficient Market theories and the large number of ” new paradigms” we have had in the past 30 years, which invariably ended in disastrous crashes, with yet looser money in their wake and another round of inevitable “new paradigms”. All of them, I guarantee you, had the solid imprimatur of some finance professor somewhere or other.

It is not all hopeless, however, because the academic study of finance has also produced Andrew Lo, whose “adaptive market hypothesis” seems to Baruch to sum up better than most how things actually work. Insofar as Baruch understands it, the general idea borrows from biology and behavioural economics. It is that markets are crucibles for evolution and adaptation, like an ecosystem, and while they can be efficient they are so only periodically and then only in bits. Strategies that work well will only do so for a time; only punters able to identify changes in the environment rapidly enough and (more difficult perhaps given the current animus against “style drift”) able to adapt their style of investment to profit, or at least not blow up, will survive. That, by the way, survival, appears to be the name of the game in the adaptive market; sticking around long enough to make it to retirement. It’s not an easy place to hang out in. As Spinoza was fond of saying, we also know this from experience to be true.

The point is, I always watch out for something from Lo and read it avidly. I was therefore very surprised to find myself disagreeing with something he was saying in an interview with CNN Money (HT I am sure either Josh or Tadas, like everything else), which was that the increased use and democratisation of technology in financial markets has led to higher levels of volatility and instability that make “buy and hold” no longer viable:

Buy-and-hold doesn’t work anymore. The volatility is too significant. Almost any asset can suddenly become much more risky. Buying into a mutual fund and holding it for 10 years is no longer going to deliver the same kind of expected return that we saw over the course of the last seven decades, simply because of the nature of financial markets and how complex it’s gotten.

Baruch worries that Lo, while likely spectacularly right in general with his highly convincing theory, may be wrong in the particular here.  Continue reading “Buy and hold no more?”

You don’t WANT to be making iPhones, really

Last week’s hairshirt NYT piece got a lot of attention — it was AR’s lead link on Sunday and pointed at by Josh, Reformed Broker,  — bemoaning “America’s inability” to manufacture or assemble iPhones and other electronic gizmos. However, it entirely missed the point, thinks Baruch. It is always en vogue to bemoan one’s own nation’s manufacturing competitiveness, in the case of Southern Europe, possibly fairly. But most of the time it ignores the great dynamic of economic development, that as economies increase in wealth, intellectual property and sophistication, pure manufacturing becomes less and less attractive an activity. America has the most sophisticated economy on the planet; the idea that it is bad that people who participate in it no longer fit bits of plastic together is a wrong one.

The other point that the article makes rings truer, that making iPhones isn’t much fun:

. . . Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

Assembling iPhones is a repetitive and gruelling manual job. It is hard on the eyes, on the stamina and probably on the spirit. The majority of the workers at the Foxconn (also known as Hon Hai) plant are young, resilient recent immigrants to the city, for whom the alternative to doing this is working on the family smallholding or some other menial job in the Chinese boondocks. They don’t need engineering degrees, though do need skills and motivations I and probably a lot of Americans don’t have, e.g. being able to put small parts together in exactly the same way, again and again for hours and hours all the while standing up, Don Rumsfeld like. Being in a position where you can be woken up at 12.30 am to do a 12 hour shift fortified only with a biscuit and a cup of tea is not something I would wish on my fellow countrymen — at least not all of them.

I don’t think the NYT seriously wants their fellow Americans to work like this either (and by the way, since when was a foreman’s job on an assembly line “middle class”?). It’s the sort of thing workers in developed countries stopped doing since the 1970s and 1980s, and trades unions have been fighting against for decades before. We shouldn’t go back.

Don’t get me wrong — I don’t disparage the necessity of mind-numbing manual work, I certainly don’t look down on those who do it, nor hate the bosses who oversee them. It is a fact of life. However, it has to be for something worthwhile, however, and in large part I think it is in the case of Foxconn and Apple. For the Turkish and Greek Gastarbeiter in Europe in the 1950s and 1960s factory manual labour was a stepping stone to better things, and similarly, one hopes the Chinese building iPhones will be able to save some money to take back home or stay in the city to start a business, get married and educate some (well, typically only one) kids, or, at worst, buy an xBox. You have to look at the alternatives open to the people doing the work; for a Chinese late teen or 20-something the more realistic alternative to the Foxconn plant is a life of rural toil, tedium and poverty. For the average US teen it would be college (and some debt) and/or relatively bearable job in a service industry, possibly cutting hair. The American shouldn’t have to compete with his Chinese counterpart — the menu of his or her life choices is so much richer.

The other idea implicit in the article I have a problem with is that iPhones and the physical location of the plants that supply them have disproportionally favoured the Chinese economy over the US. Well, when it comes to assembly, the amount that stays in China is an infinitesimal fraction of the total added value of an iPhone. Foxconn earns something like a 5% gross margin and a 2-3% EBIT margin on its assembly business and for business from Apple it might even be less. Indeed, some analysts think Foxconn only earns a positive margin because it can throw in a few components of its own into the deal. Its notable that no-one else has ever been able to take any of Apple’s assembly business from Foxconn. Many have tried and lost money, such are the competitive razor thin margin this business operates at.

Compare that to the 30% to 50% gross margins (and 20-30% EBIT) a semiconductor supplier earns selling a chip into the iPhone — almost all the semi content in the iPhone is from US companies, and by no means not all the chips are fabbed in China, although I agree with the article that many are. I’m not even talking about the great margins that a software company selling code into the iPhone foodchain makes, nor the insanely great margins Apple operates at, just the hardware foodchain. Which part of that foodchain does the NYT really want American companies to be at?

My final comment is that the article ignores the flipside of the equation, the dual nature of employees like Eric Saragoza, the mid-level Apple engineer who  got laid off in 2002. Scant comfort for him of course, but he is also a consumer. The huge benefit of the constant price down in technology is that consumers get to be able to buy amazing, life changing products at increasingly affordable prices, while incentivising the companies who make them with great margins. iPhones and iPads have changed my life moderately, but have transformed the lives of millions of people in a more profound way. This is what technology does, and I don’t know another way of ensuring that it happens. Very often the ability to make something new and useful for significantly less is just as impactful as the ability to make that new and useful thing in the first place — it opens the door to new business models, to new uses, to things the inventors may not have dreamed of. Look at Tim Berners-Lee and the internet*. Benefits like these are immeasurable and general to all, and you only notice what happened later on, while Eric Saragoza’s job loss was immediate, specific, and personal. It makes a good, heart rending story. “Everything is slowly getting better for most everyone” should make a good story too, but in practice will be less affecting, and get fewer links.

Baruch is not an American and the decline of the middle class there is not his uppermost concern; in fact he cares as much about the Chinese factory workers toiling away at Foxconn. He thinks the dynamics of what the NYT is writing about is actually fantastic for almost everyone, and actually strengthens the global middle class by adding more people to it, in China. This is wholly a Good Thing, for all the problems we actually should be concerned about, like war, poverty, the environment, healthcare, education and the personal outcomes of ourselves and our fellow humans, all these things are mitigated by expanding the middle class, because only people with some disposable wealth of time and income are able to think about them.

* You think he ever thought he would end up using his invention for finding Angry Birds cheats like the rest of us? Of course not.



Do let’s be optimistic . . . even if we don’t feel like it


Tis (or, by the time I finish this post, ’twas) the season for pundits to give specific predictions for 2012 and a more pointless exercise has yet to be devised. Baruch isn’t going to waste your time doing this, for various reasons. The main one is that Baruch has long been convinced he is almost always wrong about almost everything. His only solace (and it is a big one*) is that everyone else is always wrong as well, and unlike him they don’t know it.

This year prediction seems a lot more difficult anyway. If Baruch is at all representative of bien pensant investor opinion the overriding emotion among practitioners today is a lack of confidence in anything, especially themselves. This is because almost without exception everyone traded like an idiot in 2011, both on the hedge fund side, where “slightly down” is the new “up”, and on the side of benchmarked long only funds. As you may know, Baruch is a professional investor and helps run one of these latter things. Looking at his peer group he is amazed, despite a mild underperformance, to find himself firmly in the top quartile in YTD relative returns. Despite this, he feels like a schmuck. How much worse must the average PM have fared, he asks himself. Just why has everyone done so badly this year?

Baruch has some ideas about why this is; a lot of it can be put down to the narrative of the year and investor positioning.  Overall, the majority of the active management community were extremely badly positioned for the key moves in the market in the back half of 2011. They were mostly long for the big August swoon associated with the US credit rating cut, and many compounded this by adding exposure into the decline too early — catching falling knives, in the parlance. Having finally understood the appalling ramifications of the European debt crisis, investors were nice and short, or in cash, for the quick but steep October rally that brought the major indices almost back up to the point at which they had broken down back again in August. Shellshocked, with what seemed had seemed a decent year now in tatters, all they were able to do in November and December was curl up in a foetal position, to derisk, and hope the kicking stopped.

A time of derisking, by the way, is a terrible time for those who are not derisking to make money. It means PMs selling positions that they like, and buying the ones that they hate. If everyone is doing this it makes for the market of Bizzarro World, where down is up and up is down. Good stocks, at best, make no traction, while bad stocks are likely to squeeze. November and December were marked by this worst of enviroments, what Baruch calls “high amplitude chop”. This had the effect on putting the kibosh on the few players left who still had any profits, and who had thus been less inclined (the fools) to join the mass huddle.

By the end of 2011, then, the performance-led derisking must have been largely complete, and at least some investors, if not the majority of them, are probably looking at trying their luck in a new year, with slates wiped clean, and having another go at earning those management fees again. Indeed the last datapoint in 2011 from ISI, who tracks these things, had the gross at hedge funds (a measure of how much of their capital they have deployed in short and long positions) at the same level as June 2008 — ie very low, crisis levels. Not at all what you would expect at the end of a year in which the S&P was only flat.

Just off that then, it would seem that maybe we don’t have to worry too much, and we could have a return to something approaching a normal environment where active management works again. In fact it is necessary to be mostly optimistic in this business, as a general rule. But then again I suspect I am merely trying to reassure myself because while people may be underinvested, there is also a very high degree of nervousness out there. It won’t take much to bring us back to derisk mode again, and if 2012 is another chop-filled  year like 2011 for active managers, well the only people who are going to be happy are the indexers. And they’re the enemy.

I would like to end the blogpost right there, and not talk about the things which are actively making me worried, such as $200bn in dodgy European sovereign paper to roll over, the apparent Chinese slowdown, nasty commodity trends and record high corporate margins etc etc, because thinking about these things makes me stressed out.

Happily, others have done that better than me**. So I sign off and wish my reader(s) a very happy and prosperous new year.

* knowing that whatever thesis you have in your head is likely to be wrong makes it much easier to discard it when it gets falsified, or when you think of something better. Knowing also that you are really quite thick makes it harder to worry about looking stupid (why live a lie?), and more money is lost trying not to look stupid than in any thing else you are likely to do in the stockmarket.

** Baruch is not sure whether The Interloper makes him want to retire from blogging or want to blog a lot more. Either way, it is grand he is around to be read. If he wants a hand on Euro Telcos he can drop me a line.