StreetEYE Blog

A weekend Brexit reading list

This business will get out of control. It will get out of control and we’ll be lucky to live through it. – Admiral Josh Painter, The Hunt for Red October

Bottom line … big mess. As the world gets smaller there are increasingly issues that need get resolved across old borders…environmental, labor, industry standards, financial systems, national security. And ad-hoc treaties and arrangements aren’t always adequate. The EU has done a pretty amazing job with free movement of people and goods and binding the entire continent. But the EU institutions and decision-making can be unwieldy, it has a democratic legitimacy issue. Free flow of people from Bulgaria, Romania and Poland all the way to the UK can arouse resentment. And of course the euro is a total disaster. You can’t have a currency union without fiscal and political union and labor mobility.

I question the wisdom of extending the EU and Nato up to the borders of Russia and former Soviet republics, and starting a shooting war in the Ukraine.

One feels there should have been a reasonable way to sort this out, the alternative will be a huge mess, and in the words of George W. Bush, this sucker could go down.

(more all the time at StreetEYE, natch)

The New Yorker cover

Hillary’s damn emails

The soldier who loses his rifle faces harsher punishment than the general who loses the war. — Anonymous soldier

So, I was reading this, by Kristy Culpepper. She’s smart, you should follow her. I agree with some of it but ultimately I think it’s off base from a tech / security / policy standpoint, like most of the furor on this issue.

I had a past life as CTO of the kind of hedge fund that’s barely big enough to need a CTO. So I had to be responsible for email servers, the whole kit and caboodle, spam and malware filtering, BlackBerries, backups, retention policies, compliance, disaster recovery, responses to regulatory requests.

It sucked, it was effectively 0% of my net added value and sucked up at least 20% of my time. No matter how well you implement best practices and protect the firm from downside, it always feels to everyone like you’re creating more problems than you solve. Nothing like dealing with senior management asking why a meeting on their calendar got screwed up, or dealing with their wives up in arms because they emailed their driver using their BlackBerry at the elevator and he hadn’t got the message by the time they got down to the lobby. Yeah, I’m responsible for every dropped signal in the tristate area. I’m sure you can tell I had a great attitude and was great at the job. Well, I was good at some things, others not so much.

So I digress, but my point is, I think that gave me a little perspective on security, email policies, etc.

One element that’s missing from the story is that State Department email sucks and was thoroughly penetrated by who knows who. That’s a real scandal and crisis. They shut that shit down and people literally can’t do their jobs. The notion that it sucked in Colin Powell’s day but now it’s fine, I don’t know where that comes from. I know folks over there — tell it to them when they lose out on job postings because they’re in the field and can’t send emails because the system was locked down.

The other thing is that the whole policy around email retention is misguided. Historically, transparency meant, when you have a meeting and take a decision, you keep minutes and all the docs and everything relevant to that decision. Which historically would have included memos and the like, but not usually handwritten notes and drafts and documenting every conversation. But electronic communication these days is so pervasive that it encompasses all the offline conversations that used to happen while crafting and negotiating decisions on the sidelines of a meeting, at a bar, etc.

And of course Hillary knows that everything she does is going to be the subject of a political witch-hunt at some point regardless of whether there is anything worth investigating.

Now, the normal reaction to that is not to set up a rogue email server. The normal reaction is to use iMessage and Google Chat and the various third-party end-to-end encrypted services that have sprung up — for the occasional message that you need to send but don’t particularly want in the permanent record.

Of course there are policies about that too. But that’s kind of how it works in Wall Street firms. The company email and phones and smartphones are recorded and monitored and archived, and there are policies about not using other devices. But no one is saying every communication from your trader about his plans at the pop-up secret strip club are subject to that, there is always some safe space, might be allowing Gmail, might be tolerating some apps like those above for personal use, in the extreme it might be, we can’t stop you from carrying two phones, just don’t use your personal phone on the trading floor or for company business. (And some places definitely put in super-strong policies while tacitly winking at circumventing them, as long as it’s plausibly deniable.)

In my opinion, the way she went about it may show some very poor judgment and the result of very questionable advice. It was inevitable that it was going to turn out the way it did. At some point someone is going to look at the email record, and ask, what the hell is ‘’ And then everything will come out…unless you properly erased, de-gaussed and then shredded the server when you were done with it, which is the proper way to go.

So probably her IT and operational and legal folks are just not very good and led her astray by suggesting it was no big deal and people would never make a fuss about it or she could keep the lid on it because she’s Hillary.

Sometimes hedge funds have not-so-great IT because it’s hard for nontechnical folks to hire and vet and keep technical staff. Sometimes fast-talkers sell them a bill of goods, sometimes management is so impossible to deal with that good staff is prevented from doing things right and won’t stick around at any price. Maybe someone told her what they thought she wanted to hear.

I think if her IT guy detected a cyberattack and shut it down, nothing whatsoever wrong with that. It’s sort of like noticing someone checking the locks and doors to see if they’re open. You might take services offline even if you’re secure, to slow down the attacker, and to give yourself time to double-check that you understand the attack and nothing is out of order. It would have been a juicy target and in this day and age nothing is secure. It seems like they had an eye on it but didn’t come very close to security best practices, sort of fitting the profile of a poorly managed hedge fund infrastructure.

Bottom line is, it goes beyond red flags, there is a concerted, systematic, poorly executed attempt to evade an IT policy which doesn’t suit her.

This is also a case that shows how, if security policies are onerous, they are circumvented. If systems aren’t fit for purpose, people will find other systems to use. There are limits to how far you can legislate ‘smoky rooms,’ morality, human behavior generally.

The question is more, did she break an arcane policy, a law like a speed limit, or a law like, keep our secrets safe from our adversaries?

Personally, I think it’s a breaking of rules that every politician breaks, but an unusually brazen, ill-advised, and poorly executed one.

She fits the profile of the entitled employee who thinks the rules don’t apply to them. Unlike most, she hired her own IT guy to help evade them. And they did a half-assed job.

I don’t really see that the public is entitled to all her emails about every decision and struggle with technology, about sensitive matters of state like the TPP. Some kind of privilege should attach to that. Even without them she flip-flopped, toeing the line on Administration policy as Secretary and then campaigning against it. To the extent it’s a cover-up, it’s an extremely poor one given that the end result is all her emails being made public.

I should add that if there was a specific national security compromise, a pattern of reckless handling of information, if the Clinton money is traced somewhere nefarious, all bets are off. But if she’s going down just for communicating over a back channel, pretty much everyone in government should be scared, and it throws a monkey wrench into a lot of government business.

But it does say something about her, the question is, what exactly?

Sometimes I think the whole thing could be a bit like Bush’s National Guard service… give the opposition a juicy-looking decoy target and they’ll spend all their time on something that ultimately no one is going to care about, and disregard the Clinton Foundation and millions of dollars in Wall Street speeches which carry a pretty strong whiff of corruption.

I don’t love Hillary. She’s shown questionable judgment on major issues. The decades of Clinton Derangement Syndrome by the opposition seems to have made her paranoid and defensive, sometimes completely oblivious or angry about legitimate criticism (like about the millions in speeches). They act like everything she does is a treason against motherhood and apple pie. Sometimes, like in this case, she acts like she’s above rules. In my opinion most (not all) the attacks on her and Obama as well are political, disingenuous, and stupid. Obama generally deals with ridiculous attacks like the birth certificate thing with pretty good grace and the occasional snarky counterattack. Hillary is a little more mercurial and thin-skinned and doesn’t have Bill or Barack’s charisma, political skill, or judgment.

She’s got issues of judgment and character. But compared to Donald Trump, she’s Mother Teresa. If this email thing is the worst thing about her, it’s not that big a deal.

When she was first running for Senate in NY I thought it was a joke, but she turned out to be hard-working, effective, popular (Rudy Giuliani couldn’t touch her in 2000 and withdrew), respected on both sides of the aisle.

Hopefully, she’ll be a President like that senator, not someone who shows poor judgment, is advised by people who seem chosen more for loyalty than wisdom, thinks she is above the rules, is thin-skinned and settles scores.

I saw her at an event in 2008 and she impressed as very bright and competent. I shook her hand and made some joke I don’t remember and she didn’t understand, I mostly remember the awkward pause. She doesn’t connect to the man or woman on the street. But then I couldn’t connect to them either, but I could probably have a good conversation with Hillary about policy.

One wishes there was someone who wasn’t a polarizing figure, that both sides could respect and work with even if they disagree. But we’re obviously not going to be so lucky. God help us.

The Top 100 People To Follow To Discover Financial News On Twitter, May 2016

It’s been a year since we posted our last list of people to follow on Twitter for financial news. Time for an update!

We start with a network centrality analysis, building a graph of who follows whom and finding the people with the largest number of most influential followers. Those are probably people who will play a big role in transmitting important news.

Then we trim the list to people who are good curators: they post links to a variety of good content in a frequent and timely manner.

Who do we cull?

  • Non-relevant accounts. @BarackObama is widely followed, but the stuff he posts is only occasionally relevant to financial markets.
  • People who don’t curate, filter, and signal the most important things to read. @LHSummers is a good example. He’s a really important guy to follow but he only tweets out his own stuff, he doesn’t help people discover financial news.

We rank the quality of each person’s curation on how much financial news they tweet, how much of it gets picked up and generates a lot of buzz, and how early they post it. It’s a subjective, but hopefully sensible formula.

Here’s our map of ~500 Twitter accounts, using a force-directed network. Everyone who follows an account pulls it toward them, so we see Twitter accounts arranged into broad areas according to who follows them: Asia, Europe, US markets, tech, media, econ, politics. People who are in the center are pretty equally followed by folks in all parts of the map, whatever their varied interests. Bigger labels represent people with larger followings.

Network graph - small
Click to embiggen.
Click for interactive version with more colors and rollovers for readability (may not work on all devices)

Below are the top 100 accounts to follow, ranked by our relevance score (click on headers to re-sort). You can follow the top 50, updated weekly, on the StreetEYE Twitter leaderboard.

(And of course, see the most shared financial stories updated continuously on the StreetEYE home page.)

(A quick P.S. and caveat: I’m delighted that people I respect a great deal get a kick out of it and find it useful, but keep in mind that 1) I don’t have full Twitter data and 2) it’s just a (hopefully reasonable) simplistic formula. If you’re on here than you’re probably pretty widely followed and post a lot of timely and relevant financial news. Let’s just say it’s inherently a ranking with a lot of bias and variance and tilts mainstream by design. I wouldn’t read much into why X is higher than Y or Z isn’t on here. Answers to some frequently asked questions are below.)

Screen name Relevance Centrality
JohnLothian 100.0 22.1
MarkThoma 83.5 49.9
pdacosta 65.9 68.8
Frances_Coppola 63.3 41.8
NickatFP 61.2 38.1
jessefelder 56.1 31.3
pmarca 53.9 83.4
Noahpinion 51.5 52.8
Schuldensuehner 50.7 34.9
mathewi 49.6 27.9
memeorandum 49.5 20.1
TheStalwart 48.8 80.8
ReformedBroker 47.4 71.6
FGoria 47.2 37.4
Techmeme 46.7 26.8
BobBrinker 46.1 35.7
M_C_Klein 45.6 64.6
AdamPosen 45.5 51.8
TimDuy 45.1 38.1
MOstwald1 43.9 23.8
mims 43.5 33.2
modestproposal1 42.0 41.8
edwardnh 41.6 46.5
mediagazer 41.3 95.0
RobinWigg 41.1 51.8
BarbarianCap 41.0 37.8
JacobWolinsky 40.6 31.2
DuncanWeldon 40.5 40.6
GreekAnalyst 39.9 31.2
AmyResnick 39.5 33.5
ObsoleteDogma 38.8 60.4
jyarow 38.6 29.6
jamessaft 38.2 31.1
DavidClinchNews 37.6 23.2
LadyFOHF 37.3 47.8
ComfortablySmug 36.4 29.4
EpicureanDeal 36.2 39.3
brianstelter 35.7 34.8
davidmwessel 35.4 59.1
ritholtz 35.2 68.1
elerianm 34.7 61.4
Dvolatility 34.7 25.7
moorehn 34.7 47.9
NickTimiraos 34.6 43.2
ylanmui 34.5 33.5
RPSeawright 34.1 26.8
williamalden 33.7 29.5
fmanjoo 33.3 39.4
JimPethokoukis 33.2 40.2
MadameButcher 32.5 29.7
howardlindzon 32.3 41.3
shaneferro 32.3 35.3
bySamRo 32.1 45.8
delong 32.0 51.7
ryanchittum 32.0 26.7
hedge_funds 31.9 21.8
BCAppelbaum 31.9 56.4
LaurenLaCapra 31.7 34.1
munilass 31.7 30.2
shannybasar 31.4 21.9
newsycombinator 31.2 21.8
crampell 31.1 47.7
lizzieohreally 31.0 35.0
SoberLook 30.9 40.0
trengriffin 30.9 30.7
blakehounshell 30.9 36.4
MattZeitlin 30.6 35.2
lindayueh 30.6 42.1
Jeffrey_Cane 30.6 30.4
raju 30.4 28.8
mercenaryjack 30.3 21.8
ericbeebo 30.2 38.6
MikeIsaac 30.1 28.5
mattyglesias 30.1 54.4
dandrezner 29.9 33.5
ModeledBehavior 29.8 41.1
AlephBlog 29.7 35.0
jennablan 29.6 49.5
GTCost 29.6 29.3
pkedrosky 29.5 50.0
peter_tl 29.5 42.2
TheBubbleBubble 29.4 30.2
ktbenner 29.3 29.9
matt_levine 28.9 63.7
MarkYusko 28.8 31.7
mccarthyryanj 28.8 35.9
johngapper 28.7 47.0
rcwhalen 28.6 31.7
economistmeg 28.6 51.3
tylercowen 28.2 56.1
LorcanRK 28.2 52.1
Kiffmeister 28.2 23.9
BenedictEvans 28.2 39.4
volatilitysmile 27.9 27.8
IvanTheK 27.8 46.6
MParekh 27.8 23.5
NicTrades 27.7 37.6
JustinWolfers 27.6 60.0
HamzeiAnalytics 27.6 23.8

Frequently asked questions:

  1. What (TF) is StreetEYE? Since 2011 we’ve tried to systematically find the best people to follow for financial news, and create a crowd-sourced front page of the financial Internet. You can read more here.
  2. Why isn’t <brilliant pundit or technical commentator> on the list? Assuming they are widely followed, probably because they don’t share other people’s content very much. There are a lot of great people to follow, who only share their own original content, or that of their colleagues. They don’t add a lot of signal to help discover news, so they don’t meet the relevance bar. 
  3. Why isn’t ZeroHedge on here? Everyone knows they should be #1! ZeroHedge blocks our bot on Twitter. There are three accounts I would like to follow that block us. Maybe they just don’t like being aggregated in this way. Maybe I said something snarky. I have been known to be a jerk. Sorry! Ask them.
  4. Why isn’t <other great account> on here. Maybe they are just below the 100 cutoff. I am the first to admit the formula is subjective and arbitrary. I wouldn’t call it bizarre, but I would call it idiosyncratic. If they post a lot of timely relevant headlines, they are probably on our radar. Sometimes there are artifacts and judgment calls. For instance @mediagazer is widely followed by a lot of journalists who are great curators, so they have a very high centrality score. And they often share relevant news about financial media. Should they be culled because they’re mostly about media? Judgment call. The formula tends to like places like @DRUDGE_REPORT that post a lot of news stories in a timely manner that ultimately get a lot of buzz. If there is someone who is relevant and widely followed who is not on the list, we would like to know. Contact us! We love feedback.
  5. Can I see the whole list? Here are the top 250. If you want to see where others rank, or follow even more of them, go to town!
  6. If you have other questions, tweet at us at @StreetEYE or contact us via the contact form.

A possibly ill-conceived rant

There is no racial bigotry here. I do not look down on niggers, kikes, wops or greasers. Here, you are all equally worthless. – Gunnery Sergeant Francis Hartman

Against my better judgment, here’s a quick rant about race.

They say, on the Internet, no one knows you’re a dog…but here’s a controlled experiment: list a bunch of things on Ebay, some with a black hand showing them off, and some with a white hand. The one with the white hand will get higher prices.

This may set off cognitive dissonance that it was a poorly executed experiment, or that it’s meaningless. But I feel confident this result holds up to some degree in any careful attempt to replicate it. When was the last time you saw an ad with hands showing off a product in a mainstream media publication, and they weren’t white, usually female? (Edit: see also Airbnb while black.)

No one is immune to acting differently towards people based on their skin color/sex/religion, or any perceived difference. It’s just a matter of degree. Some people perceive stronger distinctions and reflect stronger distinctions in the way they speak and act.

First degree: I inflict, support, desire harm on someone based on the color of their skin. Lynching someone, or calling them the n word (or wearing “Kill all whites slogans” or killing someone because they’re white).

Second degree: I claim I don’t have anything against white/black people, but I am uncomfortable with my daughter marrying one. ‘Sorority racist’ as Chris Rock calls it.

Third degree: I am open toward people of many races in different roles, but I identify as a race, and have subtly different feelings, expectations, reactions, and actions toward people based on race.

No one is immune to this third degree. We’re a tribal, social, territorial, hierarchical, violent species. (See Desmond Morris.) And even if we were purely logical and rational, growing up in say New York, where people of different races talk differently, eat differently, listen to different music, watch different TV and movies, are somewhat segregated, and have different representation in different socio-economic roles, one develops a different set of expectations about the likelihood of attitudes and behavior from different races.

Lest you say this third degree doesn’t matter much, I refer you to the Ebay experiment and urge you to think about what the same means in the job market or housing market. Simple models show that modest preferences to be around some folks of your own race lead to a high degree of racial segregation, even if the starting point is well integrated. Over time, small differences add up to a lot 1.

I have seen this Ebay experiment arouse a strong reaction of cognitive dissonance. Libertarians say markets cannot discriminate, the use of group averages as a proxy in the absence of other information is not discrimination, liberals respond indignantly, everyone starts pointing fingers and resorting to ad-hominems. Read the comments on the Ebay article just a taste.

What do you do about it? I don’t know. But in terms of policy, I lean toward:

  • Laws that are 100% race blind and treat everyone as equal in front of the law.
  • Processes that try to take race out of the equation. When there are disparate outcomes based on race, take a stronger look at the process, but try to make it relatively race-blind, while avoiding completely unrepresentative and undesirable outcomes.
  • A safety net that ensures regardless of race, people aren’t denied opportunity for a decent education, health care, basic needs. We do a pretty good job of making sure old people don’t starve or get denied access to health care, we do a pretty poor job for children.

If you had college admissions based purely on an admissions test, which happens in many countries, you’d have a lot more Asians. Maybe a lot of top colleges would be like Caltech’s 45% Asian student body. Much was made about blacks at the Oscars, but here’s the entirety of Asian nominees (not winners) for Best Actor/Actress: Ben Kingsley, Yul Brynner, Merle Oberon. Something seem off? Maybe Asian performers have more to complain about with regard to access to opportunity than black folks. Ask Aziz Ansari. If you go 100% race blind, you perpetuate whatever existing advantage some group has. So be careful what you wish for.

Is it wrong to put a modest finger on the scale to get outcomes that are more representative? I think it is a proxy for fairness because we haven’t all had the same chances. It is also practical because society is better off if its elite and political leadership is representative.

But if you put too much of a finger on the scale, there are unintended consequences. Everyone starts to feel disadvantaged. People who feel disadvantaged get angry. Everyone starts fighting over who is getting more of the pie.

Disadvantaged and unpopular minorities should expect fairness from democratic government – that’s what the Bill of Rights means. But the kind of strong government that acts for fairness can be oppressive in the hands of the wrong person <cough>Trump<cough>. The Ebay market outcome is unfair, but there seems no way to remedy it without making the market as a whole even more imperfect. So, again, be careful what you wish for.

People throw around accusations of racism as if people who are racist are evil others who must be punished. But everyone’s a little bit racist. We’re neurotic, because something that is part of all of us is treated as a disease or a crime against decency.

We should all strive mightily to treat people as individuals, recognize that we are flawed and will never do so perfectly, and be reasonably tolerant of the shortcomings of others. And at the same time draw some clear lines about what type of racist action and language is not acceptable in a civilized society, and not allow the more angry and disturbed souls among us to poison the well. And see what we can do, within reason and without trampling the rights of others, to create a fairer society.

1 And if you read social media and comment sections, there sure are a lot of people who go well into degrees one and two.

What if everyone was a passive investor except Warren Buffett?

This is a slightly extended “director’s cut” of a post written for CFA Institute Enterprising Investor.

Warren Buffett sometimes says things that seem . . . contradictory.

For example, in the “You don’t have to be a genius to be a great investor” category:

Success in investing doesn’t correlate with IQ once you’re above the level of 25.”

If you are in the investment business and have an IQ of 150, sell 30 points to someone else.

He loves tweaking academic proponents of the efficient market hypothesis (EMH):

I’d be a bum on the street with a tin cup if the markets were always efficient.

Naturally the disservice done students and gullible investment professionals who have swallowed EMH has been an extraordinary service to us . . . In any sort of a contest — financial, mental, or physical — it’s an enormous advantage to have opponents who have been taught that it’s useless to even try.

And yet Buffett also says most people should steer clear of active investing: Like those same gullible investment professionals and misguided EMH proponents, he recommends low-cost index funds.

A low-cost index fund is the most sensible equity investment for the great majority of investors.

[To his own self-selected trustee] My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”

How can Buffett say passive investing is best for most people and also an “enormous advantage” for active investors like him? If it helps everyone else, how can it also help him?

The opposite view is sometimes described as the “suckers at the poker table” hypothesis — the theory that an increase in passive investing is bad for active investors like Buffett because the fewer suckers there are to fleece, the less profit there is for smart active investors.

So which view is right? The “suckers at the poker table” theory, or Warren Buffett, who says passive investors make his job easier? And how can Buffett be right while at the same time saying most people should invest passively?

Let’s do a simple thought experiment: What would happen if everyone was a passive investor except Warren Buffett?

As is often the case, we find that Buffett is way ahead of everyone else. He is both correct and self-serving. Anyone can use an index to match the market on a holding period–return basis, and yet Buffett can still crush everyone else on a money-weighted basis.

A brief theoretical digression: The Grossman-Stiglitz paradox holds that you can’t have a perfectly efficient market because that requires someone to be willing to arbitrage away any inefficient price. But arbitrageurs have to get paid. So they will only step in if they’re compensated for their time, data services, research, compliance, office rent, overhead, and an adequate after-tax, risk-adjusted return.

So markets tend toward an equilibrium where prices are boundedly efficient, where there is no more mispricing than at the level that would make arbitrage profitable.

The set of all investors is the market itself and, in the aggregate in any given period, earns the market return. The subset of index investors, by virtue of owning the market portfolio, also earns the market return. To make the indexers and non-indexers add up to the market, the non-index investors in the aggregate must also earn the market return.1

In the aggregate, those “arbitrageur” active investors aren’t making any excess profits! Before expenses, they are matching the market, and after expenses they are underperforming.

In order to have any profitable active investors, it seems you need overconfident, “dumb” active money that loses money trading against the “smart” arbitrageurs. And that doesn’t make much sense. It implies the persistence of a class of irrational investors. If there’s a tug of war between smart money and dumb money, and a priori the dumb money is as strong as the smart money, and it’s to the smart money’s advantage to trick the dumb money whenever possible, why should that make prices efficient?

It sounds like a theory of irrational traders and not very efficient markets.

Let’s see if a thought experiment can shed some light:

What happens if passive investors take over the market so there is only one active investor left: our hypothetical Warren Buffett?

Let’s disregard, for now, changes in the composition of the index. We only have Buffett trading with passive investors. The passive investors just want to enter and exit the whole market. They don’t want to trade individual stocks or a non-market-weighted portfolio. And there are no other active investors to trade with other than Buffett, who makes a bid-ask market for the index, selling when it’s above his estimate of fair value and buying when it’s below fair value.

A somewhat trivial example, which should be familiar to those who have done the CFA curriculum on holding period vs. money-weighted returns:

Cash Flows
Fair Value
Investor 1
Investor 2
Investor 3
Investor 4
Year 0 $ 100.00 100.00 (0%) (1,000) (1,000) (1,000) (1,000) 4,000
Year 1 $ 105.00 (5%) 94.50 (-10%) (1,000) 945 (1,000) 1,055
Year 2 $ 110.25 (5%) 121.28 (28.3%) (1,000) (1,000) (1,000) 1,283 1,717
Final value $ 115.76 (5%) 115.76 (0%) 1,158 3,337 2,112 955
Holding period return 5.0% 5.0% 5.0% 5.0% 5.0%
Money weighted return (IRR) 5.0% 5.4% 2.7% -5.0% 28.3%


  • The index fair value grows at 5% per year.
  • It starts priced at fair value in Year 0, in Year 1 it trades at a 10% discount, in Year 2 at a 10% premium, and then finally returns to fair value in Year 3.
  • The holding period return, which ignores flows, is 5%, matching the index.
  • Passive Investor 1 buys $1,000 worth of stock in year 0, never trades thereafter, and has holding period and money-weighted return of 5%, the market return.
  • Passive Investor 2 buys $1,000 worth of stock each year and has a money-weighted return of 5.4% as a result of automatically buying more shares when they are cheap and fewer when they are expensive.
  • Dumb Investor 3 panics when the market goes to a 10% discount and doesn’t buy that year and ends up with a 2.7% money-weighted return.
  • Dumb Investor 4 panics even worse, sells when the market goes to a 10% discount, and ends up with a -5.0% money-weighted return.
  • Warren Buffett stays out of the market until it trades at a 10% discount, sells at a 10% premium, and ends up with a 28.3% money-weighted return.
  • Corporate issuance is included as a reminder that there are two sides to the market and overall cash flows in and out have to net to zero.2

If you examine any individual year, everyone here is a passive investor in the sense of always holding the index.

Everyone gets the same 5% holding period return, which ignores flows.

But on a money-weighted, risk-adjusted basis, of course, the returns are very different, and our Warren Buffett crushes the market.

One way of looking at it is Buffett times the market, increasing the size of the overall pie when the odds are in his favor, shrinks it when they aren’t, and outperforms without necessarily taking anything from the other investors, who earn the market return in each holding period.

Another way of looking at it is to consider the whole scenario as one holding period during which Buffett took advantage of people who were selling low and buying high. Effectively, our Warren Buffett sets a floor under the market when events or cash flows make the passive investor inclined to sell excessively cheap and sets a ceiling when the market gets expensive.

Even though everyone here is passive in a given year, if you think of the entire scenario as one holding period, only someone who owns the index and never trades is really a passive investor. Everyone else is buying high or selling low within the period.

The key point here is, the only person who is a passive investor is the one who never trades. That person is guaranteed the market return. Even if you are just re-investing dividends, there’s no guarantee of how well you will execute. As soon as you trade, you are at risk of being exploited.

On a sufficiently long timeline, the probability of being a completely passive investor goes to zero. If you’re planning to invest for an objective other than buying and holding forever, you have to make decisions about when and how much to invest and when and how much to withdraw.

Eventually you have to make an active investment decision, and at that point the shrewd investors are lying in wait. Everyone eventually has to pay Charon to cross the river Styx.

It gets even better for Buffett when you incorporate index changes.

An IPO comes out. The IPO is initially not in the index. Our hypothetical Warren Buffett sets the IPO price. He doesn’t have anyone to bid against or anyone to trade with besides the issuers since the stock is not yet in the index. Being an accommodating fellow, he sets the price at fair value minus his margin of safety, illiquidity discount, etc.

The IPO eventually gets added to the index. Indexers have to buy the stock. Buffett solely determines the price at which it gets added to the index. In his obliging manner, he sets it at fair value for a liquid index stock plus a reasonable convenience premium.

What a sweet deal! Pay a steep discount for any security not in the index and demand a big premium when it goes into the index. Similar profits are available when securities exit the index.

Going back to the Grossman-Stiglitz paradox, the arbitrageur active traders can do pretty well, even without the existence of a large pool of permanently underperforming “dumb money,” which is unnecessary and illogical.

They pull a bit of Star Trek’s Kobayashi Maru scenario by going outside the bounds of picking stocks from within the index, by timing the market, by charging a toll for the more passive investors to enter and exit the index.

The “suckers at the poker table” paradigm goes astray because there isn’t some exogenous fixed size of the investment pie investors are fighting over. The returns are endogenous: They are in part determined by how smart the investors are, how well the capital in the economy is allocated, and by everything else that impacts economic and market outcomes.

The performance pie is not fixed. When someone invests in an early Apple or Google, are they stealing performance from someone else? Was Ron Baron stealing performance from someone else when he funded Wynn as a startup? He’s creating something that eventually goes into the index…pulling a bit of a Kobayashi Maru by redefining the index.

When Buffett invested in Goldman Sachs during the crisis is he stealing performance from someone else? You could argue Goldman Sachs made excess returns on his investment, it gave them opportunities no one else had, and benefited all shareholders. Buffett pulls a bit of a Kobayashi Maru by expanding the investable market when it’s cheap, instead of taking it as a given fixed pie. 3

Smart money going into appropriately priced investment opportunities grows the whole pie. Dumb money going to bad businesses shrinks the pie. Once it’s not a strictly zero-sum game, you don’t need “suckers at the poker table” to outperform. Sufficiently smart money creates its own suckers.

The more extreme advocates of passive investing go astray, I think, in concluding that passive investors can always match active investors.

See for instance, Sharpe. His mathematical proof that indexers always match the market is, of course, correct insofar as the passive investor who does nothing, gets the market return. But as soon as you trade, you’re an active investor in that period (Sharpe’s footnote 4). And the spread you have to pay to transact is the gain of the active player on the other side. So passive performance = active performance, but only because the passive investor has to briefly become an active investor in order to get fleeced.

Sharpe’s proof is correct on an accounting basis, but tautological and not fully descriptive of market reality. In order for the passive investor to match the market in practice, he must be able to trade in size at the market price and not allow himself be exploited. Which is not a bad assumption at small scale but gets harder as the passive investor gets bigger. (Sharpe hand-waves past this in footnote 3, saying trading makes the math more complicated but doesn’t change the basic principles. But if passive trading is big enough to move the market, if effective trading spreads are sufficiently large, that can no longer be true.)

Passive investors cannot always have a free option to match the market, unless the other side gives it to them. The outcome is an equilibrium. When few people are passive, indexers get to match the market and free ride with the people who do the research and set the prices. On the other hand, when many are passive and few are active, there are mispricings, and when indexers have to trade, for instance around big dividends, corporate actions, index changes, rebalancing, seasonal cash flows, economic developments that necessitate cash flows, they can be exploited because they herd.

It’s a little absurd to take a fanatical view about indexing. Active vs. passive is a continuum, from matching the market portfolio and never trading, at one extreme, to finding big bets where you have an edge and trading often, at the other extreme. Anyone who trades inside your time frame is active and giving you an option to potentially eat their lunch if they’re willing to trade at a favorable price, and on a long enough time frame no one can be completely passive forever. What one should be fanatical about is expenses, after-tax risk-adjusted returns, keeping it simple, and avoiding mistakes – all of which are good arguments for indexing.

There are many useful parallels between investing and poker. You have to zig when everyone else zags. Simple strategies can be exploited. You have to use a meta strategy, like a mixed Nash equilibrium.

Unlike poker, investing is not a zero-sum game. Dumb money is not the primary driver of returns for most strategies, and “suckers at the poker table” is not a useful analogy for most long-term investors. There is always a game beyond the game, where the best players astutely redefine the game to find an edge.

Efficient market proponents make the point that there ain’t no such thing as a free lunch, in the form of persistent pricing inefficiencies that provide excess risk-adjusted returns. But in a sense, indexing is yet another attempt to find a free lunch … the indexer gets a free ride on efficient prices determined by everyone who does their homework. Like all free lunches, this one also goes away if enough people take advantage of it.


  • If sufficiently few people index, indexing is a free lunch: same performance with lower costs.
  • If you can index and never trade, you are guaranteed the index return (without reinvesting dividends).
  • Nobody can be totally passive forever. Everyone has to trade sometime. Even re-investing dividends, rebalancing has a cost.
  • Everybody can’t be passive, someone has to take the other side of each trade.
  • If enough people index, and have to trade, they can be exploited.
  • As indexing increases, herding increases, correlation increases, overall volatility increases. 4
  • The math that proves indexers can always closely or perfectly match the index performance, doesn’t add up when the indexer has to trade, and trades are big enough to move markets.
  • Instead, there’s a Nash-like mixed strategy equilibrium: too little passive, passive can exploit active, too much active, active can exploit passive.
  • Dumb money doesn’t become smart money because it indexes. It just finds another way to lose. There is always a game beyond the game.
  • And finally, everybody likes a good Buffett angle, even if it’s a MacGuffin for a boring discussion of limits of active v. passive.

This benefited from discussion with Will Ortel of CFA Institute and Wes Gray of Alpha Architect.

1. This accounting excludes issuers of stock, who are kind of important. Companies are net distributors of cash to their stockholders. They pay dividends and they on net buy back stock, these days. So everyone cannot be a passive investor in the S&P and reinvest dividends. If they tried, something would have to give. Investors would bid up stocks until someone capitulated and started selling, or companies started issuing stock, or something. When it’s not a zero-sum game, reasoning from accounting identities tends to be misleading.

2. Here’s a thought exercise: do you think the issuers are on balance generally timing their corporate actions efficiently, issuing high and buying back low? Does it matter? Answer (I think): On any finite time period, of course it matters! If companies are acting efficiently over time, generally selling stock when it’s expensive and buying it back when it’s cheap, that is bad for whoever took the other side of that trade. The shareholders on the other side have a lower return than the market average. The company has a lower effective cost of capital than long-term market averages would suggest. And the shareholder who holds indefinitely and never trades gets a benefit.

Going back to footnote 1, this is another reason active=passive only with simplifying assumptions of ignoring issuance and distributions and trading, which are rather significant to returns and properly functioning capital markets.

(If any good research summary on how well capital transactions are timed, I would love to read about it. À priori I would guess IPOs and LBOs tend to be not advantageously timed for public shareholders; dividend adjustments tend to lag market developments; buybacks tend to be distorted by management incentives around return on equity and stock options; cash mergers, not sure. )

3. When someone invests in an early Microsoft, they are partly creating wealth, partly taking it from e.g. IBM shareholders. Similarly when Buffett invests in GE on the cheap, he is partly increasing the pie for everyone, partly giving himself a better deal at the expense of everyone else. The beauty of a properly designed free market is that everyone has to harness creativity for the benefit of all to gain something for themselves.

4. These seem the most plausible first-order approximations. The reasoning is that as active investors turn passive, flows are more correlated, the inside bid-ask from the remaining active investors can only get wider, and a given flow has a bigger impact on price. But if the one Warren Buffett who is left changes his mind daily on intra-index relative prices more than the exiting investors did, you could conceivably see an increase in intra-index volatility.

Stories Are Powerful, But Check the Math

The first principle [of scientific inquiry] is that you must not fool yourself – and you are the easiest person to fool – Richard Feynman

In God we trust; all others must bring data. – attributed to W. Edwards Deming (ironically without any primary source backing up the attribution)

This Amy Cuddy TED talk was electrifying.

Video spoiler: If you adopt a “power pose” for 2 minutes, Amy Cuddy says it will not only change your posture, image, and attitude, but even your body chemistry, with more production of testosterone and anti-stress hormones.

It’s a great story, which is probably why it’s currently the second most-viewed TED talk.

Unfortunately, the published study study had only 42 participants. And other studies haven’t replicated the results on hormone production. Andrew Gelman even uses the opprobrious term p-hacking: data-mining to find a spectacular result.

The curse of dimensionality: the more things you measure, the more things will significantly deviate from the median.

The math can be counterintuitive.

Take a sample of apples. Grade each apple with a single number, like weight. For a contrived example, let’s say weight is uniformly distributed between 0 and 1.

What percentage of objects lie between 0.25 and 0.75 (the middle 50%?).

50% number line

Obviously, the blue line is 50% of the orange line.

Let’s grade apples along 2 dimensions, e.g. weight and redness.

What percentage of objects lie in the middle along both dimensions? Assuming weight and redness are uncorrelated, the answer is 50% squared, i.e. 25%.

How big a circle do we have to select to get to 50% of objects? We have to solve

    \[ \Pi r^2 = 0.5 \]

which gives r = 0.3989.

We see that we need a circle with almost 80% diameter to capture 50% of the square.

Number square

Let’s grade apples along 3 dimensions, e.g. weight, redness, and sweetness.

What range do we have to select to get to 50% of objects? We have to solve

    \[ \dfrac{4}{3} \Pi r^3 = 0.5 \]

which gives r = 0.492373.

We need a sphere with almost 100% diameter to capture 50% of the cube.

Sphere in cube

The point is, as you add more variables, the central 50% (or any x%) contains more and more extreme values. As you add dimensions, the outlying regions get bigger faster.

We can extend to higher dimensions which we can’t visualize, and chart the width of the 50% hypercube as we increase the dimension:


If you have 14 dimensions, the 50% hypercube is 95% of the length of the unit hypercube.

With enough features, anything or anybody is an outlier on some dimension.

Suppose you do an experiment measuring the variation of testosterone after assuming a power pose.

Suppose the power pose in fact has no effect on the level of testosterone (the ‘null hypothesis’).

If you observe a change due to chance variation, 95% of the time it will be statistically insignificant at the p > 0.05 level, and significant (p < 0.05) 5% of the time.

If testosterone and corticosteroids both exhibit no effect, the measured change in both will be statistically insignificant 0.95 * 0.95 = 90% of the time (assuming no correlation between them). As you measure more variables, the chance of one of them being significant goes up rapidly.

If you measure 14 insignificant variables, there’s a 50% chance one will be significant at the p < 0.05 level.

If you measure 50 insignificant variables, there’s a 92% chance one will be significant. 92% of that 50-dimensional ‘hypercube’ is in its outermost 5% region.

That’s how you get a prank paper to go viral showing chocolate helps people lose weight.

This sort of thing could be avoided if it was standard practice to hold back some test data, and do an out-of-sample test on any scientific finding. The methodology as practiced, to assume errors are unsystematic, and report p-values and significance on that basis, even on small samples tested for multiple relationships, seems weak and unscientific.

Returning to Amy Cuddy, you can interpret this a couple of different ways.

One interpretation: Statistics do not back up her story, that power poses raise hormone levels.

Another interpretation: Statistical methods are weak at finding complex stories, and you have to come up with a story to understand the world, and look for statistical confirmation where you can find it.

Acting with confidence and joy is contagious, to your own psyche and how others view you. That’s a story. Stories let humans understand and remember very complex phenomena.

For instance, attach a story related to their personal experience, and people solve tricky logic problems easily. Show them the same version as an abstract math problem, they fail miserably.

Feynman, quoted above about not fooling yourself, also said you must develop your intuition, thinking through examples and understanding the story of how things work as more than mathematical abstractions.

Stories are powerful. The more interesting things in the universe are complex interactions, like stories: evolution, the Big Bang, the French Revolution.

The curse of dimensionality means that as you absorb more features of the world, the possible states and explanations and oddities rise according to factorials and exponents. Things get curiouser and curiouser. There are complex interactions that can’t easily be explained. Stories are how humans make sense of a complex world.

Stories can mislead. A great story can be spurious, T. H. Huxley’s “great tragedy of science – the slaying of a beautiful hypothesis by an ugly fact.”

Stories are a powerful shortcut (Kahneman’s ‘thinking fast.’). But they are a shortcut that can lead you astray, so you also need to stop from time to time and make sure you know where you are going (Kahneman’s ‘thinking slow’).

So use your evolution-given power to understand complexity through narrative — but check the math.

Even if poses don’t elevate hormone levels, Superman and Wonder Woman were depicted that way for a reason. Don’t slouch through life due to lack of statistical evidence you shouldn’t!

(Mathematica notebook.)

iPhone Backdoors for the FBI, a blockchain approach for transparent due process, and why it’s a bad idea

So, the security complex is putting on the full court PR press for encryption back doors. See here and here.

Basically this is about giving someone a TSA lock to your phone and promising to keep it really really safe unless a legit law enforcement request is received. Of course, legitimacy is in the eye of the beholder.

One place where the real-world analogy breaks down is that any backdoor, in theory, enables industrial-scale exploitation. Potentially, it’s not just making it possible to open a car trunk that contains a body but more like requiring cars made out of material that’s transparent to the state. And then counting on due process to make it not infringe on the 4th Amendment and freedom from constant state surveillance.

The problem is, the folks at the NSA, CIA, DIA are in the deception business, and feel they have a moral imperative that demands deceiving the enemy, which in turn demands deceiving (lying to) the public.

I don’t even blame them, they have a job with a lot of risk, no real glory. Their job is to do what they can with the tools they’re given, and probably take the fall for ‘not connecting the dots’ even when they pretty much connected the dots.

Hillary talks about a Manhattan Project for cybersecurity…the truth is there is no way to create a magic bullet that can only be fired by the good guys, and there has been a $10b annual Manhattan project for years to enable the NSA to undermine and exploit the tech industry’s security.

So, I really thank Tim Cook for standing up to useful idiots who say Apple enables terrorists.

But with the current level of stupidity, there’s a very real possibility it’s a losing battle against that accusation, especially if there actually is a terrorist attack that hits an investigation roadblock due to iPhone encryption.

If you go down the backdoor road, there has to be maximum real-time transparency and due process. That’s kind of what the blockchain is: a secure, open public ledger of transactions. They can be money transactions, or transfer of ownership of other rights or responsibilities, or any bits, really.

So anyway, here is, as a thought experiment, how you can use the blockchain to enable transparency and due process in a key escrow scheme.

1) When Apple generates keys to encrypts your phone, they keep a copy. The copy is kept in such a way that the only way to release it is through due process.

  • Records of keys to be kept in one location, e.g. basement vault at Apple HQ.
  • They are kept only on physical media.
  • There is no network access to that storage
  • The location is electromagnetically shielded, physically secured per DoD standard for most secret information.
  • The keys are generated and conveyed to that storage securely, and any copy outside the room is destroyed. How to actually guarantee that is another giant bag of worms that is beyond my pay grade. But it has to be done per a checklist like generating nuclear launch codes, and the process audited regularly, and e.g. Tim Cook to certify annually under criminal penalty that the procedures were followed, and any shortcomings or attempts at circumvention publicly disclosed.

2) When law enforcement wants access to a phone for a criminal investigation, they post the request on public blockchain that is jointly maintained by all the interested parties, including watchdogs like the ACLU. The request records

  • requestor (state attorney general, US attorney, etc.)
  • target device
  • specific major felony accusation
  • specific individual or witness

3) Judge approves the request and posts approval on the blockchain.

4) There is a reasonable delay e.g. 72h to allow challenging/appealing the request.

5) Public signature by e.g. Tim Cook that he personally authorized access after finding it was legit and all necessary information was public on the blockchain, and appeals/challenges exhausted.

6) Keys transmitted to law enforcement by similar nuclear launch code checklist, e.g. all access to the physical location and media where it’s stored by two people who follow the checklist and record that it was followed, under criminal penalty for exfiltrating information inappropriately, or not documenting any attempt at circumvention. And again, procedures and logs subject to annual 3rd party audit, and management to certify that all procedures followed, any gaps or attempts at circumvention publicly disclosed.

The point of this exercise is that once you have a backdoor, you need real, public due process with teeth.

This process will satisfy no one. It’s a huge hassle for e.g. Apple. The security community wants something where they can ask for an inch and take a mile, and blame civil authority when they don’t find the threats. The civil liberties community will rightly suspect there is a hole in there somewhere, or that one will be created at the next ‘national security emergency,’ because that’s what the public raised on ’24’ and ‘Homeland’ expects.

And of course China and Russia will demand their own, much more leaky version of this, and Apple will end up in the Stasi-enabling business.

More and more, your whole life is on the phone. It leaks plenty of information semi-voluntarily about everywhere you go, everyone you spend time with, communicate with, what sites you browse, who you transact with. The security guys can do all kinds of other things to track you, GPS monitors, hack your phone, search your garbage.

Better to not go down this road of giving the surveillance state unfettered access to everything. And maybe it’s time to try to use technology for cryptographically secure transparency and due process.

The most popular keywords and sites of 2015

Here’s a word cloud of StreetEYE headlines in 2015 (click to embiggen).

word cloud

Greece (remember Greece?) beat out China for the biggest headline-bait of the year. Tsipras even beat out Yellen, although Grexit ended up a non-event. (To my surprise actually…Schäuble and Varoufakis were both apparently playing for Grexit, so I thought it would take a miracle. The center held, but the political cost to Europhiles like Merkel, Hollande, Draghi, Renzi hasn’t been counted yet.)

One thing that makes me happy: we posted stories from 1536 unique domains in 2015. We (or you, our readers and curators) posted about 65 headlines a day. About half were from the ‘Big 5’ of Bloomberg, Wall Street Journal, Financial Times, New York Times, and Reuters. The balance were from the long tail of domains (see below).

The most-clicked stories of 2015 were quality features, but sometimes a little click-baity. We’re all about the good headlines.

Details below. Thanks for coming along on this journey. If you have any comments or suggestions, please let us know. Have a great 2016!

1 It’€™s sleazy, it’€™s totally illegal, and yet it could become the future of retirement (Tontines, per Moshe Milevsky (I agree))
2 What the Smartest People in Finance Think You Should Read (books)
3 What is code? If you don’t know, you need to read this
4 The CEO Paying Everyone $70,000 Salaries Has Something to Hide
5 How Two Guys Lost God and Found $40 Million
6 Carly Fiorina failed to register this domain.
7 I Had a Baby and Cancer When I Worked at Amazon. This Is My Story
8 Inside Hunt & Fish, where beauties trawl for sugar daddies (throw’em back!)
9 What The New York Times Didn’€™t Tell You (about Amazon)
10 ‘Shell-shocked’ CNBC staffers had long flight home

Top domains of 2015

1 Bloomberg
2 Wall Street Journal
3 Financial Times
4 New York Times
5 Reuters
6 The Guardian
7 Bloomberg View
8 Business Insider
9 Washington Post
10 The Telegraph
11 VOX
13 Re/code
14 The Economist
15 European Union
16 Fortune
17 Vox
18 Quartz
19 MarketWatch
20 Project Syndicate
21 Medium
23 Forbes
24 Federal Reserve
25 New York Fed
26 A Wealth Of Common Sense
28 ZeroHedge
29 TechCrunch
30 Politico
31 The Reformed Broker
32 New Yorker
33 NY Post
34 Dealbreaker
35 The Verge
36 Calculated Risk
37 mainly macro
38 Marginal Revolution
40 Yahoo
41 Fusion
42 Econbrowser
43 The Atlantic
45 IMF
46 Huffington Post
47 BuzzFeed
49 Stumbling and Mumbling
50 New York
52 CNNMoney
53 BBC
54 Wired
55 Economist’s View
56 Barron’s
57 Gawker
58 LA Times
59 Yanis Varoufakis
61 Bank Underground
62 YouTube
64 Noahpinion
66 USA Today
67 Slate
68 Bank of England
69 The Independent
70 Der Spiegel
71 Worthwhile Canadian Initiative
72 BBC
75 Vanity Fair
76 Macro and Other Market Musings
77 Conversable Economist
78 InvestmentNews
80 BIS
84 The Grumpy Economist
86 The Times
89 Time
96 Foreign Policy
97 The Big Picture
100 Institutional Investor

The End of the PC? On Intel’s Apple and ARM problems

apple-iphone-6s-live-_0752.0Tim Cook has been running around heralding the end of the PC. A self-serving assessment, but Intel and the PC ecosystem are going to struggle to maintain their traditional relevance. In this post, I will look at 1) the narrowing Intel/ARM performance gap, and 2) what the ‘end of the PC’ might look like.

1. The narrowing performance gap

At the introduction of the new iPhone 6s, Phil Schiller made the claim that the phone’s ARM-based SOC (system-on-chip) is more powerful than chips powering 80% of laptops…in other words faster than the low-end Intel Atoms, Celerons, i3s, and on a par with the Intel’s bread-and-butter Core i5s which powers pricey MacBook Pros.

iPad Pro benchmarks

Benchmarks bear him out (scroll through for Intel comparisons).

Comparing the new iPad Pro to the latest Intel-based Microsoft Surface Pro 4, the new iPad has a bigger screen, weighs less, and has longer battery life than Surface.

The Surface Pro 4 seems to have similar single-threaded performance and higher multicore performance. It seems positioned as a good laptop, which can also function as a tablet.

(Aside: Mystifyingly, no built-in LTE option. For many people having a single mobile plan and tethering other devices via Wifi/Bluetooth seems like the best option, but for many corporate use cases LTE is still a needed option.)

Bottom line: Right now, ARM can’t offer the raw performance of the high-end Core i7 and Xeon processors. But it can hold its own against the bread-and-butter i5, at a superior performance per watt and performance per dollar.

This is a big problem for Intel.

2. How did this happen?

Historically Intel has had a number of key advantages over its competitors in CPUs:

  • Above all, the most advanced chip fabrication. In process, Intel typically was a generation ahead of its competitors like Samsung, TSMC etc. That means smaller chips, lower power per transistor, higher performance.
  • CPU R&D – more advanced architecture design with higher transistor counts, larger caches, out-of-order execution pipelines etc.
  • Scale and network effects – more investment in compilers, tools for the x86 platform.

That added up to a mega franchise:

Investment in fab and architecture
-> most advanced and powerful CPUs
-> market share, volume, industry standards
-> huge margins
-> plowed back into massive investment in fab and architecture
-> rinse and repeat.

Intel had 2 ‘high quality’ problems:

  • Backward compatibility – Acts as a performance tax, requiring legacy features / more transistors/ more power / hamstrings architecture. Unclear how significant due to Intel’s other advantages but it’s there.
  • High margins / innovator’s dilemma. Intel could no doubt have offered an x86 mobile architecture that was cost/performance competitive with ARM. But they could not do it without having it installed in PCs and servers and cannibalizing their PC/server business.

The tick slip: Intel has operated on an alternating tick/tock model. On the tick, they shrink the existing architecture, putting it on a new manufacturing process that runs on smaller chips with closer-packed transistors that draw less power and run at higher clock speeds. On the tock, they introduce a new architecture with more transistors and design optimizations.

These tick/tocks about a year apart have kept them ahead of the competition.

In September 2014, they started shipping Broadwell chips manufactured on a 14nm process.

In August 2015, they started shipping Skylake chips, the new micro-architecture on the same 14nm process. But they also announced the 10nm successor process would be delayed until 2017.

In the meantime, Samsung began shipping 14nm SOCs in the Samsung Galaxy S6 smartphone in early 2015, over a year behind Intel. Apple then released its iPhone 6s, also on 14nm Samsung and 20nm TSMC SOCs, in late 2015.

I hasten to add, all 14nm chips are not identical. For instance, the iPhone you get may have either a 14nm Samsung or a 20nm TSMC chip: they are dual-sourcing the SOC. Some testers and pundits proclaimed the TSMC iPhones on the larger die/older fab process actually used less power and performed better, contrary to what one might expect. Samsung’s 14nm may not be higher density than Intel’s, and clearly not even a knockout punch vs. TSMC’s 20nm.

Nevertheless, right now Intel’s competitors are nipping at Intel’s heels. And Moore’s law is running out of room. At this point each transistor is a few dozen atoms. We have maybe 6 50% ‘shrinks’ before we hit a single atom. People have been saying Moore’s law has reached its limit for a long time…but perhaps Intel’s struggles to stay ahead are the real deal this time.

ARM is big in cheap, high performance, PC-incompatible Chromebook laptops. But ARM servers haven’t had an impact yet. Nevertheless, for loads highly distributed across numerous servers like Google and Facebook’s immense Web server farms, they would appear to make a lot of sense. Companies like Calxeda have tried before and failed. But the ‘tick slip’ seems to create a window of opportunity where the Intel fab edge is limited, for the next year or more, and could get closed entirely if ARM fabs improve further. (Both Samsung and TSMC say they will match Intel’s roadmap, but talk is cheap.)

The key metric in massive web farms is performance/watt. If ARM OEMs can achieve fab parity with Intel, the case appears to be compelling. Intel would then have to cut margins to compete. It would seem incumbent on the Googles, Facebooks to be testing ARM and developing standards for ARM servers via the Open Compute Project.

From there you might see ARM start showing up in corporate server farms, cloud infrastructure providers like Amazon AWS. Eventually, ARM CPUs with larger caches, more execution pipelines could be designed to compete with Xeon and make inroads in the largest single-server applications, like databases.

It’s also worth pointing out this rumor that the next iPhone will be on an Intel-manufactured ARM SOC. That would be a huge Intel hedge against a decline in its x86 business. Dell’s purchase of EMC and attempt to sell its PC business can also be seen in this light.

3. The phone as PC

The other issue is…the phone is the primary computing platform for more and more people.

On many dimensions your phone is more advanced than your PC. It features

  • 20+ radios communicating on any mobile network known to mankind, WiFi, Bluetooth.
  • A phone properly integrated into the OS and messaging, which PCs never really got working right.
  • Voice control and input with Siri, Google, Cortana
  • Touch screen UI with multi-touch and Apple’s pressure-sensitive 3D Touch, biometric fingerprint ID.
  • Integration of watches, fitness trackers, internet of things; sensors galore (2 cameras, multiple mikes with noise canceling, GPS, accelerometer, gyroscope, digital compass, ambient light detector, proximity sensor)

The mobile phone is ludicrous technology, the nexus of a technology singularity. It may not have as much RAM, or a competitive equivalent to an Excel or Powerpoint. But if most of what you do is email and Web browsing, and you can make do with Google apps, you’re in good shape when you just have your phone/tablet.

It’s perfectly fair to say that a lot of office workers could do all their work on their phone/tablet. A lot of sales guys just need a phone and a CRM app on a tablet.

The Mac was a miracle to my generation in college. A generation raised on an iPhone and iPad may well view a Mac as a step backwards.

With the iPad Pro, Apple is aiming at content creators. Give the iPad Pro a decent keyboard, stylus, and mouse and you can use it as your main screen, even if you’re a power user. I’m kind of expecting it to bomb, near term. Not enough apps or a large enough market for those users.

But Apple is just one killer app away.

In offices, as iPhones became popular, most companies went to BYOD – bring your own mobile device for email. This makes users happy, and to some extent, system administrators.

A few companies have gone to VDI – virtual desktop infrastructure. The actual PC runs on a virtual machine in the cloud, users view it on a local thin terminal display. Your Excel and Powerpoint, even Bloomberg and trading systems live in the cloud, you connect over the internet, just like RDP you may be familiar with (Remote Desktop Protocol).

VDI is a far better disaster recovery posture. Sit anywhere with a terminal and a network connection, get all your apps and data, everything backed up to the cloud.

Both BYOD and VDI are a far better security posture. Harder for malware on your phone to spread throughout a company, since it’s basically a foreign device outside on the Internet. Get an infection on your VDI image, restore it immediately from a pristine image.

You can see where I’m going with this…VDI will potentially be a killer app on an iPad Pro.

All your servers and desktops go into the cloud using e.g. Amazon cloud infrastructure as a service and VDI. Then you give your users a tablet with the keyboard and VDI app. Presto, no more PC desktops or servers in your front office. The end of the PC world as we know it.

I could see quite a few knowledge workers being issued hybrid PC/tablets like Surface Pro and using them primarily as tablets. Over time they may find they don’t need the PC functionality. And departments and even companies go 100% BYOD.

Of course there would be many Intel CPUs in that cloud infrastructure. But over time perhaps not as many, unless Intel retains their fab edge even as they lose a chunk of the revenues that support it.

The phone would displace the desktop PC, while the PC platform would complete its displacement of the old centralized mainframes.

Back in the 80s, who would have thought that was in the original IBM PC’s future. Big iron mainframe guys were laughing at the PC as a toy. But then again so did the the first iPhone. The next big thing often starts out looking like a toy.

Strange times. And possibly risky ones for Intel.

Zombie army

Is China’s sale of Treasurys ‘quantitative tightening’ for the US?

There’s this notion going around that since the Fed buying Treasurys was QE, therefore China selling Treasurys constitutes monetary tightening.

Nope. The root cause of the disequilibrium and resulting capital flows is capital flight from China to the US.

An oligarch wants to buy a condo in New York. He takes yuan to the Chinese central bank and exchanges them for USD. In order to provide the dollars, the Chinese central bank sells some Treasurys.

How can capital rushing into US risk assets be ‘quantitative tightening?’ It’s the opposite. At the end of it, the Chinese foreign sector has exchanged an American safe asset, a Treasury, for a condo at 432 Park, a risky asset. The US has built a big building, generating jobs, demand, maybe a little inflationary pressure.

The Chinese central bank could do nothing, and the yuan will drop until US assets look expensive to Chinese oligarchs and equilibrium is restored.

Or they could intervene to limit the drop in the yuan by buying yuan for dollars, which requires them to sell Treasurys.

The sale of Treasurys is a second-order reaction to partially stem the drop in the yuan and accommodate capital flight. At the end of it, at best, it’s an even swap of Treasury bonds for condos.

It’s possible that a central bank might sell Treasurys to buy non-US assets, gold, etc. In the case of the Saudis selling reserves to support their local economy, pay for imports from a lot of places, there might be some ‘quantitative tightening’, ie capital flight from US assets.

In China, though, it seems that the sale of Treasurys is a second-order effect from flight into US assets.

It’s a good principle in life and in economics that second-order effects partially offset first-order effects. It’s more probable that on balance, the capital flight from China into the US is a stimulus, and the Chinese FX intervention and sale of Treasurys partially offsets that stimulus.

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