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Observations at the heart of Permian basin

Office for the day. A proxy of view into the heart of the Permian basin as I get my car wheels aligned

The level of auto traffic along the Cedar Street, Pecos Texas is a very clear proxy on the health status of the US Oil industry.

Factors negatively impacting economic activities in the area:

  • US Elections: Oil companies operating in area put activities on hold awaiting for forthcoming mandate
  • Holidays: Demand for oil drops
  • COVID pandemic: Demand for oil drops

Responsiveness of lagging indicators:

  • Lag time between events and lagging indicators within the region is typically 24 hours
  • Layoffs can happen within 24 hours of environment triggers
  • Rapid hiring can happen within 24 hours of environment trigger
  • On occasions, rapid hiring and layoffs could happen simultaneously in different sectors

Qualitative background:

On mornings during times of Economic boom in the Oil industry, the Pilot center across the street could be observe lined with trucks rushing to fuel up as they go about transporting out their cargo to their destinations.

On such days, the empty parking lot in front of Custom Mufflers Tire Repair center could be seen filled up with trucks getting their wheels serviced.

With the election of President Biden, a bill was past that totally stopped all oil and gas related activities in New Mexico. This has resulted in the damping of traffic heading north along Cedar Street for the foreseeable future.

 

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Weapons of Math destruction by Cathy O’Neil

Weapons of Math Destruction

Key take aways

  • Human values like justice and mercy is hard if not impossible to encode as rules
  • Data scientist use proxies as an approximate gauge for the existence of values. These are inherently inaccurate if not downright wrong
  • While using of race as a feature to determine if loan should be approve is obviously racist, the use zip codes though not obvious is equally racist since race tends to segregate around geographical territories
  • Models are increasingly used to across various domains to help increase the speed of decision making. This increases the negative impact of badly designed models will have on humans
  • A feedback is necessary to ensure continuous correction of badly design models – transparency of how your credit score is calculated
  • Regulations are necessary on the use of models as companies driven by quarterly reporting requirements of shareholders are primarily be focused on the bottom line

 

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The dichotomy between privacy and health

1984: Big Brother is Watching
Across multiple literature, its been stated privacy versus health will be one of the primary dichotomy societies around the world will need to juggle with as technological advances are made in the fields of artificial intelligence, communications (surveillance) and medical science (genetic research).
 
What is surprising was the rate at which the Corona pandemic catalyzed this change. In light of this, it is fascinating to observe how different societies position along the spectrum. Some societies has opted for surveillance to the maximum extend possible with current technology while others opted for its polar opposite going to the extend of staging mass protests against it use. 
 

Related readings:

  • The AI Economy, Roger Bootler
  • To Be a Machine, Mark O’Connell
  • Irrational Exuberance, Shiller, Robert J.
  • Life 3.0: Being Human in the Age of Artificial Intelligence, Max Tegmark
  • Mind Children The Future of Robot, Hans Moravec
  • The Singularity Is Near, Ray Kurzweil
  • 1984, George Orwell
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Thoughts on the nature of framing

Optical illusion of the old lady and young lady

The basis we use for interpreting what is happening our world is through the understanding of our history. History heavily relies on narrative constructs.

The critical flaw with using narration as a tool to understand, encode and communicate what has transpired is it can only support data in a chronological order while reality is inherently chaotic, multi-linear, on occasions non-linear and confounds understanding thus narration. To tell a coherent tale of what has transpired, authors are forced to decide what to include and leave out of the narrative they weave. This phenomena is commonly labelled as the narrative fallacy.

Compound narrative fallacy with a collection of common human cognitive bias such as the framing bias, survivor bias, confirmation bias and consistency bias and you get a recipe for a fragmented society. This is especially more so when you have multiple equally plausible narratives that are diametrically opposed but draw evidences from the same chaotic sample space to reinforce their positions.

The task of deciphering what has transpired becomes even more daunting to the everyday individual with the reintermediation of social platforms as our primary news source. In the days prior, individuals need only rely on one official news source on how to understanding what is happening, usually from their government. Now, individuals are bombard on a daily basis with news sources sponsored by multiple parties with varying interest and agendas. In this day and age, it has become crucial for individuals to exercise critical thinking.

Some final food for thoughts:

  • Iran is portrayed as an evil country in American media
  • America is portrayed as the devils incarnate in Iranian media
  • China is portrayed as an evil country in American media
  • America is portrayed as an evil country in Chinese media
  • Why is it that the winners are always as good and righteous in any battle?
  • “If God’s on our side, who the hell could be on theirs?” Private Reiben in Saving Private Ryan.

Thought provoking artifacts

Conflicting frames about Bills Gates

Bill Gates the evil person
Bill and Melinda Gates the philanthropists

Conflicting frames about the 2020 CoronaVirus

Conflicting frames about global warming

Related references:

Continue reading “Thoughts on the nature of framing”

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The trouble with markets by Roger Bootle

  • Wealth is really a subjective reflection of how we feel about the current state of things.
  • Finance unimpeded by dealing with physical objects tend to respond faster to news and sentiment than physical operations which are tied to physical infrastructure
  • Credit which the modern economy is built upon trust. In times of uncertainty, trust evaporates credit becomes unavailable. Credit crunch ensues.
  • Austrian economics versus Keynesian economics
    • Austrians economists, subscribe fully to the Adam’s invisible hand theory, hold the view the market is always rational, crashes are a necessary catharsis and central banks should not intervene to prevent the crash in this process of creative destruction.
    • Keynesian economists believe the markets are rational most of the time but malfunctions somethings. In these exceptional times it is necessary to step in to fix the malfunction so as to avert unnecessary hardship. Central banks are the lenders of last resort.
  • Keynesian economics on handling market malfunction
    • All market malfunction usually stems from an economic shock
      • the IT revolution shock lead to heavy and ultimately unsound investment in software technology. The period of rapidly advancing DotComs share prices, the underlying manic optimism, the resultant excess infrastructure capacity and excessive use of leverage marks the initial phase of this malfunction
      • at the height of the euphoria, market participants start to come to their senses, share prices start softening as demand fails to catch up with excess capacity.
      • fear sets in when market participants start exiting the market. Panic ensues, rapidly declining share prices and triggered margin calls compounds into a vicious cycle.
    • The key challenge for central banks in such turbulent times is to act with resolve to provide dollops upon dollops of credit all the way to infinity if necessary to tame the turbulence and to restore proper market functions.
    • Japan’s 20 years of stagflation and slow recovery post 2008 are outcomes of mild central bank response to stimulate the economy due to concerns over inflation
  • The real economy
    • aggregate demand – consumer side
    • aggregate supply – production side
    • availability of credit – money supply in the market
  • Sources of low inflation rate – lack of demand or excess production capacity
    • East Asian behavior which tends towards saving a larger portion of their earnings compared to the west
    • Aging population world wide which results in lesser consumption versus a younger population
    • Automation which allows for higher throughput volume given the same amount of resources.

Related references

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Observations on our news reporting system as well as investment bank forecasting.

On the quality news reporting

Good news reporting should seeks to inform rather than sensationalize with attention grabbing headlines. Its easy to appear data driven but still be misleading if you do not use the proper frame for understanding the numbers

An example of bad news reporting
An example of bad news reporting
An example of quality news reporting

On investment bank predictions

When on the receiving end of predictions made by external parties it is important to understand the underlying agenda they are trying to achieve. When examined thoroughly, predictions made by investment banks are so bad and contradictory, they should just stop making public declarations.

However if taking into account their objective is not to inform but to incite a trading decision by their clients so as to make a commission or offload losing positions on their trading books, it makes perfect sense.

Related references

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The AI economy, Roger Bootle

Paradoxes

  • Polanyi Paradox
  • Moravec’s paradox

Key skill sets for the AI era

  • complex communication
  • Creativity
  • Strategic thinking / critical thinking
  • Empathy / humanity

Key themes

  • AI as labor cost versus AI as capital expenditure
  • Taxes on AI development versus edge in global competition
  • Labor versus leisure
  • Global positioning
  • Population size as advantage for big data
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Chat with Johnson and Dad on CoronaVirus and crisis investing

  • A company is only likely to go bankrupt if its creditors recalls debts and it is not able to pay back.
  • In the event of a major wide spread disaster and there is no one around to take advantage of it, it is unlikely the creditors recall debts
  • creditors of airlines would more likely want to have all their clients continue generating revenue with the planes to pay off debt than to foreclose of them and take back planes which are at that point worthless inventory for them
  • Labor unions will not want to have all their union members laid off, they will likely go into negotiations to deal with salary issues.
  • Ships of cruises are likely to deteriorate fast and require Capex to upkeep
  • Credit lines and payment schedule can always be renegotiated if impact is industry wide
  • If creditors are not willing to recall debts, then what would be the cause of bankruptcy? Beware of fake news that preach doom and gloom with no underlying basis
  • If you bought too early into the dip and you are more than half way into the dip might as well hold on for the recovery. Trying to exit too late into the dip will only cause more losses to be unnecessarily incurred.
  • Oil specialists are either producers or consumers, it is hard to determine the demand unless you are an insider
  • Wait till all the bad news are out and sentiment has turned before entering into position. Its ok to only go into position after the company share price has advanced 100% from its lowest levels.
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Thoughts on the Corona Virus stock market crash

Key takeaways on White house press releases

  • White house has taken very decision steps since the start of the spread in China to limit the import of viruses within the US
  • It has followed through with further travel bans of air travel from Europe
  • The next step is the 15 day shelter at home notices as of 15th March 2020
  • Its a trade off between financial markets turmoil and health system turmoil
  • To reduce maximum potential casualties, White house has opted to drag out the time it takes for the virus to spread throughout the community through social distancing measures.
  • The process can be modified to have each state go through its own bell curve of peaking
  • When health facilities are not overload, healthcare workers can afford to provide the necessary level of care to patients so as to limit the number of fatalities
  • In times of crisis, democratic systems after much bickering will align and perform execution with tremendous velocity. Private sectors will get mobilized to deal with the crisis as well.
  • Crisis are opportunities to remove red tapes and refresh platforms that are otherwise outdated. This makes the system more robust and able to handle future scenarios
  • Media do not always accurately report what is the official communication from the White House. When possible always seek out the original communication.
  • Targeting to reopen the country by 12th April 2020, Easter

Stock market price actions

 

  • In prior two pandemics (2003 SARS, 2009 H1N1), the height of the shock was experienced during the month of March before a subsequent rebound was observed
  • Federal reserve announcements of interest rate cuts ironically caused markets to dip
  • During period of turbulence, euphoria and subsequent price spikes due to government promise of bail out will not be long lasting
  • Oil is a leading indicator
  • Percentage coverage of media on pandemic is also a leading indicator of drops in markets
  • SPY might go through periods of denial before acknowledging pandemic is cause for concern
  • Gold which is considered a safe haven during time of crisis will dip when traders experiencing margin calls on their equity positions start unloading their gold to fulfill margin calls
  • US Treasury yield curve will start steepening when Federal reserve starts lowering interest rates and performing quantitative easing
  • Gold and bond prices decline will quickly follow the steepening of the yield curve.
  • Global markets will experience sharp retreat as funds exit from global markets for US treasury when steepening compared to negative interest rates worldwide
  • US dollar exchange rates will start surging as liquidity exit from emerging markets
  • Execution of fiscal policies will usually lag monetary policies
  • Share prices levels of directly impact companies can be seen trading at
    • ratios on 19th March 2020
      • PE ratio: 1.5 – 2.5X
      • PB ratio: 0.25-0.30
      • Discount from peak: 80-90%
        • 2020 Corona Pandemic: NHCL, RCL, CUK, CAR, MGM
        • 2019 California forest: PCG
    • affected industries: cruises, hotels, airlines

Related references