Mother Nature versus City – public utilities

View of wind speeds in the area during the public utilities shutdown
The sizzling power lines
Large dips in PCG attributed to scheduled blackouts and negative ruling by judge.

 

Climate change reduces land mass under occupation.

Overview

Wind speeds across inland California has a negative correlation with public utility company share prices.

Our infrastructure is constructed above ground to avoid disruption from earthquakes when they occur. This makes them susceptible to producing sparks when strong winds blow. Combine that with increasingly dry weather conditions caused by climate change and we have the perfect recipe for power disruptions either by fire hazards or controlled shut downs. 

Utilities are natural monopolies in their region of operations giving them very inelastic demand curves. 

They also happen to be public companies which incentivized them to optimize performance for the short term thereby on a quarterly basis. This thus leaves them disincentivized to invest for the long run (aka infrastructure upgrade) without active government intervention. 

The government does actively intervene when circumstances go awry. They need these companies to continue operating least the whole population plunges back to the Stone Age. The previous instance was when the same utilities went bankrupt during the 2003 oil crisis when prices shot into the stratosphere. They ended up on the receiving end of a government bail out.

In a nutshell, the residents are basically setup to bear the brunt of this shit show. 

The last time I walked under one of those power lines on a windy day, the sound of those sizzling brought a chill down my spine

Proposed models

  • Wildfire (fire)
    • Wind speed
    • Temperature
    • Humidity levels
    • Vegetation density
  • Tornados (air)
  • Earthquakes (earth)
  • Floods (water)
  • Hurricanes (water/air)
  • Tsunami (water/earth)

Related references

 

 

NYMT rotation from agency RMBS to CMBS

NYMT has been observed to shift much of its portfolio to CMBS from agency RBMS over the year.

This is to guard against the likelihood of prepayment risk and reinvestment risk associated with the lowering interest rate environment we are seeing right now as the US/China trade war forces lower interest rates and a flatter yield curve. The downside to this strategy is that most of the loans will be maturing within 10 years as opposed to 30 years.

Performance across various interest rate environments

In a stable interest rate environment a rotation to RMBS can help guard against reinvestment risk and prepayment risk since loans mature over a period of 30 years and borrowers are unlikely to increase their rates of prepayment.

And since these are agency RMBS, the government become  the ultimate underwriter in the event of defaults.

In an environment where interest rate increase and spread widens, increase in short term interest rates pinches into profit margins thus lowers net interest income for all both types of MBS. Also likelihood of default increases.

Overview of CMBS versus RMBS

CMBS typically matures over a 10 year period. It pays interest during the entire period with a final lump sum principal payment at the end.

Borrowers will usually extend another loan to pay off lump sum as the current loan matures. The new loans is usually at then prevailing interest rates.

CMBS are usually backed by 10 to 300 commercial properties.

RMBS matures over a period of 30 years. It pays both interest and principal steadily over the entire course with increasing amounts of interest paid to the end.

RMBS is usually backed by thousands of homes.

Types of risks:

  • default risk – property does not generate rent to cover interest
  • maturity risk – borrower can not repay final lump sum at maturity
  • prepayment risk – more is paid down rapidly so less overall interest income generated from loan
  • reinvestment risk – associated with prepayment risk. If mortgage is paid down fairly quickly due to low interest rate environments, owner of lender will be forced to lend out loans in prevailing lower interest rate environments
  • extension risk – less principal is paid down by borrower per period because interest rate has increased

Of the above CMBS is usually only subjected to default risk and maturity risk.

Arrangements are within contract to guard against prepayment risk and extension risk in CMBS.

Default risks for CMBS are low unless tenants are no longer able to pay for rental of commercial space. Senior CMBS were not much affected even during 2008 / 2009

Other issues for consideration

Subordination are important points for consideration. Senior loans with 30% subordination means it will only start experiencing default when 30% of tranche beneath it has defaulted.

CMBS annual default rate peaked at 4.07% in 2010 while cumulative default rate peaked at 13.52% in 2013.

Related references

https://www.lordabbett.com/en/perspectives/fixedincomeinsights/investment-brief-commercial-mortgage-backed-securities.html

https://www.sec.gov/ix?doc=/Archives/edgar/data/1273685/000127368519000074/nymt-06302019x10q.htm#s4E8231C084AE58E780F8E58D6BD4C381

Bloomberg is a laggard for trend reporting

It’s been observed there is an average time lag of around one to three months before obvious trends observed to insider becomes apparent to mainstream media.

Examples

New Blow to Hedge Funds as Software Darlings Start to Crumble
https://www.bloomberg.com/news/articles/2019-10-19/fresh-blow-to-hedge-funds-as-software-darlings-start-to-crumble

 

https://www.bloomberg.com/amp/news/articles/2019-08-07/home-prices-decline-in-some-of-the-costliest-markets-in-the-u-s

 

https://www.bloomberg.com/news/articles/2018-01-24/san-francisco-s-sky-high-office-rents-to-slip-as-building-peaks

 

 

 

 

Growth Leaders Cocktail Hour & Modern CMO Panel

Panelist

  • Todd Wilms, Fractional
  • Lauren Vaccarello, Talend
  • Matt McAllister, Mobile Tech RX
  • Carilu Dietrich, Classy

Key take aways of being a CMO

  • Counter-intuitively – the higher you are in the hierarchy the more silo-ed you become
    • average tenure 18 months
  • Alignment is the most important thing
    • your primary team is the executive team
    • Always figure out what the CEO is reading
    • Start thinking about needs of board, investors and C-Suit
  • strategic mindset:
    • start thinking in terms of framework
      • step away from the minute details
      • it is the job of the VP of marketing to fill in the details within the framework
    • look across various functions for solutions
    • move beyond your own functional area when required
    • as opposed to marketing which is
      • minding the day to day activities
      • moving the levers to drive conversion rates
  • Growth mindset
    • be ready to go where the business needs you
    • Be hypothesis driven
  • market focus
    • actively monitor the markets
      • define a new category
      • size of market
      • competitors
      • disruptors
    • read earnings report of company and competitors
    • read more Wall Street Journal
    • Understand the P&L so as to understand how money is flowing through the company
  • Important allies
    • Someone on the sales team
    • Someone on the finance team
      • they know where money comes from and where money is spent
  • Brand values
    • clarify the narrative for your team to do their job
    • quite similar to core values
    • the personality that will dictate how interaction occurs at all touch points
  • Creating the customer communications play book
  • Analytics
    • on users
    • secondary data from researchers
    • to gain influence to own the P&L
  • Perpetual learner
    • The new paradigm
    • AI disruption: Department of defense using AI to parse through PHD thesis to figure out new technology to defend against
    • start utilizing the services of coaches for private help as the stakes are high
  • Marketing
    • demand generation
    • digital marketing
  • On hiring
    • ask about topics not related to their area of interest
    • see if they crumble under pressue
    • how did they turn a crisis into an opportunity.

Related readings

  • The hard thing about hard things, Ben Horrowitz
  • Beyond Product, Todd Wilms

General thoughts on Mark Zuckerberg’s warning of the internet’s role in Authoritarianism displacing Democracy

  • The polarization between democratic systems and authoritarian systems is becoming more apparent as China leverages its growing middle class to project it’s influence on the world stage a strategy that US has been utilizing for the past decades.
  • Facebook is a vehicle for projecting American values overseas.
  • The African continent remains a land grab for the two different regime types. Thus far, China has won out on the physical infrastructure and government level while FaceBook has won out on the community grassroots levels.
  • For the C Suite especially CMOs to execute their jobs well they need to be focused on what’s happening out there in the world as opposed to what’s happening within their own functional organization. It’s the VP of marketing’s job to handle what is within their own marketing organization.
  • Its a time when US companies will need to navigate the international markets while managing the challenges to their American values.
  • The Chinese government has done a better execution on that front with their One Belt Road initiative by clearing the path at the government level to facilitate the unhindered expansion at the commercial level by its enterprises.
  • Western media is working at full Rev to control the narrative frames that drives public opinions.
  • Mark Zuckerberg has masterfully leverage recent trends to reframe Libra as a champion of democratic ideals as opposed to a disintermediation force on central banks around the world.

Related references

Zuckerberg Warns China’s Censored Internet Could Still Win Out
https://www.bloomberg.com/news/articles/2019-10-17/zuckerberg-warns-china-s-censored-internet-could-still-win-out

Apple bows to China by removing Taiwanese emoji

https://qz.com/1723334/apple-removes-taiwan-flag-emoji-in-hong-kong-macau-in-ios-13-1-1/

Christian Dior apologizes for omitting Taiwan from Chinese map

https://www.breitbart.com/national-security/2019/10/17/china-bullies-christian-dior-apologizing-omitting-taiwan-map/

China exerts pressure on NBA to fire key executive for tweet on Hong Kong unrest

https://www.nytimes.com/2019/10/17/sports/basketball/nba-china-adam-silver.amp.html

Solomon island switches relationship to China from Taiwan

https://www.nytimes.com/2019/09/16/world/asia/solomon-islands-taiwan-china.amp.html

Kiribati switches relationship to China from Taiwan

https://amp.theguardian.com/world/2019/sep/20/taiwan-loses-second-ally-in-a-week-as-kiribati-switches-to-china

Southeast Asia balances between Chinese Markets and US defense

https://www.nytimes.com/interactive/2018/03/09/world/asia/china-us-asia-rivalry.html

Facebook Warns Washington That Beijing Wins If Libra Plan Fails
https://www.bloomberg.com/news/articles/2019-10-17/facebook-warns-washington-that-beijing-wins-if-libra-plan-fails

 

 

Book Summary: The book of why, Dana Mackenzie and Judea Pearl

Key take aways

Without a casual model, data science is purely an exercise in data reduction. Statistics can only prove correlation but not causation. The human brain is a natural causal machine and is thus still relevant. Humans should go about identifying causality within our environment and delegate the ongoing monitoring to machines.

Components for consideration

Confounders

B and C are positively correlated but there are no direct causal links between the both of them. Without knowledge that A exists, B and C can be considered to be confounders.

  • A therefore B
  • A therefore C
  • C and B both occur together
  • B does not cause C
  • C does not cause B

Colliders

In the example A and C are considered colliders because both of them will result in B

  • A therefore B
  • C therefore B

Figuring out the coefficients

  • A therefore B
  • B therefore C
  • D therefore C

Front door techniques

Figuring out the cause model via path of A -> B -> C. This approach is only possible when you are able measure A, B and C

Backdoor techniques

Figuring out C by isolating B and D. This approach is used when not the entire causal chain is measurable.

Constrains on world GDP levels

Absolute constrains

  • Break throughs in fundamental science
  • Level of human population
  • Size of geographical mass under occupation – currently Earth

Transient constrains

  • monetary and credit supply levels
    • inflation
    • deflation
  • proliferation of scientific techniques
    • full proliferation results in zero or negative ROI when further credit is employed
  • ease of population, trade and credit/money flows around the world

Related references

Simultaneous inflation and deflation pressures in China

China simultaneously experiences imported deflation and inflation. 

Drop in global demand for exports causes credit to unwind within the manufacturing sector. 

Swine flu and depleting foreign reserves causes price pig to increase. 

This will be a useful case study to observe the monetary and fiscal policy China implements to deal with simultaneous inflationary and deflationary pressures. 

China Factory Deflation Worsens as Pork Drives Consumer Prices  https://www.bloomberg.com/news/articles/2019-10-15/china-factory-deflation-worsens-as-pork-drives-consumer-prices

Bloomberg does AB testing

Fascinating AB testing observed on the entire world’s population by major news networks. 

Barely 72 hours after the announcement of phase 1 trade deal, its accompanying mass euphoria and surge in world markets, the almost same exact photo with some slight changes in copyrighting and background color is released into production. 

It will be fascinating to observe the world’s reaction to this new AB year variant that just got released and the corresponding market price levels.