Everything is Awesome (for Lego Collectors)!

LEGO, sometimes referred to as the Apple of Toys, is one of the most popular toys in the world. Some fun facts: the plural of LEGO is LEGO and the name is derived from the Danish word leg godt, meaning "play well." The 83 years old company also happens to be the world's largest producer of rubber wheels, making more tires per year than Bridgestone, Michelin, Goodyear, etc.! 

Well, now there's another reason to be interested in LEGO (if that was even necessary). They apparently make pretty good investments, too! That's the finding of a study by Victoria Dobrynskaya and Julia Kishilova: LEGO - The Toy of Smart Investors. LEGO are collected by thousands of adults and has a thriving secondary market. The authors tracked the returns of 2,322 sets over 18 years and found that they had an average return of 18.5% p.a., with a standard deviation of 35%. The authors then constructed a LEGO price index from a hedonic regression of coefficients. The LEGO index outperformed large stocks, bonds, gold, and alternative investments in the sample period 1987–2015, yielding an average return of at least 11% (though LEGO underperformed the CRSP index consisting of all stocks in the NYSE, AMEX and NASDAQ exchanges by about 100 bps p.a.). 

Source: Dobrynskaya and Kishilova (2018).

They also found that LEGO returns were not significantly exposed to market, value, momentum, and volatility risk factors. Only the Fama–French size factor demonstrated significance, suggesting that LEGO investments perform similarly to small stocks. The LEGO return index had a correlation of just 13% with the S&P 500 and exhibited a positive skew (0.7). The uncorrelated nature of the LEGO market is reflected in its strong performance through the "dotcom" bubble and Global Financial Crisis.

The main reason for such high returns on the secondary market is diminishing supply over time. LEGO releases new sets each year and retires existing ones periodically. This sets ups interesting pricing dynamics. In the study sample, the returns on individual sets varied from −53.61% to 613.28% p.a. (with the average return of 18.5% p.a., as noted earlier). Very large sets, those with 1200+ pieces, and small sets, those with <340 pieces tended to perform better. Returns also varied dramatically by theme. Out of 44 themes identified by the authors, the 5 best performing were: Ideas, seasonal, superheroes, Minecraft and Friends (averaging 50% returns p.a.); the 5 worst were: Simpsons, Prince of Persia, factory, TNMNT, and space (averaging 2% returns p.a.).

         Source: Dobrynskaya and Kishilova (2018).          

                    

   

                                                                                        Source: Dobrynskaya and Kishilova (2018).

So, from now on always buy two sets of LEGO. One for the kids (or grownups) to play with and one for the investment! Who knows that new set could be the new Lego Millennium Falcon which retailed for $500 in 2007, and today sells for $9,000 on eBay.

How Safe is Your Password?

Using an easy-to-remember password is convenient but risky. And if people have to choose...well, they generally choose convenience. According to Statista, 123456, picture1, password, 111111 and 123123 were the world's most common passwords in 2020; all of which could be cracked in less than a second by bots. However, as Statista's Katherina Buchholz notes, even little tweaks can make passwords a lot more robust: "adding even one upper case letter to a password can already dramatically alter its potential. In the case of an 8-character password, it can now be broken in 22 minutes instead of instantaneously in one second...A 12-character password with one uppercase letter, one number and one symbol is almost unbreakable, taking a computer 34,000 years to crack."

How? Combinations and permutations. There are 26 lower case letters in the English alphabet. A password of eight characters has 26^8 or ~209 billion possible combinations. Adding the uppercase, we already arrive at 52^8 or ~53.5 trillion combinations. With the numbers (0-9) in there, it’s 62^8 or 218 trillion combinations. Symbols add another great potential for security, but since only the handful displayed on computer keyboards are convenient to use, this ups the number of combinations once more to around 90^8 or 430 trillion combinations.

If you're still wondering how much of an effort you need to make, the below graphic provides a useful convenience-risk guide.

Also, if you can see your password from this weighted list of the world's most common ones, it really is time to change to something else.

Jaws of Life?

Nearly 50 years after they first terrorized the folks at Amity Islands and got their own week-long TV programming block on Discovery...are sharks becoming our allies? A new study in Nature Communications, reported by the Daily Beast, suggests shark proteins can act as antibodies against COVID and its variants. According to the report, researchers at the University of Wisconsin-Madison ("UWM") have discovered a protein unique to sharks that is small and nimble enough to "get into nooks and crannies" of Covid-19's spiky structure that human antibodies cannot, which allows them to recognize coronavirus proteins more effectively than our own antibodies. As a result, they are better able to neutralize the COVID-19 virus. The proteins, called VNARs, are produced by shark immune systems naturally and are about one-tenth of the size of human antibodies. 

That's promising news with Delta, Omicron and other variants possibly on the way. Oh Jaws...frenemies?

Squid Game: South Dakota Edition

Teachers in South Dakota competed in a "Dash for Cash" game that was reminiscent of the mega-hit Netflix show. Perhaps that was the point, life imitating art. The teachers, wearing hockey helmets, "crawled into the pile of cash, frantically stuffing the bills into their shirts as an arena of spectators hollered and cheered until every dollar was snatched up." 

According to Kelo, the Sioux Falls Stampede, a local hockey team, hosted the event using money donated by CU Mortgage Direct, a Sioux Falls lender (of course!). It was billed as an opportunity for teachers to gather money for their classroom needs, with the rousing tagline: “put it in their shirt, pants, wherever... they can take as much money as they can grab during the time that we have during the intermission.”

A clip of the event went viral over the weekend and critics said the image of teachers on their hands and knees, scrambling for low-denomination bills, was “dehumanizing” and even “dystopian,” especially as teachers are paid relatively small salaries in South Dakota. In fact, according to a recent report from the National Education Association, South Dakota teachers in the 2019-20 fiscal year earned an average annual salary of about $49,000, behind only Mississippi. The state ranked 38th in terms of per-student spending, having spent about $10,800 per student in the fall term of that year...Are you not entertained?

Time's Person of the Year: Emperor Muskimus

Time's Person of the Year honors, like the magazine itself, doesn't carry nearly as much cachet as it used to, except maybe to one person. Still, be it tradition or nostalgia, the PoY edition does manage to garner a disproportionate amount of media attention, like the US News & World Report's college rankings. Time's purported criteria for PoY is “the person or persons who most affected the news and our lives, for good or ill, and embodied what was important about the year.” But you gotta sell magazines too. And so, in keeping with their annual buzzy-but-not-really-meeting-their-own-criteria choices, this year Time went with retail trading folk hero, SNL guest host, and noted EV evangelist, Elon Musk.

Time helpfully lays out its exhaustive methodology for the choice of Musk, the world's richest man and future ruler of Mars: 

"An army of devotees hangs on his every utterance. He dreams of Mars as he bestrides Earth, square-jawed and indomitable...He tosses satellites into orbit and harnesses the sun; he drives a car he created that uses no gas and barely needs a driver. With a flick of his finger, the stock market soars or swoons." But most importantly because "Lately, Elon Musk also likes to live-tweet his poops"...Hmmm. But please continue...“Just dropping some friends off at the pool,” the 50-year-old zillionaire informed his 66 million Twitter followers on the evening of Nov. 29, having previously advised that at least half his tweets were “made on a porcelain throne.” After an interval—21 minutes, if you must know—an update: “Splish splash.” Cool Time, you're so hip; maybe Elon will buy you now.

Ok, ok it's still something to be proud of (we're posting about it, aren't we?). Almost up there with when a budding multi-millionaire Elon got a chance to pitch Tony Stark all those years ago.

Bitcoin: Safe-haven or Fool's Gold?

U.S. equities had its worst day in a year on Black Friday, down 2.3%. Bitcoin ("BTC") fell even more, down over 7% during the day. BTC is many things to many people, from an instrument of world peace to a source financial instability. For enthusiastic investors, BTC promises not only to be a wonderful returning asset but also an important portfolio diversifier, a safe-haven asset that is a potential alternative to gold. Hmm, okay...so BTC fans have big expectations! True, in years past, when BTC was an obscure crypto-thingy interesting only to techno-geeks, it was largely uncorrelated to public equities. But as BTC has become mainstream, its volatility (always high) and correlation to broader markets have increased as well. Consider that in 2019, BTC exhibited a beta of -0.28 to the S&P 500; in 2021, its beta has risen to +1.83!

                                    Source: Yahoo Finance, Mantabye

But what really highlights BTC's increasing correlation with public equities is the growing dichotomy of the cryptocurrency's performance on days the market is up versus when it is down, as shown in the up/down capture chart below. Over the past three years, the S&P 500 has been up on 320 days or 58% of the time; the positive days are roughly equally distributed across each year. In 2019, BTC was, on average, positive when the market was negative and captured roughly 50% of the market's upside on positive days. In 2021 so far, BTC has on average underperformed the S&P 500 on market down days and outperformed on market up days, consistent with its growing beta of ~2x. 

                                   Source: Yahoo Finance, Mantabye

BTC's seeming change from a diversifying asset to a levered equity bet is best reflected during large market moves, defined as +/-1% days. The S&P 500 had 115/85 of them, respectively, over the last three years. As shown below, BTC has gone from exhibiting characteristics of a safe-haven asset in 2019 to becoming the go-to "risk-on" asset in 2021. And it's not just BTC. Ethereum, the second most popular cryptocurrency, exhibits an 80%+ correlation to BTC and displays similar dynamics. (Together, Bitcoin (50%) and Ethereum (25%) make up 75% of the $2 trillion crypto market, i.e., basically the whole market) By contrast, gold continues to be a source of diversification in periods of stress (if not a great source of returns). As they say, all that glitters is not gold... 

                                  Source: Yahoo Finance, Mantabye

                                  Source: Yahoo Finance, Mantabye

Winter is Coming (Again)

Last November we wrote about how bad the Covid pandemic in the U.S. could become once winter arrived...and that was before we had vaccines. Well, we got vaccines in 2021, plenty of them (at least here in the U.S). Yet, the number of Covid deaths in 2021 has already surpassed that of 2020, with 5 more weeks to go. In 2020, there were 327,027 Covid-related deaths, according to Worldometer. As of Nov 24, 2021 there were already 428,215 Covid deaths or 58,188 more. 

Looking at the chart below, we can see a surge in deaths in the colder months between Oct and Mar; roughly 45% of all U.S. Covid deaths happened in those six months. With the rapid uptake in vaccinations in the early months of 2021, deaths fells precipitously in Q2. But the onset of the more contagious Delta variant, lower adherence to social distancing and masking, and the plateauing of vaccination rates, all contributed to a significant increase in deaths in the Q3 and Q4. In total 798,242 Americans have died due to the virus since January 2020.

                          Source: worldometer, Mantabye. *As of Nov 24, 2021.

To put those numbers in context, according to the Peterson KFF Health System Tracker, "COVID-19 was the third leading cause of death across most of 2020, but in December 2020 and early 2021, the illness surged and briefly became the number one leading cause of death in the U.S., far surpassing even cancer and heart disease deaths in those months." Historically, heart disease and cancer have averaged around 600K-650K deaths a year, Covid is averaging over 400K (click chart to enlarge)...and winter is coming, once more!

 

The Return of Greenspan's Conundrum and a Market Crash?

Back in 2005, then Fed Chair Alan Greenspan expressed frustration that despite hiking the Fed’s target rate six times, by a total of 150 basis points, long-term interest rates barely budged. He called it a "conundrum." (Years later the Fed's own research would provide evidence of the tenuous connection between the federal fund rates and long-term yields). 

Well, it's important because not long after in 2006 the yield curve inverted and not long after that the global financial system crashed. As Cullen Roche of the Pragmatic Capitalist notes the conditions today seem eerily familiar:

• Prices are rising across the board at an uncomfortable pace
• The Fed is getting worried about all of this and has started discussing potential rate hikes
• The long end of the curve has barely budged

However, back in 2005, the benchmark 10-year Treasury yield was hovering around 5%, today it's at 1.5%. As Roche notes, if the Fed starts raising rates they don’t have the same 5% of wriggle room before the curve starts to invert. "They have barely any room at all." 

As of now the bond market is strongly signaling that it thinks “inflation is transitory.” To use the gambling analogy to financial markets (which seems apropos), the bond market is the casino...and the "house" always wins (well, almost always). So the Fed is in a precarious position of having to choose between saving the financial markets (which is not in its mandate, but you know, the "wealth effect") and controlling inflation (which is a part of its dual mandate). Sure, sure this time it's different; after all, in the mid-2000s there was a massive housing bubble...but only in hindsight. Could the same not be said about a corporate debt bubble today?

Regardless, it's a fascinating exercise for portfolio managers. Inflation and the potential Fed hikes should be bad for bonds. Yet, the dangers of an ensuing bear market will likely cause fixed income assets to surge! Quite the conundrum? So, do you allocate 60/40 to stocks and bonds or 40/60 or even 20/80? Perhaps it's time for gold to finally shine again. 

BRIC By BRIC

In 2001, Goldman Sachs economist Jim O'Neill coined the acronym BRICs to represent the four major emerging market nations, Brazil, Russia, India and China, that he predicted would drive global growth and transform the international economic order. (The full report is here.) The idea soon took off, leading to an investment and business charge into the BRICs that catapulted O'Neill from head economist to chairman of GSAM. Two decades on, how have O'Neill's predictions fared?

From an economics perspective, it's been a mixed bag. China has soared to become the second biggest economy in the world. India has climbed, while Brazil and Russia have stagnated after a decade of strong growth, as shown below (GDPs in current USD; click to enlarge). In 2001, Brazil, Russia, India and China were 2.2%, 1.2%, 1.9% and 5.3% of global GDP, respectively. By 2020, Brazil and Russia were still around 2.4% and 2.5% of world GDP, respectively; India had risen to 4.3% of global GDP; but China...had shot up to a remarkable 24.3% of global GDP from $1.3 trillion to $14.7 trillion. Over the past two decades, the world's economy grew from $20.5 trillion to $60.5 trillion and China was responsible for nearly 40% of that increase!  

                                 Source: Bloomberg, World Bank

                                         Source: World Bank, Mantabye

                                            Source: Mantabye 

But what has been the result from investors' perspective? Were all the billions flowing into the BRICs, as a result of O'Neill's report, a good investment? Based on returns of the individual countries' MSCI indices...the answer is (a qualified) yes, as shown below. (MSCI ACWI represents MSCI's benchmark All Country World Index and MSCI EAFE represents Europe, Australia and Far East) 

                                            Source: MSCI family of indices, Mantabye. Returns range: Nov 2001-Oct 2021

Since the GS report was published in November 2001, the BRICs have all outperformed the U.S. and global equities. But all of the outperformance came in the first 10 years. Over the past decade, following the Global Finance Crisis, each of the BRICs substantially underperformed the U.S. and global equities. Brazil has especially struggled in the past 10 years, losing investors 4% per year. Even Chinese equities have generated only half the gains as U.S. equities. Perhaps that's an opportunity...now that U.S. equities are at elevated valuations, some of the BRICs may once again be attractive.

One of These Things is Not Like the Others

Inflation is dominating headlines around the world...except in Japan. While most OECD countries are experiencing the biggest surge in inflation in decades, Japan continues to struggle with deflation. In the U.S. the Consumer Price Index ("CPI") gained 6.2% y-o-y in Oct, the highest increase in over 30 years. The U.S., U.K. and other major OECD economies have now averaged a 2.5% y-o-y increase in CPI over the past twelve months; Japan just -0.5%.

                                  Source: OECD.Stat, Mantabye

                                   

Inflation in moderation is good for the economy, but too much or too little it hurts economic growth. Japan has been fighting deflation ever since its economic bubble burst in the 1990s. Over that time Japan has attacked the problem with innovative policies, including "using negative interest rates to encourage spending and injecting money into the economy through large-scale asset purchases, a policy known as quantitative easing." But nothing has really worked. Economists believe a combination of self-fulfilling expectations of lower prices, Japan’s aging population, globalization, and technology have worked to worked to keep demand and costs down. It's part of the secular stagnation thesis, popular among prominent economists. The big worry, even a few quarters ago, was that the U.S. and Europe and would also struggle with the same forces. And they may yet do so, but for right now one of these things is not like the others. 

Who Killed Malcolm X?

That's still a mystery. But new evidence shows that two of the three persons actually convicted of doing so were innocent. Inspired by the Netflix documentary of the same name, the Manhattan DA--Cyrus R. Vance, Jr.--is set to exonerate Muhammad A. Aziz, 83, and Khalil Islam (who died in 2009), who along with Mujahid Abdul Halim, were convicted of killing the the charismatic civil rights leader in 1965. Vance acknowledged that Aziz and Islam did not get a fair trial and plans to ask a judge to vacate the convictions on Thursday. Both men have consistently denied being involved in the murder. Halim has confessed to being one of the three gunmen who killed Malcolm X, but testified that neither Aziz nor Islam were involved in one of the most important political assassinations in American history. Both Aziz and Islam served more than two decades in prison for the crime.

Profits, What's That?

Chartr has great data and charts. In light of Rivian's massive IPO, this one, based on work by University of Florida professor Jay Ritter (aka "Mr. IPO"), seems very relevant:

It's probably just a coincidence that the last time only 20% of IPOs consisted profitable companies was in the 1999-2000 period. Naturally, it's different this time.

Bezos and Musk Bring Fight Back to Earth

Elon and Jeff are not just vying for supremacy in space (if that weren't enough!), they both want to take over transportation on earth too. Electric vehicles ("EV") are all the rage (at least among investors) and Telsa is the $1 trillion colossal in the space (no pun intended). Musk's company is more than three times bigger than Toyota by market capitalization, even though Telsa sells only about 5% of the cars per year that Toyota does. Yes, yes, it's all about growth...but still...there are limits? There were 56 million cars sold worldwide in 2020, 3 million were EVs, Telsa sold 500K of those, and it is worth more than all those other car manufacturers combined! 

Well, Bezos has certainly taken notice. After all of Musk's snarky tweets and jokes, Bezos has hit back with him own EV-maker Rivian, that went public on Wednesday in the largest share sales since Facebook in 2012. Sort of...Amazon owns 20% of Rivan, and Bezos maintains a 10% ownership of Amazon (Musk owns 17% of Telsa). At one point in the trading day Rivian was worth $100 billion, more than Ford or General Motors, even though the company had delivered just 53 vehicles, so far, in 2021. Why not? It's electric, and it's being funded by Amazon, err Bezos. Rivian is 10% the size of Tesla by market cap even though (based on full-year 2021 projections) it sells about 0.2% of the cars as Telsa. Makes sense.

The only question is which one would you buy? And if you're keeping score Elon is ahead...

Covid-19 is Partisan Too

And why not? In the U.S. everything these days is either Left or Right. Why should a virus infecting the world be different when it come wrecking havoc here? Even the solutions are political. The NY Times' David Leonhardt has great piece highlighting the large gap in vaccination rates between Democrat-leaning areas and Republican-leaning areas of the country. He writes "the political divide over vaccinations is so large that almost every reliably blue state now has a higher vaccination rate than almost every reliably red state." That pattern further extends to the county-level of each state. And that's led to significantly higher deaths among Republicans:

Why is this happening? It's predictably about conspiracy theories and "own the left." But even conspiracy minded right-wing pundits are beginning to question their side's rejection of vaccines..."In a country where elections are decided on razor-thin margins, does it not benefit one side if their opponents simply drop dead?" Maybe the easiest way to own Liberals is to stay healthy and vote?

The Man Who Solved the Market?

Gregory Zuckerman's 2019 book of the same name sought to provide a look behind the curtains of Jim's Simon's Renaissance Technologies, the most successful (and secretive) hedge fund of all time. Well, sort of...While how RenTec makes money is as much a mystery at the end of the book as it is at the start, Zuckerman provides a good background into the key personalities, investment philosophy, and the scope of RenTec's massive engineering infrastructure that has been critical to its success. 

Renaissance was founded in the early 1980s by Simons, a highly respected mathematician, successful NSA code-breaker and university administrator who left academia in his '40s to try his hand at this finance thing, drawn by...what else?...MONEY! The Firm became a pioneer in using mathematical and scientific techniques to identify hidden patterns in the market. And its flagship fund, Medallion, has been phenomenally, wildly, crazily successful--a veritable money machine!!! How successful? Since its inception in 1988, Medallion has generated annualized net returns of 39%. Effectively doubling investors' money every two years! By comparison, the S&P 500 has returned just 10% per year over the same period. The average hedge fund, represented by benchmark HFRI Fund-weighted Composite, has returned 9%, as shown below:

                                            Source: Gregory Zuckerman, newtraderu.com, HFR

Just as importantly, Medallion generated those returns with a negative beta to the S&P 500, generating 42% of alpha per year. Its returns were not just spectacular but they were uncorrelated to the broader market. In fact, the Fund's best years were in periods of the worst dislocations for stocks: 2000 (+99%), 2008 (+82%), 2020 (+76%). 

                                            Source: Mantabye.com

Mind, you Medallion's 39% annualized net returns are after its hefty 5% management and 44% incentive fees. On a gross basis, Medallion has generated 66% annualized returns. To put that in dollar context, Medallion, which has $10 billion of assets, has produced over $126 billion of gross trading profits for investors (mostly Renaissance employees). It has generated $8 billion of management fees and $51 billion of performance fees for Jim Simons and other shareholders.  

No one knows exactly how Medallion makes so much money. Probably only a few people at Renaissance fully know either. Conceptually, Medallion utilizes statistical arbitrage, exploiting very short-term deviations of historical relationships between assets (think trading horizons of minutes and hours). Betting that these relationships will mean-revert, Medallion uses significant leverage to amplify gains. According to the book, Renaissance is only looking to be right 51% of the time, but that's more than enough. Trading thousands of times a day, those gains add up, especially when multiplied by leverage.

So, does Medallion single-handedly prove that markets really are not efficient? Did Simons really solve the market? Or is Medallion the exception that proves the rule? Perhaps it's the latter. Medallion's consistency, or persistence, is so remarkable precisely because of its rarity. Moreover, there are trade-offs. Short-term trading is generally capacity constrained. That's why Renaissance has capped the size of Medallion at $10 billion and distributes profits annually. (It's now effectively the world's most attractive bond! Producing 39% of yield per year!) Renaissance has tried to scale its business by attempting to develop long-term trading strategies that have less capacity issues. Alas, the Firm's other funds, like RIEF, RIFF or RIDA have not able been able to produce anything close. In fact, REIF, RenTec's longer-term equity trading strategy (think trading horizons of weeks and months) has actually underperformed the S&P 500, since inception in 2006 (by 2% per year): 

So, in the end Simons and Renaissance's many brilliant researchers have figured how to stay just ahead of everyone else, and that's all they need to do. This video basically narrates Zuckerman's whole book in 20 minutes (with some deepfake images from Mr. Robot). Or you can hear RenTech's story from Simons himself:

SNL Rookie Nails DJT!

Saturday Night Live, introduced a new Donald Trump and it is, by far,  the best impersonation of the former President yet. New cast member James Austin Johnson debuted his "the Donald" in this week's cold open and what a Trump it was. Johnson was able to mick Trump's mannerisms, discursive rambling and even the tone of his voice almost to perfection. It is scarily accurate! The rookie cast member is becoming an integral part of the show this season, playing Biden and Trump.

Salah Demolishes Man U

Mohamad Salah scored three and assisted one as Liverpool gave Manchester United a 5-0 drubbing at Old Trafford yesterday. Salah is now top scorer in the EPL with 10 goals from 9 matches, three ahead of Jamie Vardy. He's also joint second in assists with 5. And scored in ten consecutive games, a Liverpool record. Will they extend his contract, now?!

The China Equity Paradox

In an earlier post we looked at Japan's boom & bust cycle. But just as Japan's economy was starting to falter, another Asian economy was taking its place. According to the World Bank the size of the Chinese economy in 1990 was just $847 billion, by the end of the century it was $2.2 trillion, and at the end of 2020 it was $11.8 trillion, the second biggest economy in the world after the U.S. Between 2000 and 2020, China's economy increased over 5.3x. Over the same period the U.S. economy grew just 2.0x. Yet the CSI 300 and its U.S. equivalent the S&P 500 had the same overall returns over that period, as shown below: 

While there are many factors and nuances behind why this may be so, one line of economic thinking believes the overarching reasons have to do with (i) relative strength of labor in China and (ii) higher corporate taxes (there vs here); with the former being by far the stronger driver. While median real wages in the U.S. has remained largely stagnant over the past two decades, wage increases in China has moved largely in lock-step with GDP growth. This brings us to the famous "elephant" chart from Branko Milanovic, a former lead economist at the World Bank and author of Global Inequality:A New Approach for the Age of Globalization,  covering the period between 1988 and 2008.

How labor and owners of capital fared generally over those two decades of globalization depended on where you were on the "elephant." Branko labels 3 points (A,B,C) as of particular importance. He explains that 9/10 people at point A are from Asian economies, mainly China and India. While 7/10 people at point B are from the older, mature OECD countries. Finally, point C consists of the global 1% or the biggest owners of capital, more than half of whom were in the U.S.

So, labor took in a larger share of corporate profits in China than in the U.S., where the lion's share of gains accrued to shareholders. So despite significantly higher growth in China, returns to equity were the same in both countries. Is it more complicated than that? Of course, but it is an interesting argument. Marx's revenge? 

Note, the above chart ended in 2008. It may very well be that China has moved closer to point B now more than a decade later. In which case, future equity returns could be better even as growth slows as the same labor-capital dynamics play out. But that's probably what the Communist Party is at pains to avoid.   

Banksy's Shredded Painting Sells for $25 Million

Banksy set a new personal record this week, with the British street artist’s self-destructing piece “Love is in the Bin” selling for a record $25.4 million at a Sotheby’s auction in London on Thursday. The sale comes almost three years ago to the day the piece became a viral sensation when the original work, “Girl With Balloon,” became “the first artwork in history to have been created live during an auction.” After selling for a then-record $1.4 million, the artwork was sliced when a hidden shredder was activated. Like this:

And increased the work's value by $24 million! Nice. It was a just the type of insubordinate and audacious act that would have made Thomas Crown proud. Oh, Sinnerman...

The Nobel Peace Prize Goes to Maria Ressa and Dmitry Muratov

The most high-profile (and controversial) Nobel Prize is the one for peace. The 2021 Peace Prize was awarded by the Nobel Assembly to journalists Maria Ressa and Dmitry Muratov "for their efforts to safeguard freedom of expression, which is a precondition for democracy and lasting peace." 

Ressa has been a journalist in Asia for more than 30 years. She is CEO and executive editor of the Philippines-based online news organization Rappler.com. She graduated from Princeton in 1986 with a bachelor of arts in English.

Muratov is a veteran Russian journalist and founding editor of the fiercely independent Novaya Gazeta newspaper known for hard-hitting investigative work. He attended Kuibyshev State University and served in the Soviet military, before working in journalism.

Apple Watch Meet Smart Toilet

A Stanford study finds that a disease-detecting “precision health” toilet can sense multiple signs of illness through automated urine and stool analysis.

Conceived by a group of Stanford University scientists, led by Sanjiv Gambhir, professor and chair of radiology at Stanford Medical School, the "smart" toilet is an ordinary commode fitted with motion sensing technology to deploy different tests that can detect a range of disease markers in stool and urine, including colorectal or urologic cancers. Samples are captured on video and then processed "by a set of algorithms that can distinguish normal urodynamics (flow rate, stream time and total volume, among other parameters) and stool consistencies from those that are unhealthy." The toilet can also deploy uranalysis strips to measure features such as white blood cell count, blood contamination, and protein levels that can be used to identify a range of infections, and even kidney disease and bladder cancer. The toilet automatically stores data extracted from any sample to a secure, cloud-based system, which in the future could potentially be integrated into physicians' record-keeping system for easy access.

The reports notes that the smart toilet "falls into a category of technology known as continuous health monitoring, which encompasses wearables like smart watches...Gambhir envisions the smart toilet as part of the average home bathroom." And since everyone uses the toilet, it enhances its value as disease-detecting devise. If 40% of the world's population has access to flush toilets that's a potential customer base of at least 2.8 billion people.

But in most homes more than one person typically uses the same toilet. How the does "smart" toilet differentiate between users? Well, it has a built-in identification system. As Gambhir notes, “the whole point is to provide precise, individualized health feedback, so we needed to make sure the toilet could discern between users.” But how exactly does it do that? Initially, Gambhir's team used a flush lever with a fingerprint scanner, but soon realized, however, that wasn't enough. "What if one person uses the toilet, but someone else flushes it? Or what if the toilet is of the auto-flush variety?" To solve the problem the team added a small scanner that images your...butthole. It turns out, like fingerprints, everyone also has a unique anal print. A combination of finger and anal prints should make it nearly impossible to results get mixed up. But don't worry, no one, including your doctor will see the scans. They will be simple used a recognition marker by the system to match users to their data. Bottom's up! 

Then and Now: Japan Edition

A generation ago, Japan ruled the financial world and Americans were panicking about Japan Inc. taking over the U.S. Hollywood made movies about it; books were written about it, some that were even turned into movies; pop stars even sang about it. The mania reached its apogee when Mitsubishi purchased the iconic Rockefeller Center. And why not? The Japanese economy and its financial markets had experienced an astonishing and unprecedented 40-year growth, that seemed destined to continue. Ah, but how times have changed. 

In 1989, Japan accounted for 45% of the global stock market by market cap, with the benchmark Nikkei 225 Index growing 900% just between 1982 and 1989; the real estate value of just one single park in Tokyo was worth more than all of the real estate in the state of California combined! Seven of the world's top ten companies were Japanese conglomerates. 

Fast forward today...The five FAAMG stocks are worth 20% more than the entire Nikkei 225. It's again the U.S. that dominates global equity markets, accounting for 56% of market share by market cap; Japan just 7%. Seven of the ten biggest companies are American. No Japanese company is even in the top 10 or even top 30. 

Another interesting change...back in the 1980s, 8/10 biggest companies were either Financials (5) or Energy (3). Today, on two are: Saudi Aramco (Energy) and Berkshire (Financials). Five (AAPL, MSFT, GOOG, FB and TCN) are Technology and three (AMZN, TSLA and ALBA) are Consumer Discretionary. Shows the impact of falling rates. And that change is constant.                             

Men are from Mars, Women are from Venus...

The metaphor is apt in more ways than author John Gray probably thought when he titled his best-selling book. Room temperature has long been a common cause of arguments among couples, may even the most common. Now scientists at Tel Aviv University have discovered that female members of species are naturally drawn to warmer temperatures and men cooler temperatures because of an in-built 'evolutionary difference'...leading to physical distance between them at certain times of the year. Co-authors Dr. Eran Levin and Dr. Tali Magory Cohen hypothesize that differences in the heat-sensitive mechanisms of women and men evolved "to keep offspring away from aggressive males and to reduce competition for food."  

Oh, and going to back to our titular analogy, Mars has a surface temperature of -81 F, while Venus has a normal temperature of 847 F. Makes sense... 

Barcelona's $1.2 billion teen, Benzima's triumph, and Salah's Magic

FC Barcelona's teen sensation, Pedro González López ("Pedri"), has agreed to a new deal at the club which includes a $1.16 billion release clause. Barcelona increased its release clauses massively "since Neymar's move to Paris Saint-Germain, a transfer triggered by PSG activating the Brazilian's roughly $260 million release clause." Now big clubs like Barcelona and Real Madrid are incorporating ridiculously valued clauses in contracts to avoid losing their best players. Its the joint biggest ever with  Real Madrid striker Karim Benzema's.

Speaking of Benzema, the Frenchman is having a dream start to the 2021-2022 season, leading the La Liga in goals scored (9) and assists (7). And this week he scored the goal of the tournament to help France lift the UEFA Nations League title.

Speaking of spectacular goals, Mohamed Salah keeps them coming, with another stunning solo effort, preceded by brilliant assist to Mane as Liverpool demolishes Watford 5-0.

 

But the game of the week seems to be Leicester City's 4-2 upset over Manchester United.

The Nobel Prize in Economics Goes to Messrs. Card, Angrist and Imbens

Monday the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2021 was awarded one half to David Card "for his empirical contributions to labour economics", and the other half jointly to Joshua D. Angrist and Guido W. Imbens "for their methodological contributions to the analysis of causal relationships" 

In plain language, the trio shared the prize for pioneering work in the use of "natural experiments" that use real-life situations to work out the impact of government decisions. The winners' work had "substantially improved our ability to answer key causal questions, which has been of great benefit to society," said Peter Fredriksson, chair of the Economic Sciences Prize Committee.

David Card is the Class of 1950 Professor of Economics at the University of California, Berkeley and Director of the Labor Studies Program at the National Bureau of Economic Research. He is best known for his study of the impact of minimum wage increases on employment in US states.

Joshua Angrist is the Ford Professor of Economics at the Massachusetts Institute of Technology, while Guido Imbens is the Applied Econometrics Professor and Professor of Economics at the Stanford Graduate School of Business. Their work help to develop the "framework for studying issues that can’t rely on traditional scientific methods research." 

The Nobel Prize for Literature Goes to Abdulrazak Gurnah

Last Thursday the Nobel Assembly announced they awarded the 2021 Nobel Prize in Literature to Tanzanian writer Abdulrazak Gurnah "for his uncompromising and compassionate penetration of the effects of colonialism and the fate of the refugee in the gulf between cultures and continents." 

The Tanzanian novelist is the first Black writer to be awarded the prize since 1993, and only the fourth ever. since the prize's inception 120 years ago. Gurnah was born in Zanzibar in 1948 and arrived in Britain as an 18-year old refugee half a century ago. He recently retired as a professor of English and post-colonial literatures at the University of Kent. Gurnah says the themes of migration, displacement, and identity explored in his novels are even more urgent now than when he began his writing career with the mass movements of displaced people from Syria, Afghanistan and beyond.  

Captain Kirk Goes to Space

William Shatner went to space yesterday on Blue Origin's New Shepard rocket. At 90, Shatner became the oldest person to boldly go where only a few have gone. And he was overjoyed...thanking Bezos for giving him the experience of his life.

As always Bezos was the shrewd businessman. He comped Shatner's ticket (sorry, the other non-celebrity passengers) but reaped multiples dollar's worth of free media coverage. And will be able to use footage of "Captain Kirk" for Blue Origin's PR plans. But sometimes a good message gets in the way of great messaging, as when Bezos cut off an emotional Shatner to spray congratulatory champagne. Stick to the script Shatner!

Then and Now

Captain Kirk himself went to space on Jeff Bezo's New Shepard rocket yesterday. How far Bezos and, really, all of us have come in making space travel a reality (for the rich), as these two clips show:

2000: Space travel is really hard, Charlie

 2021: Capitalism baby! Yee haw!

Wally Funk's expression is hilarious...Also, Bezos' voice has become a lot deeper, in correlation with his net worth.

Is the Climate Change Tax Here?

What a change a year makes. At one point last year early in the global pandemic, oil prices plunged into negative territory! The S&P 500 Energy index was down 50% in Q1 2020 and finished the year down 34% even as the broader market rallied 18%. This year the story is very different as synchronized global fiscal and monetary stimulus has jump-started the global economy. Oil prices have risen sharply YTD from ~$43/bbl to ~$73/bbl and Energy is, by far, the best performing sector.

While there's always noise around Energy prices, Goldman Sachs notes the seeds of the current spike in energy prices can be traced back to years of under investment in long-cycle projects. Large scale oil & gas investments were shelved due to a combination of poor energy returns and ESG concerns for nearly a decade, as shown below. 

Instead capital flowed more to short-term investments in shale and renewables. Solar and wind are great, but the technology hasn't really caught up with the demand. The basic issue of intermittent power supply remains--what do you do when the sun doesn't shine and or the wind doesn't blow? So, you still need oil, natural gas and coal, and a lot of it, to keep up with growing energy demand.

Environmentalists have long pined for an explicit carbon tax to reduce fossil fuel consumption. At least 27 countries, including many EU countries and even China, have one. But here in the U.S., Congress has never seriously considered it. Rather the movement for clean energy has been driven by the private sector and individual states with sometimes very aggressive mandates. All good. But going green and also not paying more at the pump during the transition phase was always going to be difficult. And as energy demand is rising the structural supply constraints are becoming clearer. The likely result is more volatile energy markets in the future. In effect, a unintended carbon tax?