BY THE PRICKING OF MY THUMBS, SOMETHING WICKED THIS WAY COMES

By the Pricking of my Thumbs, Something Wicked this way Comes.*

Didn’t you just have to know that this Post would not start well, nor end well.

In January of 2015, the Author Rob posted about the rise of big data and the trillions of dollars of uncompensated content that enriches the server class. Facebook, YouTube, Google, people that talk in petabytes. The title of the post, borrowed from the title of the book of the same name, “Who Owns the Future?.

Some Quotes from this post:"Who Owns the Future?"

Every second, millions of [Facebook] members post billions of dollars worth of uncompensated content. Something as simple as a darn good recipe, instructions for changing a headlamp on a Ford Explorer, or pictures of a bygone era in a small Indiana town. Or it could be a newsworthy video or a song by the next U2.

What happens is this: The poster gives away value and Facebook skims value off the top in form of advertising revenue. And billions of dollars of this uncompensated value moves from Facebook users to Facebook shareholders. (The author’s are short Facebook, just as a disclosure. So we wish them all the worst. At least for now, and until we go long in the company.)  Remember, in the pre-Internet days, people would have gladly paid some amount of money for this information in the form of a cookbook, a mechanic or CD album. 

STANFORD AND MIT COURSES ARE ONLINE AND FREE

Lanier also makes the point that tech leaders have an ambivalent relationship with the university and the degree. On the one hand, there is prestige in a degree from a premier institution. But on the other hand, the tech industry will accept any college dropout with the next disruptive business concept. And the top tiers have such famous (but exceedingly rare) college dropouts as Zuckerberg, Gates, Wozniak and Jobs. And with the demise of second tier institutions comes the demise of thousands of middle class and upper middle class jobs.  Say hello to the life of the adjunct professor, the day laborers of the academic world.

ALGORITHMS, ALGORITHMS EVERYWHERE, AND NEVER THE NEED TO THINK

WHITHER THE INSTITUTION. OR UP THE ACADEMY.

Thousands of other jobs could be on the block as the information necessary to run them is reduced to an algorithm and software-controlled (or mediated).

TRY THIS ON FOR AN ALGORITHM.

Where UV = Uncompensated Value.

Bits x UV= Petazillions of Free Money for Facebook. Mark Zuckerberg can have a life-size 18k gold statute of himself. (Or for those really steeped in Baudrillard, a gold map like that of the Borges' Empire so detailed that it ends up covering the entire Borge Empire.)

OK, THAT TAKES CARE OF THE INFORMATION CLASS. NOW LET’S SWEEP UP THE FACTORY FLOOR

At every small town dive bar and VFW, it is the Chinese and the “mezcuns,” that’s “uh taken our jawbs.” Sorry cuz, there must be something funny in the AM Radio you listen to. It’s automation. Its here, and it is big. And hungry.

In the last decade or so, Mexico and China combined took about 1.7 million American manufacturing jobs. Sounds like a big number and it is:

That might sound high. But consider that last year alone, the U.S. added more jobs than those losses combined (1.7 million). Other research shows robots eat up a much bigger portion of the job-loss pie.

One study by two Ball State University professors found that between 2000 and 2010, about 87% of the manufacturing job losses stemmed from factories becoming more efficient. The chief driver of more efficiency in factories: automation and better technology. The other 13% of job losses were due to trade. [1]
 
OK. 100 YEARS AGO YOU COULD ALWAYS BE A DITCH DIGGER.

BUT IF ALL ELSE FAILS TODAY PEOPLE CAN WORK AT RETAIL OR FAST FOOD.

The last 35 years or so has seen the safety net rent unrelentlessly. (Wow. Was that alliterative.) At this point in America, the safety net is more of a swinging trapeze or a high wire. After all, there is no surer way to erode a man’s work ethic than providing him with assistance while he tries to get back to productive work.  Nothing motivates a man like an empty belly. So just say “Geronimo” when Yahoo lays you off.  

OR MAYBE NOT.

In a post from last May, "The Next IndustrialRevolution-Robots are Coming for even the Lowest of Jobs, or how I Learned toLove Software Disintermediation," the, the Author Rob addressed the inchoate robot revolution in fast food. An Article in Salon Magazine described a company, Momentum Machines, and its products:

San Francisco start-up company Momentum Machines, Inc., has set out to fully automate the  production of gourmet-quality hamburgers.  Whereas a fast food worker might toss a frozen patty onto the grill, Momentum Machines’ device shapes burgers from freshly ground meat and then grills them to order—including even the ability to add just the right amount of char while retaining all the juices. The machine, which is capable of producing about  360 hamburgers  per hour, also toasts the bun and then slices and adds fresh ingredients like tomatoes, onions, and pickles only after the order is placed. Burgers arrive assembled and ready to serve on a conveyer belt. 

Other articles warn of the sea change in greasy meat and fried sticks of starch. The CEO of Hardee’s and Carl’s, Jr., the fast food choice of fat boys, predicts automated restaurants in a few years. http://www.businessinsider.com/carls-jr-wants-open-automated-location-2016-3 Hardee's . Wendy’s predicts the same move toward machines. https://www.fool.com/investing/2017/02/27/is-the-end-near-for-fast-food-workers.aspx

Robotic burgers will come at a substantial social cost:

Those burgers might sound very inviting, but they would come at a considerable cost. Millions of people hold low-wage, often part-time, jobs in the fast food and beverage industries. McDonald’s alone employs about 1.8 million workers in 34,000 restaurants worldwide. Historically,  low wages, few benefits, and a high turnover  rate have helped to make fast food jobs relatively easy to find, and fast food jobs, together with other low-skill positions in retail, have provided a kind of private sector safety net for workers  with few other options: these jobs have traditionally offered an income of last resort when no better alternatives are available.

And as everyone that is paying attention knows, fast food workers are not the stereotypical high school kids looking to buy a car or save for college. 

 While fast food employment was once dominated by young people looking for a part-time income while in school, the industry now employs far more mature workers who rely on the jobs as their primary income. Nearly 90 percent of fast food workers are twenty or older, and the average age is thirty-five. Many of these older workers have to support families—a nearly impossible task at a median wage of just $8.69 per hour.

AND IF THAT WASN’T GLOOMY ENOUGH…

Retail stores have provided similar avenues of employment as fast food. Retail is not facing the same issues as fast food, although technology is helping the industry shed workers. American retail is facing the same class of crashes that the country periodically faces. A huge shift in overbuilt supply and dead-in-the-water demand. https://www.usatoday.com/story/money/2017/01/11/walmart-layoffs-just-latest-retail-cuts/96450196/ American retail is grossly overbuilt and the firms are being left to their economic fate. Government bailout is not in the cards, although one must wonder if retail employees were primarily white high school grads with daddies that worked in the mines or the mills, assistance would forthcoming.

But the broader point is that retail jobs will evaporate just as middle-level white/pink collar work, factory work, and fast-food employment. Currently unemployment is a low levels, but the way that unemployment is counted does not count people that have dropped out of the workforce. 

SO NOW SOMETHING GOOD COMES BACK OUR WAY

Like a lot of us that work with our brain and not the back, we must usually remain focused on tasks, leaving little time for day dreaming or pleasant revelries. When we have built and tweaked an obscure spreadsheet for the last hour, wouldn’t it be nice on a warm spring day to think back to a day on the campus green or picking morel mushrooms in the leaf-budding forest. 

Listening to music can ease the drudgery, but songs with vocals often break our concentration as we hear words over our work thoughts. A couple of alternatives are classical and jazz. The Author Rob does not particularly enjoy classical, but loves jazz. Jazz is available on Pandora and on internet sites, just as are other genres of music. 

But sometimes cool and smooth jazz can get a little slow just when you need to kick up the tempo. So here is an alternative. Surf Rock. 

Surf Rock was a hot genre in the mid-1960s[2]. We all think back to the Beach Boys, the Ventures and the Rivieras, who hail from South Bend, Indiana. But there is much more.

Much Surf Rock is instrumental and up-tempo. It draws upon blues progressions with hints of Arabic music. It has guitars rich in tremelo, Marshall Amps,  lots of whams on the whammy bar and picked riffs as opposed to hammer on’s and pull offs that dominate rock guitar. Surf Rock often has organs and alto or baritone sax. Occasionally trumpets.

The Pandora Surf Rock channel also plays a lot of early 1960s rock instrumentals on the Surf Rock channel. like Duane Eddy andLink Wray.[3]
 

SO...

As you read about the depressing future of work, consider two things. Can a culture accommodate millions of unneeded workers and provide them a decent standard of living (If only for the purposes of pacification)?  Can it, or will it, finance this system? And can the uneeded workers tolerate living without work and the purpose that work provides?

Listen to these Surf Rock classics and perhaps Wicked Things won’t Come your Way. 

https://www.youtube.com/watch?v=VXi3mCfv15k You will remember this from Pulp Fiction.

https://www.youtube.com/watch?v=-y3h9p_c5-M Dick Dale’s Misrlou, the Surf Rock Anthem.

COWABUNGA, DUDES, FROM THE DESERT OF THE REAL.

*Witch No. 2., The Scottish Play, Act IV, Scene I. (Don't say the name of the play. Don't even think about saying the name of the play. Don't even think of the name of the play.)

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[1] http://money.cnn.com/2017/01/30/news/economy/jobs-china-mexico-automation/

[2] These were the pre-Beatle and British Invasion Days.

[3] , Link Wray is the inventor of the Power Chord, or 5^th, a quasi-chord that only works because of the reverb and harmonics on an electric guitar.

APRIL NEWSLETTER

Desert of the Real Economic Analysis

APRIL 2017

ALPHA IS THE ALPHA AND OMEGA OF MUTUAL FUND SELECTION

BETA NOW, ALPHA LATER

The next two Desert of the Real Newsletters will look at two mutual fund “Greeks” Alpha and Beta.[1] This Newsletter will aid you in selecting better performing mutual funds.  Many individual investors, and nearly all 401(k) owners, have much of their money in mutual funds.

BETA IS A “SHORTHAND” MEASUREMENT OF VOLATILITY

Beta compares the volatility of a particular mutual fund (or stock) against the movements of the S&P 500 Index. Volatility, you will recall, is the fluctuation of the value of an investment, going up or down in value. Volatility is a whole subject in itself.

If the S&P 500 Index goes up 5% last year, and Acme Growth and Income Mutual Fund went up 5% in that same year, then Acme will have a Beta of 1.0. This is because the volatility of the S&P fund, its movement up or down in a given year or period of time, is assigned the value of 1. One is the mathematical baseline of Beta.

So in thinking about the Beta of the S&P 500 for last year, the value of 1 really means that the S&P 500 went up 5%. The Beta value of 1 just gives us a baseline measure of the S&P 500’s volatility that we can simply and quickly compare with other investments.

For this first example, we only looked at the Beta of the S&P 500 for one year. However, the S&P 500 Beta is based upon years of prior movement. Beta can be thought of as a moving average. And since the S&P 500 is a common index that tracks the movement of many stocks, it is considered a broad measure of the market as a whole. So the Beta of the S&P that is assigned the value of 1 equals a figure that reflects the percent that the S&P 500 fluctuates year to year.

BETA AS A COMPARISON TO OTHER INVESTMENTS

Let’s look at two hypothetical mutual funds. The Slow and Steady Value Fund and the Afterburner Tech Stock Fund. We wanted to look at the volatility of these funds. Here is what we found:

If Slow and Steady Value Stock Mutual Fund has a beta of .8, that means that the mutual fund is only 80% as volatile as the S&P 500. This fund only moves 80% in value in comparison to the S&P 500. So if the S&P was up 5% for the past year, Slow and Steady would have been up 4% (5 * 80% = 4). However, if the S&P were down 7.21%, then Slow and Steady would have only fallen by 5.77%.

Afterburner Tech Stock Fund has a beta of 1.25. This means that this mutual fund is 25% more volatile than the S& P 500. So if the S&P 500 rises by 9%, then Afterburner would be up by 11.25%. But if the S&P nosedives by 13.3%, then Afterburner will sink by 16.625%.

There is nothing intrinsically bad about either a high or a low beta. And either fund above, Slow and Steady and Afterburner, may have their place in a portfolio at certain times and/or under certain conditions. So which fund do we want and when?

WHEN THE STOCK MARKET IS GENERALLY FLAT OR FALLING, KEEP THE BETA LOWER.

In a flat market, with small gains and small rises, a low Beta investment is the preferred choice. In an environment when there are more losses than gains, we want to avoid big losses and eke out gains when we can. The low Beta Slow and Steady Fund will be our better choice. If the S&P 500 is more likely to go down than up, then a high Beta fund will magnify our losses, while a low Beta investment will minimize our losses. Let’s crunch some numbers:

Remember for the following example that Afterburner Tech Stock Fund has a Beta of 1.25. That means that it is 25% MORE volatile than the S&P 500. Slow and Steady Value Fund, by contrast, has a Beta of .8. That means it is only 80% as volatile as the S&P 500.

Year One. In Year One we put $1000 in each fund. The S&P 500 loses 12% in Year One. Since Afterburner has a Beta 1.25, it will fall 15% when the S&P 500 loses 12% (12% S&P Loss * Beta 1.25 = 15%) So Afterburner will fall to $850.

Slow and Steady will also fall, but it will only fall to $904. (12% S&P Loss * Beta .8 = 9.6%).

Year Two. In year two the S&P 500 slips another 4%. Afterburner will lose another 5% (4% S&P Loss * Beta 1.25= 5%) and Slow & Steady will lose 3.2% (4% S&P Loss * .8 Beta = 3.2%). So Afterburner slips to $807.25 and Slow and Steady goes to $875.

Year Three. In year three the S&P 500 is up 5%. Afterburner will rise to $857.70 (5% S&P Gain *1.25 Beta = 6.25%) and Slow and Steady will increase to $910. So Slow and Steady wins this race.

AFTERBURNER WINS THE BLOWOUT, HOWEVER.

If the trends of the S%P 500 moved in the other direction, with large gains most years and only a few years with small losses, Afterburner’s higher Beta would work to its advantage and make it the clear winner. So the logic of when to employ each fund is clear.

Of course an even better strategy is to hold investments that will rise in value when stocks fall, such as shorts, puts and inverse funds. But as an illustration of the effects of a mutual fund’s Beta, the foregoing stock comparison tells much of the story.

Problems with Beta

There are a few limits to keep in mind with Beta, however. First, Beta is a backwards looking metric. It does not reflect new information. Also, single stocks mover about in price, making Beta potentially unreliable. However, Beta is much more stable when examined within an index, ETF, or mutual fund.

We will look at Alpha in the future and see how Alpha in combination with Beta can help you select investments that will have lower Betas and Higher returns.

Stock Update 

Like Humphrey Bogart and Gloria Grahame in the 1950 Film Noir classic, the Desert of the Real's stockporfolio is “In a Lonely Place."  There are several stocks we are still looking at for breakout moves. But the markets are in a trading zone and we are not looking for movement, at least upward movement, in the near term.  All this while ignorant armies approach each other by night.

STOCK             SYMBOL                      3.29.17 Price                  SIGNAL

Aeri Pharmaceuticals AERI                                   45.25                             Breakout at 52

Neuoraderm                     NDRM                         26.90                            Breakout at 29

Vanda Pharm                  VNDA                          14.20                            Breakout at 16

Kindred Bioscience             KIN                               7.05                           Breakout at 7.50

Essent Group                  ESNT                            35.51                           Breakout at 39

FAR OUTSIDE THE DESERT OF THE REAL, ROUGH BEASTS SLOUCH TOWARD PYONYANG ON THE DAY FROM BETHLEHEM, ONE SEEKING SLAKELESS VALIDATION, THE OTHER SURVIVAL UNDER A CROWN OF BARBS.

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[1] If you like the “Greeks” you will love options. Commonly used Greeks in option trading are delta, gamma, theta and vega. And don’t forget the Ford Pinto.