Mouring Edson Arantes do Nascimento (1940-2022), the King of Football

Brazilian football legend Pelé, widely considered one of the best players ever, if not the best, died yesterday after a year-long battle with colon cancer. He was 82 years old.

Brazil has planned 48 hours of national mourning. Pelé, is expected to be buried in Santos, southeast of Sao Paulo, where he played for the city's club from 1956 to 1974. Gianni Infantino, the president of FIFA, said in a statement Pelé's "life was about more than football. He changed perceptions for the better in Brazil, in South America and across the world." 

The UK's Guardian has a great piece on his career and how he came to be the face of football the world over. Pelé burst onto the world stage when he was just 17 scoring six goals to help Brazil win the 1958 World Cup in Sweden. He stole the show in the final which Brazil won over hosts Sweden, 5-2, with two goals that were "an illustration of the ability that set him apart from all other footballers. The first was a breathtaking piece of skill; he controlled the ball on his chest, chipped it back over his head and then ran around the flummoxed defender and volleyed it into the net. For the second, he soared above his marker before making a perfectly placed header." He is the only player to have won the World Cup three times (1958, 1962, and 1970).

"Pelé was blessed with a blend of supreme athleticism, skill and tactical vision...His sheer physicality and turn of speed were electrifying as he homed in on goal, outsprinting or simply charging through defences while managing to keep the ball under close control."  Those qualities made him a hot commodity as wealthy clubs attempted to lure him away from Brazil, offering a then unheard-of $1m to his club, Santos FC. But in 1961, Brazil's president Jânio Quadros "declared Pelé a 'non-exportable national treasure', ensuring that he remained at the club for almost two decades."

 It was at the 1970 World Cup, however, that Pelé truly became a global phenomenon. It was the first football tournament watched live by a worldwide television audience and also the first to be broadcast in color. "In the brilliant Mexican sunshine, the gold shirts and cobalt blue shorts of Brazil dazzled the watching world. They won the tournament for the third time – beating Italy 4-1 in the final – by playing football of such imagination and thrilling execution that it is regarded as one of the high-water marks in the history of sport...with Pelé [its] most potent symbol." After that World Cup he was the most recognizable man in sport.

In 1999 Pelé was named athlete of the century by the IOC and in 2000 FIFA player of the century (jointly with Diego Maradona). Pelé first two marriages ended in divorce. In 2016 he married his third wife, Marcia Cibele Aoki. She survives him, along with six children from prior relationships.

Felicidades Argentina!!! Campeona Del Mundo!!!

ARG (4) 3 - 3 (2) FRA 

Argentina edges out France on penalties.

The most thrilling World Cup final...in perhaps the best World Cup ever? So much drama, so much quality, and so many goals! Messi, Mbappe, and Martinez...a breathless, epic finish to a magnificent tournament. In the end, Argentina are World Champions for the third time!

  Relive the highlights here:

And the full drama of the penalties:

Oh, Elon: It's Funny Because its True

He's been trying for months...but finally lands a great Twitter joke.

Wonder if his backers are laughing as well..."Musk gathered over $7 billion in equity commitments from an unusual mix of investors, including Silicon Valley billionaire Larry Ellison, cryptocurrency exchange Binance, venture capital firms Andreessen Horowitz and Sequoia Capital...Text messages produced during the legal fight showed that co-investors did little analysis of their own, deferring instead to Musk. “If you are considering equity partners, my growth fund is in for $250M with no additional work required,” wrote Marc Andreessen." 

Investing with other people's money is so easy! Hahaha...Funny for everyone except Andreessen's investors. 

The Jewel in the Crown: UK Get its Own Obama Moment

Congratulations to Rishi Sunak who is set to succeed Liz Truss at Britain's next Prime Minister. He becomes the 81st person to attain the position, going back to 1721. Significantly, he will be the first person of color to lead the country in the long history of Brittania. While Sunak was born and raised in Britain, his parents are of Indian origin. He is also the UK's first Hindu Prime Minister. That he becomes PM by leading the Conservative Party is even more remarkable and a truly historic moment for multiculturalism and racial equality.

Rishi Sunak was born in the port city of Southhampton in 1980. His parents are of Indian descent by way of East Africa. His father, Yashvir, a doctor, was born in Kenya and his mother, Usha, in Tanzania. They migrated to the UK in the 1960s. While Sunak maybe a second-generation Briton, his rise to first, among equals followed "one of the most traditional paths to power: prestigious Winchester College, one of the U.K.’s elite private boarding schools, before going on to study philosophy, politics, and economics—the quintessential degree for anyone aspiring to go into British politics—at Oxford University." After graduating in 2001, he pursued a career in finance; working first as an analyst with Goldman Sachs and then, after getting his MBA from Stanford University, joining Chris Hohn's hedge fund, the Children's Investment Fund ("TCI"). Sunak started his own fund, Theleme Partners, in 2010 before leaving to join politics in 2015. 

Rishi Rich 

Sunak's background isn't the only thing atypical about him. He is also the richest lawmaker in the House of Commons, ranking in at #222 on the Sunday Times Rich List of the wealthiest people in Britain in 2022. Sunak is worth an estimated £730m, thanks to his finance past and marriage to Akshata Murty, his Stanford classmate and daughter of Indian billionaire and Infosys founder, N. R. Narayana Murthy. I guess it takes a billionaire to relate to kitchen table issues. Err, how much is a pint of milk Rishi?

Well, in any case, the new PM has his work cut out for him, having inherited an economy that is experiencing significant turmoil, not least due to the ill-conceived policies of his predecessor. But it is worth taking in the symbolism of the UK's "Barack Obama" moment. The British conquered India in 1742 and for the 200 years it was the jewel in the crown of an empire that stretched across a quarter of the earth. India was so valuable that General Charles Cornwallis, who lost the Colonies in the Revolutionary War, was feted at home as a hero because of his successes in the Subcontinent. America, what? Now, the new King of England will appoint a new Prime Minister that looks very different from everyone else before him. Interesting times!

The Nobel Prize for Physics Goes to Messrs. Aspect, Clauser, and Zeilinger

Nobel Prize season continues and on Tuesday the Nobel Assembly announced they awarded the 2022 Nobel Prize in Physics to Alain Aspect, John F. Clauser and Anton Zeilinger “for experiments with entangled photons, establishing the violation of Bell inequalities and pioneering quantum information science.” Umm...in more layman terms, their independent works showed that tiny particles of light can be "entangled" and behave like a single unit, even when separated by large distances. The phenomenon was famously called "spooky action at a distance" by Albert Einstein, who dismissed the theory.

Their results have cleared the way for new technology based upon quantum information, including encrypted communication.

Alain Aspect is French and is associated with Université Paris-Saclay, Paris and École Polytechnique, Palaiseau, France. John Clauser is an American and is associated with the University of California, Berkeley and John F. Clauser and Associates. Anton Zeilinger is Austrian and is associated with the University of Vienna.

The Nobel Prize for Medicine Goes to Svante Pääbo

It's the start of the Nobel Prize season and today the Nobel Assembly announced they have awarded the 2022 Nobel Prize in Physiology or Medicine to Svante Pääbo for "his discoveries concerning the genomes of extinct hominins and human evolution."

Svante is a Swedish geneticist specializing in the field of evolutionary genetics and has worked extensively on the Neanderthal genome. He is the founding director of the Department of Genetics at the Max Planck Institute for Evolutionary Anthropology in Leipzig, Germany, since 1997 and is also professor at Okinawa Institute of Science and Technology, Japan.

Pääbo, 67, has spent decades pioneering and perfecting the complex methods of extracting Neanderthal DNA, and successfully sequencing their genome. His decades of research have made it possible for scientists to study the differences between today’s modern humans and their ancient ancestors, giving insights into human physiology and possible future cures for disease.

An Expensive Speech

Fed Chair Jay Powell's Jackson Hole speech yesterday was just 8-minutes long, but it packed quite a punch. After hiking Fed Funds rate by 75 bps in June and July, Powell tried to mollify investors with some unscripted soothing comments when he said, "the central bank had already reached a “neutral” setting -- where it’s neither stoking nor restraining consumer prices." Mind you the Fed Funds rate was only up to 2.25% while inflation was running at 8.5%. Larry Summers for one, called the comments "indefensible." But the markets loved Powell's words and interpreted it as a "pivot" to more dovish rate moves (i.e., reinstatement of the Fed put), extending a ferocious rally. Between June 16th and August 15th, the S&P 500 and NASDAQ gained 17.2% and 23.3%, respectively. 

However, Powell seemed to put an end to that nonsense this afternoon, when he reiterated that restoring price stability was Fed' #1 priority and that "will likely require maintaining a restrictive policy stance for some time.” And just for good measure, if there was any doubt, he pointedly reminded investors that “the historical record cautions strongly against prematurely loosening policy.” Summers approved.

Okay, so how did the markets react? As you might expect, with the S&P and NASDAQ down 3.4% and 3.9%, respectively. It also meant that it was an expensive day for America's richest, especially tech billionaires. Bloomberg helpfully calculated that Powell's short speech cost America's billionaires $78 billion. Elon Musk lost $5.5bn, while pal(?) Sergey Brin lost $4.7bn. But at least rival Jeff Bezos lost even more $6.8bn, right?

These numbers are absurd. According to the U.S. Bureau of Labor Statistics, the median annual personal income in the U.S. was around $51,500. Roughly speaking, it would take the median American over 106,000 years to make what Musk lost in just one day!

Yet, these numbers are still essentially a drop in the bucket to the fortunes of America's richest. According to wealth porn site Forbes, which runs the Real-Time Billionaire List, Musk was worth $257 bn at close of business yesterday and Bezos $155 bn. Wealth tax anyone?

The New Mad Men: Page, Brin, Zuck, and Bezos

If Matthew Weiner were to ever do an updated version of Mad Men, it would need to be set in the West Coast. Advertising today is the purview of tech giants, whose algorithms direct you to things you didn't even know you wanted. Online advertising dwarf other mediums with Amazon's ad revenue alone more than that of the entire global newspaper industry in 2021! (H/T Scott Galloway)

The chart below (click to enlarge) from Raconteur shows how the internet has changed the advertising game over the past two decades and also decimated the newspaper industry. Before 2004, newspapers and television were responsible for over 70% of the ad business. Today, search, social media, and online video drives ~66% of the ad business. They've particularly cut into the newspaper business, which has gone from collecting ~33% of global ad spend in 2002 to ~5% in 2020.

And if the internet will soon absorb all the world's ad spend, just three companies are likely to take most of the share: Google, Meta/Facebook, and Amazon. Already these three tech giants account for 74% of global digital ad spend and 47% of total global ad spend.

Google/Alphabet is king of digital ad spend, accounting for 44% of all online ad revenues (via search and YouTube) and 16% of all ad spend period. But there's a new kid that's got everyone's attention: Amazon. The ecommerce giant generated more ad revenue than YouTube or Facebook in 4Q21. What's more Amazon's advertising arm represents just 7% of company's $470 billion of net sales.

There are several factors that have impacted Amazon’s inevitable transformation into a colossal advertising entity. These include industry trends, consumer habits, and its continued dominance in the ecommerce industry. About 3 in 4 persons say that when they look for a product online, they search on Amazon. Most importantly for sponsors, ads on Amazon have a higher conversion rate than on Google. When you want to learn about a product you might do a Google search, but if you have made a decision to purchase that product, you go on Amazon to find the best brand/price.

Imagine what Don Draper could do with that...

Girls Just Wanna Have Fun

Finnish Prime Minister, Sanna Marin, who became the country's youngest PM at 34 in 2019, is under fire after a leaked video shows her partying hard with friends.  

Opposition party members have called for Marin to take a drug test...suggesting that her actions are inappropriate for a prime minister. Marin denied any drug use and countered “I have danced, sung, celebrated, done legal things,” she said. Too much vodka? Possibly. But cocaine? No! So there! Stop hating her dance moves.   

Eat the Rich

A Brooklyn artist collective called MSCHF is selling popsicles shaped to be the world’s leading billionaires: Elon Musk, Jeff Bezos, Mark Zuckerberg, Bill Gates, and Alibaba co-founder Jack Ma. New Yorkers can now “Munch Musk,” “Bite Bezos,” “Gobble Gates,” “Snack on Jack” and even “Suck Zuck!”

Alas, "eating the rich," isn't cheap. The ice creams retail at its own inflated price of $10 apiece. 

The Three Types of Inflation

Inflation is dominating the news. While the price of everyday goods, including food and energy—naturally—grab the headlines, the ever-interesting Visual Capitalist reminds us of the other forms inflation within the economic system that impact our lives.

The first is monetary inflation, which occurs when the U.S. money supply increases over time. This represents both physical and digital money circulating in the economy including cash, checking accounts, and money market mutual funds. In the U.S. the Federal Reserve typically influences the money supply by printing money, buying bonds, or changing bank reserve requirements. The Fed controls the money supply in order to boost the economy or tame inflation and keep prices stable. 

Nobel Laureate Milton Friedman once posited that "inflation is always and everywhere a monetary phenomenon." That's because, in theory at least, increasing the money supply faster than the growth in real output may cause consumer price inflation (# 2 below); more money chasing the same amount goods should eventually lead to increases in prices.

                                               Source: Visual Capitalist, New York Life Investments

Next is consumer price inflation ("CPI"), which occurs when the prices of goods and services actually increase. It is typically measured by the Consumer Price Index (CPI), which shows the average price increase of a basket of goods, such as food, clothing, and housing. Supply chain issues, geopolitical events, monetary supply, and consumer demand may all affect CPI. When CPI is persistently increasing at rate above 2% per annum, the Fed may increase interest rates to curtail spending and allow prices to cool down, and vice versa.

Lastly, asset price inflation ("API") represents the price increase of stocks, bonds, real estate, and other financial assets over time. One measure of API is the ratio of household net worth to GDP. Often, a low interest rate climate creates a favorable environment for asset prices by lowering the total cost of asset ownership. This has been evident over the past decade as low rates were met with rising asset prices. In 2021, household net worth as a percentage of GDP stood at 620%. Rising asset prices can sometimes be a misleading sign of a strong economy since no real output is produced—the stock market is not the economy. Instead, it may indicate an asset bubble, which is dangerous because it contributes to rising inequality (as typically the very rich own the vast majority of economic assets). But when bubbles burst, the government has to step in with taxpayers' (i.e., everyone's) money to save the economy (and thereby the rich). The moral hazards in a laissez-faire capitalistic system can give rise to demagoguery.

Happy Birthday: America Turns 246

 

In celebration of America's 246th birthday, the U.S. Census Bureau released some fun facts. E.g., when America declared her independence from Great Britain in July 1776, there were an estimated 2.5 million people* in the 13 original colonies (vs ~7 million in the U.K.); today there are over 330 million Americans** (vs ~68 million Britons). Or that in 2021 the U.S. imported $6.7 million worth of American flags and exported $2.5 million worth. In any case, Happy 4th of July!

*Approximately 450,000 of the 2.5 million were African Americans, who pointedly didn't gain their independence in 1776.

**Over 48 million of whom are African Americans. 

Freakonomics: Will Repeal of Roe vs Wade Lead to More Crime?

In 1973, the U.S. Supreme Court legalized abortion in all 50 states in a seminal case called Roe v. Wade that quickly became a heated cultural divide in the U.S. Last week, after nearly 50 years, the conservative-majority Supreme Court overed turned Roe vs Wade, returning authority on abortion back to individual states. Justice (and history fan) Samuel Alito, writing for the majority, reasoned "abortion presents a profound moral question...the Constitution does not prohibit the citizens of each State from regulating or prohibiting abortion. Roe and Casey arrogated that authority. We now overrule those decisions and return that authority to the people and their elected representatives.” 

Ok, abortion is a hot-button issue and both sides have their points. But there may be another interesting angle to this topic...crime. In 2001 economist Steve Levitt published his (most?) famous paper linking abortions to reductions in crime: "Understanding Why Crime Fell in the 1990s." From 1991 to 2001, violent crime in the U.S. fell more than 30%, after rising for three decades and Levitt wanted to understand why, explains Steve Dubner and Levitt's Freakonomics co-author in a Medium post: 

Levitt explored all the commonly suggested reasons his 2001 paper...The six factors that, according to [his] analysis, did not contribute to the crime drop: a strengthening economy; the aging of the population; innovative policing strategies; gun control laws; right to carry laws; and the increased use of capital punishment. While each of these, in theory, might seem to have some explanatory power, Levitt found that none of them did...Then there were the factors he found did contribute: the increase in the number of police; an increase in the number of criminals imprisoned; and the decline of the crack-cocaine trade, which had been unusually violent. But these three factors could explain only about half of the massive drop in crime. It was as if there was some mysterious force that all the politicians and criminologists and journalists weren’t thinking about at all..."

"...Paging through the Statistical Abstract of the United States...[Levitt] saw a number that shocked him. Abortion rose so much after Roe v. Wade that by its peak (in 1990), there were 1.5 million abortions a year in the U.S. compared to 4 million live births. The magnitude surprised Levitt, and he wondered what sort of secondary effects it might have. He wondered, for instance, if it might somehow be connected to the huge drop in crime. Levitt spent a few weeks working on the idea before ultimately deciding it didn’t quite add up." 

But then one of Levitt’s collaborators, John Donohue, a professor of law at Stanford Law School who also has a PhD. in economics, pointed out the "unwantedness” factor—the expansive literature showing that "children born to parents who didn’t truly want that child, or weren’t ready for that child, were more likely to have worse outcomes as they grew up; not only were health and education outcomes worse, but these so-called “unwanted” kids were disproportionately likely to engage in criminal behaviors."

Levitt and Donohue divided states into three groups: high abortion-rate states, medium abortion-rate states, and low abortion-rate states and tracked crime in all three groups over time. They found there was a 30% difference in what had happened to crime between the highest abortion states and the lowest abortion states by 1997 and through other similar tests concluded that "legalized abortion appears to account for as much as 50% of the recent drop in crime."

The paper generated a lot of buzz in the mainstream media and managed to unite to both the Right and Left in their...condemnation of the results. The Right was uneasy because the findings suggested there were positive outcomes from what they considered a reprehensible act; and the Left felt it was endorsing a form of eugenics and Minority Report-style "pre-crime" judgement.

There have been other criticisms of the paper on methodological grounds, but even in a recent update to the paper, Levitt and Donohue continue to find a strong relationship between abortion and crime between 1997 and 2014 — "states with high abortion rates saw crime rates fall 60 percent more than states with the lowest abortion rates. The magnitude of the effect is enormous." According to Levitt, the “cumulative effect over the last 30 years, if you just look at our numbers, suggests that abortion might explain something like 80 or 90 percent of the entire decline in crime.”

We'll see what the next update of the paper in 20 years or so finds.

U.S. Gas Prices Top $5 in Historic First

As we wrote yesterday, CPI was up 8.6% year-on-year ("YoY") in May---the fastest pace in 40 years. A significant driver of headline inflation was record gas prices, though core CPI (excluding volatile food and energy components) was also worse than expected, rising 6.0% YoY. While core CPI may be a better measure for policy making, food and energy prices impact people more urgently and intensely. Energy costs are 34.6% higher compared to a year ago, driven by a nearly 50% jump in gas prices. As a result, the typical US household is spending about $460 more every month than they did last year to purchase the same basket of goods and services. AAA's tracking of gas prices shows the price of a gallon of regular gas nationwide was over $5.00 for the first time on June 12, 2022. (Click chart to enlarge)

Source: AAA

California had the highest average gas prices at $6.43/gallon, while Georgia had the lowest at $4.48/gallon. Nearly half the states average gas prices of $5.00/gallon or more. Higher fuel costs are making travel, food and other products more expensive across the economy. 

Higher energy prices are supposed to reduce demand, but there's no sign yet of the so-called "demand destruction." Road travel in the busy summer season has remained relatively strong, just a couple of percentage points below pre-pandemic levels. That just means inflation, which was supposed to have peaked in April, will likely continue to go up.

The Remarkable Rise of Bangladesh

When people think of the Indian Subcontinent, they think of, well, India, and secondarily Pakistan, two rival nuclear powers. Often lost in the mix is another populous country with a long, shared, and bloody history: Bangladesh.

The end of British colonialism in India was associated with a rushed and botched partition of the country by Viceroy Mountbatten (better known to Americans as Prince Charles' ambitious uncle in Netflix's The Crown). In any case, at the stroke of midnight on August 15, 1947, two countries were born: Hindu-majority India, and Muslim-majority Pakistan. Pakistan itself was divided into two parts, East and West, separated by over a thousand miles (the two green sections, as shown below). In 1971, Bangladesh declared its independence from the richer and more powerful (West) Pakistan.

At the time, there seemed to be little hope for the new nation, reeling from a brutal war and a terrible famine. Henry Kissinger, then National Security Advisor, famously called it a “basketcase.” Oh, how times have changed! Fifty-years on, Bangladesh has emerged as an unlikely economic success eclipsing its two larger neighbors. In a fascinating piece for Bloomberg, Mihir Sharma argues that Bangladesh is South Asia's standout star. Per Sharma:

Bangladesh's GDP per capita grew by 9% over the past year, rising to $2,227 [in 2020-21]. Pakistan’s per capita income, meanwhile, is $1,543. In 1971, Pakistan was 70% richer than Bangladesh; today, Bangladesh is 45% richer than Pakistan. One Pakistani economist glumly pointed out that “it is in the realm of possibility that we could be seeking aid from Bangladesh in 2030.”

India — eternally confident about being the only South Asian economy that matters — now must grapple with the fact that it, too, is poorer than Bangladesh in per capita terms. India’s per capita income in 2020-21 was a mere $1,947.

Bangladesh’s growth rests on three pillars: exports, social progress and fiscal prudence...Between 2011 and 2019, Bangladesh’s exports grew at 8.6% every year, compared to the world average of 0.4%. The success is largely due to the country’s relentless focus on products, such as apparel, in which it possesses a comparative advantage. Meanwhile, the share of Bangladeshi women in the labor force has consistently grown, unlike in India and Pakistan, where it has decreased. And Bangladesh has maintained a public debt-to-GDP ratio between 30% and 40%. India and Pakistan will both emerge from the pandemic with public debt close to 90% of GDP. Fiscal restraint has allowed Bangladesh’s private sector to borrow and invest.

But Sharma also notes that success brings its own set of problems. For one, Bangladesh's exports benefit from the country’s participation in various mechanisms that allow tariff-free access to developed economies, such as the U.S.’s Generalized System of Preferences. These groupings are only open to the world’s least developed countries. Thanks to its growth, Bangladesh will likely have to give up these privileges by 2026 or so. Structurally, as its economy matures, its comparative advantages will also change. Like Vietnam and others, it will then have to shift emphasis away from garments to higher-value exports. The transition will test Bangladesh as it has those other nations.

These are good problems to have, and Bangladesh has demonstrated an ability to meet challenges. Moreover, the country isn't content to just be a local success story. It aims to be a developed economy by 2041. Ambitious? Yes. But as Sharma notes, "the past 50 years have shown how unwise it is to bet against Bangladesh."

Rise of the Proletariat Robot Class?

Robots can do a lot, from building cars in factories to sorting items in warehouses, and even patrolling streets. But until very recently there were some, almost basic, things robots could not do...like picking apples from a tree. A Guardian article finds advances in robotics now have the potential to transform agriculture. 

While picking fruits is a simple thing for humans, developing a robotic implement that can "pick an apple and drop it into a bin without damaging it is a multimillion-dollar effort that has been decades in the making." Teams around the world, including Joe Davidson's at the Orgon State University, have tried various approaches. Their collective efforts are helping turn "fruit-picking – a backbreaking, time-consuming human task – into one that’s speedy and easier on farm workers." From the Guardian article:

Teaching robots to perform these tasks requires modernized versions of both the orchard and the apple. Traditional orchards, with irregularly shaped trees and giant canopies, are too much of a challenge for algorithms to parse and process. Shifting sunbeams, fog and clouds add to computer vision’s challenges. Tangled, tall old trees are problematic even to human pickers, who end up spending much of their time hauling and positioning ladders, not picking fruit. Now, many growers have transitioned to orchards where trees grow flat against trellises, their trunks and branches at right angles to create a “wall of fruit” (see below) ...the thinner canopy also lets more sunlight in, encouraging fruits to form. 

In orchards with trellised trees, robots...essentially a giant arm mounted on a rolling platform reach up for the fruits...sensors under each [robotic] fingertip track the pressure, speed, angle and other aspects of its grasp to help the robot complete its task...the fingers tighten, then twist, and the apple – successfully picked – rests in the robot’s palm. Here's an example of a good pick:

And an example of a bad one:

The robot's hit rate isn't that great, so far. It has picked an apple successfully about only half of the times. Still, the robotic arm has cracked some problems that posed hurdles to automation. For instance, it can avoid damaging both fruit and tree limbs in the harvesting process. Rapid improvements in computing make Davidson and others hopeful the robots will work on farms within the next five to 10 years. That's right, the tech to teach robots how to pick fruit may still be a decade away. It's that deceptively hard...do you suddenly have more respect for your species? 

It’s unclear to many farm workers how the robots will affect their livelihood...Across various industries, including agriculture, waves of automation have led to job losses and a devaluing of human work...[but] the emergence of robotic farm workers could even be an opportunity for humans to engage in different – and far less strenuous – work than pruning or harvesting, says Ines Hanrahan, executive director of the Washington Tree Fruit Research Commission. “When you take the physical aspect out, these tasks become more accessible to older workers or those less physically capable of lugging ladders and things. It enables more people to be drawn into this work.”

We'll see. In any case, it's still a while off before farm robots lead a revolution and go from targeting apples to humans.

GEICO Needs a Tie-in with Durex

GEICO is America's second most popular auto insurance provider writing over $33 billion in premiums per year. Its catchy ads feature a talking gecko telling you how easy it is to save money. But is your auto insurance also your health insurance? It can be...and apparently the no-fault rule applies: An appellate court ruled that "Geico must pay a Missouri woman $5.2 million after she caught HPV from unprotected sex with her then-boyfriend in his insured automobile." Huh?

The woman (identified as "M.O.") said that she "engaged in unprotected sexual activities in Insured's vehicle" in November and December 2017 and that he "negligently caused or contributed to" her catching the human papillomavirus (HPV), a common sexually transmitted infection, court papers said. After Geico turned down her claim, M.O. took the matter to an arbitrator, who found in her favor before a court affirmed the $5.2 million judgment.

Geico appealed, claiming it never had a chance to contest the claim. "But GEICO did have the opportunity to participate and defend its interests — including the ability to challenge liability and damages — by entering a defense of Insured," according to the appeals court opinion, which put the word "did" in bold italics. The insurance company has "no right to relitigate those issues" now in appeal, the court said.

So, the appellate court ruled on the procedure, rather than the merits, of the case. Now it's going to federal court with GEICO arguing that "it never had any responsibility to defend the boyfriend, identified only as "M.B.," because it should be on the hook only for damages coming "out of the ownership, maintenance or use of the ... auto.” Umm, wait, use of the car? Hmm, maybe they got you there GEICO...cars are commonly used for sex, no? Nearly 2/3 of Americans have admitted to doing "it" there. Presumably, as a major auto insurer, GEICO knows a lot about cars and what people do in them. Well, GEICO's position is that "M.O.’s alleged damages have no nexus to the ownership, maintenance, or covered use of the 2014 Hyundai Genesis...[in] other words, the vehicle’s covered use did not cause M.O.’s alleged injuries; instead, her injuries arose from an intervening cause — namely, her failure to prevent transmission of STDs by having unprotected sex."

That seems like common sense, but we'll see. Lawyers are an enterprising bunch. Regardless, we are certain that going forward auto insurance policies will have explicit (no pun intended) language about sex in cars. And maybe policies will also include tips on safe sex, just in case.

Inflation: Is 2022 the New 1980?

Yesterday's CPI report upended a narrative that had taken hold in recent weeks by (ever optimistic) sell-side analysts and strategists (see one prime example here) that inflation had peaked. After headline CPI for April fell to 8.3% year-on-year ("YoY") versus 8.5% in March, many CNBC guests were selling the idea of a soft landing and new bull market in stocks. Not so fast...here's a summary of the May report: 

• YoY headline inflation reached 8.6%---a fresh 40-year high vs 8.3% consensus
• Worse, core CPI (excluding the more volatile food and energy components) was up 6.0% vs 5.9% consensus 
• Goods inflation was just 1.7% of the 8.6%; declining as supply chain disruptions moderate. However, service inflation was up 3.0%---the highest rate in 4 decades. (Click chart below to enlarge)
  
  
  
   Source: Zerohedge

Not surprisingly, the markets did not react well. The S&P 500 and NASDAQ Composite were down 2.9% and 3.5%, respectively, on Friday. The two benchmarks are now down 18.7% and 29.4%, respectively, from their 4Q21 peaks. And for the tech-heavy NASDAQ there are real shades of 2000, as shown below. After 140 trading days, or ~6 calendar months following the peak, the NASDAQ of 2000 and the NASDAQ of 2021 are tracking each other almost to the percentage. As reminder, the NASDAQ eventually lost 80% of value following the dotcom bubble. 

                                                                Source: Yahoo Finance, Mantabye

 

We'll at least inflation is nowhere near as bad as in the 1980s, right? Nominal inflation was after all running over 14% YoY in early 1980. Or was it? Larry Summers, who correctly warned about inflationary pressures last year, is now cautioning that inflation may be worse than what the official numbers show. How's that? In a new paper, Summers and co-authors Marijn Bohuis and Judd Cramer, argue that prior to 1983, the CPI did not correctly account for consumer spending on housing. The authors claim that the way housing spending was measured pre-1983 was "without conceptual foundation...and resulted in a substantial upward bias in the CPI." You see, the pre-1983 index included both home purchase prices and the total outlay of mortgage payments, despite mortgages being paid out gradually over several years." Summers and colleagues argue that "this caused inflation measures before 1983 to look artificially high at the beginning of the tightening cycle, and to recede artificially fast." According to Summers, Bohuis, and Cramer ("SBC"), when the alleged problem with housing spending is removed the official inflation rate of 13.6% in 1980 falls to 9.1%. That's just 50 basis points higher that yesterday's reading. Yikes! 

The upshot is that if SBC's methodology is accurate, it could mean that Federal Reserve will have to get far more aggressive to bring inflation under control, despite recession risks, like Paul Volcker did. For example, SBC estimates that "a return to 2% core CPI inflation today may require nearly the same amount of disinflation as achieved under Chairman Volcker." As reminder, Volcker’s monetary tightening increased the federal funds rate up about 10 percentage points, to a peak of 20% in the early 1980s to bring core CPI down by 5 percentage points. So, by that logic, bringing core CPI down from 6% to 2% may require hiking the feds fund rate by 7-8 percentage points! Good luck with that!

Victory! Man City Wins the League in Day of High Drama

Manchester City edged out Liverpool by a point to win their 4th EPL title in 5 years, in a riveting last day of the 2021-22 season. Down 0-2 with a quarter of an hour to go, Man City scored three times in 5 minutes to repeat as Champions:

Full match highlights here. While Liverpool just missed out on a domestic triple, Mohamed Salah secured two personal accolades: (i) sharing the Golden Boot with Spurs striker Son Heung-min after both scored 23 goals and (ii) winning the inaugural Playmaker of the Season award for most assists. 

Congratulations Man City, congratulations Salah!

Bitcoin: Early Bird Gets the Worm

We've been somewhat skeptical about the hype around crypto currencies, particularly about its role as a potential portfolio diversifier. Indeed, over the past several months, Bitcoin (and other crypto currencies) have moved largely in line with the NASDAQ Composite. Just as with speculative growth stocks, the specter of rising rates, has hit Bitcoin hard. As with the technology-heavy NASDAQ, Bitcoin peaked in November; reaching $69,000 around the time that infamous Matt Damon crypto ad first aired. Since then, the NASDAQ has fallen nearly 25%, while Bitcoin has dropped almost 55%. That's in line with its ~2x beta to equity markets in recent years--not what you want to see from your "diversifying" asset class, especially one that is supposedly an inflation hedge. 

                                    Source: Yahoo Finance, Mantabye

Now, new data from blockchain organization Glassnode indicates that 40% of Bitcoin holders maybe underwater on their investments and that both whales and shrimps have been sellers. "Accumulation among small-scale holders— those with less than 1 bitcoin [and who have been among Bitcoin's strongest supporters] — is notably weaker now than it was in February and March." Analysts from Glassnode also noted "an influx of “urgent transactions” [recently]...in which investors paid higher fees...in order to expedite transaction times. Great, liquidity is also an issue.

Still, if you bought Bitcoin before January 2021, you're breaking even. And if you were lucky (or prescient) enough to purchase some crypto currencies at the beginning of 2020, you are doing just fine. Yes Matt, fortune does favor the brave, but in financial markets it's usually the early bird that gets the worm.

                                            Source: Yahoo Finance, Mantabye

Netflix: Not Chilling

Netflix is not having a good 2022. This week the company reported that instead of adding 2.5m subscribers, as expected, it lost 200,000 in Q1. To be fair, the net loss was due to Netflix suspending services in Russia to show solidarity with Ukraine. The decision cost Netflix 700,000 Russian users...so the company's subscriber base actually grew by 500,000. However, the company does expect to lose 2m subscribers by July, as noted by Visual Capitalist. 

So, is streaming reaching a saturation point? Are the vast majority of consumers already getting their entertainment from Apps than their cable modems? Not even close, despite the spectacular growth of streaming in the last few years. According to Nielson, "streaming accounted for just 30 percent of total TV screen time in March 2022, with linear TV (i.e., cable and broadcast) still dominating video consumption."

Yes, streaming has overtaken broadcast TV, but it's still sizable and cable is king. What's more the streaming segment is highly competitive. While Netflix is synonymous with streaming, it only controls about 23% of the market. Disney, Hulu, HBO Max and other streamers are steadily chipping away at the former's share. It's why Netflix has lost about four years of gains in the last four months.

Netflix has jacked up subscription prices, with increasing regularity, to keep being able to deliver massive amounts of (subpar?) content and attract new customers. But the strategy seems to be reaching its limits. So, to get its finances in better order, the company is going after password sharers, which it conspicuously allowed for a long time. It is also trying hard to crack down on scammers in illegal password-sharing marketplaces that offer its premium $19.99/month subscriptions for $1.00/month. Combined the company says password sharing costs it $7b-$8b of revenue per year. Furthermore, Netflix is said to also be considering, gulp, ads!

Regardless, the main metric investors are looking for is growth. Until Netflix can demonstrate consecutive quarters of solid growth, the stock will continue to suffer. 

NASDAQ: Now and Then

The stock market had a very bad day yesterday, as well as a very bad month...and, oh yeah, a historically bad start to the year. The S&P 500 was down 3.63% on the day, 8.8% on the month and 13.3% YTD, the worst 4-month start to a year since 1939 (-17.3%). But the S&P 500's tumble was not nearly as bad as that of the tech-heavy NASDAQ Composite. The Composite was down 13.3% in April, its worst month since October 2008 (remember Lehman?) and 21.2% YTD, its worst start to a year ever. Below is a chart of the Jan-Apr returns of the NASDAQ Composite since 1999:

                                                Source: Macrotrends.net, Mantabye

Jan-Apr 2022's NASDAQ drawdown is 50% worse than the Composite's 2001 drop over the same months...and that was during the middle of "dot.com bust." Could this be the start of dotcom crash 2.0? Until this earning season, the resilience of Big Tech (Google, Microsoft, Apple, Amazon, etc.) had been supporting the broader indices. But even by early March the damage below the surface was extensive, as this chart from the SocGen and the FT shows, with over 60% of the NASDAQ's underlying, mostly technology, stocks down at least 25% and 40% of stocks down more than 50%.

                                                    Source: Societe General, FT
  

As the FT's Robbin Wigglesworth wrote: "For companies that are sustained more by dreams than cash flows, 2022 has been a nightmare. For those that scoffed at the last two years of excesses in markets, it has felt like sweet vindication." And that was in March.

Well now, Google has missed, Amazon incurred its first quarterly loss since 2006, and Apple has warned of weaker earnings ahead. We're sure the MAAMAs will be okay, perhaps after giving back most if not all of the pandemic gains. But for many unicorns this could be a replay of 2000? The chart below shows how the NASDAQ has behaved after reaching their 2000 and 2021 peaks. After 110 trading days (~5 months) we are in the same position.

                                            Source: Yahoo Finance, Mantabye

Where will the NASDAQ go next? Who knows, but here's what happened in 2000 over the following five months after this point. Of course, it's different this time, right?

                                              Source: Yahoo Finance, Mantabye

Best College Prank Ever?

An oldie, but gold. This was an answer to a question on Quora about epic university pranks. There have been many classic ones. This one, perhaps borrowing a page from Cal Tech's 1961 Rose Bowl Hoax, certainly ranks near the top. It was perpetrated on Harvard (or Hah-vahd, if you speak Boston) by their rivals during the annual Harvard-Yale football game on November 20, 2004.  

Months prior, two Yale students, Mike Kai and David Aulicino got a grid of the Harvard Stadium seating and began hatching their plan. They made giant signs with Harvard's red or white colors on them and printed fake T-Shirts that said, “Harvard Pep Squad” as well as fake Harvard student IDs. They handed these out to more than a dozen people who would pass these signs out at the football game to the designated people in the Harvard side of the stands, who were told it would read "Go Harvard."

"Then, after they had been distributed to all the Harvard students and alumni. They gave the signal. All of the Harvard students began to hold their signs...And the prank was complete."

"WE SUCK"

The full story, which got a lot of media coverage, is here. The prank was masterfully executed and had the effect of upstaging Harvard's lopsided 35-3 victory.