Andy Kessler

WSJ: Cracker Jack Economics

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https://www.wsj.com/articles/cracker-jack-economics-11584906547

What is it with Cracker Jack politicians who want a prize in every package?

Last week when Joe Biden and Bernie Sanders clashed over stimulus in a primary debate, Mr. Biden celebrated the 2009 Recovery Act, saying it “had $900 billion in it and was the thing that kept us from going into a Great Depression.” If you believe that, I’ve got a bridge to nowhere to sell you. The Obama administration touted “shovel ready” projects—they were shoveling something, all right. Then again, remember President George W. Bush’s 2008 $152 billion stimulus in the form of tax-rebate checks? The “booster shot” for the economy was a huge dud. Sadly, here we go again—a stimulus for all of us.

What actually saved the economy in 2009 was one word: backstop. Finance froze because toxic mortgage-backed securities littered the system and, as with mad-cow disease, no one knew which ones were bad. The Federal Reserve provided a backstop to the commercial-paper market, then money-market funds and eventually banks, by buying up many mortgages to relieve default risk. Once bank stress tests took Armageddon off the table, lending restarted and the crisis ended. Spending on roads and bailing out General Motors were mere pork-barrel waste.

The economy is now grinding to a halt. Forty million Californians must “shelter in place” until further notice. New Yorkers too. Everywhere bars are (gasp!) closed. Planes are empty. Cruise ships are mothballed. Marriott and other hotel chains are furloughing employees.

Politicians need to do something, right? Yes, but it should be short-term and temporary. President Trump has a “big bold plan.” White House adviser Peter Navarro wants an $800 billion payroll-tax cut. Senate Republicans want to send $1,200 checks to a huge share of Americans. Treasury Secretary Steven Mnuchin is negotiating with congressional leaders a bailout of as much as $2 trillion. Rep. Ro Khanna, Mr. Sanders’s campaign co-chairman, ups the ante with checks of up to $6,000 for those making less than $65,000. Candy-coated popcorn, peanuts and a prize.

Mr. Mnuchin has smartly authorized the Fed, via Section 13(3) of the Federal Reserve Act, to lend directly to solvent companies.

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WSJ: Crisis Means a New Business Era

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https://www.wsj.com/articles/crisis-means-a-new-business-era-11584313927

The junk-bond-financed $6.75 billion buyout of United Airlines collapsed on Friday, Oct. 13, 1989. The stock market immediately dropped 191 points or almost 7%, equivalent to a 1,500-point drop today. Scary.

Rod Berens, head of research at Morgan Stanley at the time, called a departmentwide meeting after the market closed. I dreaded going. I had a list of tech stocks I was recommending that got killed that day. When I showed up, I noticed several cases of champagne—a weird way to celebrate the loss of wealth. But why not? I grabbed a glass; it was Friday.

And then my boss headed toward me. Uh oh, I thought, he’s going to fire me. Instead, he smiled, gave me a high-five and said, “Congratulations, now it’s your turn,” and clinked my glass. Talk about confused—one of the worst days in my professional life and I get congratulated?

I didn’t see it at the time, but he was dead right. Eras change, sometimes overnight. Over the next decade, the stock market shifted from junk-bond-fueled buyouts, a dominant Japan and the Cold War to highly valued emerging technology companies, ending with the dot-com blowout.

The current market turmoil tells me a new era is breaking, so question everything. Will cable, energy, mobile and social media ever come back? And if not, what’s next?

Well, the knee-jerk reactions will come first.

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WSJ: How to Read the Myopic Market

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https://www.wsj.com/articles/how-to-read-the-myopic-market-11583685581

Happy 20th anniversary Tuesday to the Nasdaq index peak of 5049 back in 2000, zenith of the dot-com era. After observing our current beer-head frothy market for months, I was an idiot for thinking I could hold off until today to write a warning column. The market always trades to maximize pain. So, ouch.

Time waits for no one. One thing I’ve learned investing is that for every stock there’s this invisible arrow pointing to some moment, some time in the future, that markets focus on to evaluate it. That time horizon isn’t published anywhere; it’s something you feel, an equity duration. Typically, it’s 12 to 18 months.

Euphoria drives that arrow out years. Beyond Meat was selling at 20 times 2020 revenue, Apple stock boomed even with flat-ish iPhone sales, and Tesla stock did Icarus-like figure eights close to the sun. But Nasdaq and the entire market have done so many daily ascents and drops and barrel rolls since their peak Feb. 19—it’s now a coronavirus roller-coaster market. Why? Because uncertainty can collapse time horizons to months or even tomorrow.

Remember, a stock’s value is the sum of all future profits discounted back to today. It’s dependent on profits, growth and risk. Investors estimate future profits and growth rates, but risk? Again, you can’t look that up anywhere—it’s just a feeling based on interest rates, competition, world events and more. Beyond Meat seemed to be priced for five years out. Risk is in the eye of the beholder. So investors use a shorthand: A price-to-earnings multiple that provides some hint to how far out the market is looking. In May 1999, Yahoo’s P/E multiple hit 1,062!

Twenty years ago, we had this new internet thing, a loose Federal Reserve, AOL juicing startups in exchange for IPO shares, and momentum investors, or momos. Like ants to a lollipop, momos crawled into dot-com stocks, pouring in price-insensitive money that attracted even more momos. George Soros’s hedge fund might have been the last one in. After the Federal Reserve flooded the world with dollars to mitigate the nonexistent Y2K threat, it pulled back in early 2000 and markets reversed. Momos became nonos. After 9/11, when time horizons collapsed from years to months, Amazon’s stock had fallen 94%, to $6.

Today’s market madness features fewer IPOs, but the loose Fed and momos are present and accounted for.

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WSJ: Give Philanthropy the Market Test

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https://www.wsj.com/articles/give-philanthropy-the-market-test-11583100757

I’m always mystified by philanthropic foundations and how fruitlessly they disperse their capitalism-provided funds. Bloomberg Philanthropies spends a chunk of its $8 billion on “Sustainable Cities.” The new $10 billion Bezos Earth Fund is backing climate activists. The $12 billion Ford Foundation insists, “To address the climate crisis, we must address inequality.”

Huh? Way more than philanthropy, free-market capitalism gets people out of poverty, raises living standards and cures the world’s ills. Of the four things you can do with your money—spend it, pay taxes, give it away or invest it—investing is the only one that increases productivity, the scaffolding of capitalism and societal wealth.

So my eyebrows rose when I was offered a chance to meet Raj Shah, president of the $4 billion Rockefeller Foundation. Maybe I’d be able to gather some squishy grant-making examples to make fun of. Boy was I wrong.

Perhaps the Rockefeller difference traces in part to the foundation’s founder. John D. Rockefeller was an interesting guy, much maligned despite bringing light and heat to the masses (and saving whales). On top of his heroic business efforts, he understood where philanthropy could be useful.

A favorite book of mine, Ron Chernow’s 1998 “Titan,” describes how Rockefeller made his money, then gave it away. He looked for big projects only he could fund, such as eradicating hookworm—a parasite that struck people who walked barefoot, predominantly Southern blacks. Rockefeller funded tests for thousands of rural citizens and provided shoes. It worked. One branch of the Bill and Melinda Gates Foundation uses a similar philosophy to fight malaria and HIV.

Mr. Shah told me about the Rockefeller Foundation’s current big project, Smart Power India.

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WSJ: Don’t Buy Into Big-Tech Hysteria

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https://www.wsj.com/articles/dont-buy-into-big-tech-hysteria-11582484198

Is Big Tech “downgrading humanity”? So says former Googler and podcaster Tristan (rhymes with “twist-on”) Harris, director of the weirdly named Center for Humane Technology. Mr. Harris and many of his fellow tech skeptics describe humans as little different from pets, believing everyone who uses Facebook or an iPhone is a manipulatable idiot. He couldn’t be more wrong.

Mr. Harris preaches about an “attention crisis.” OK, you have my attention. Testifying before the Senate last year, he said tech companies are in a “race to the bottom of the brain stem.” He also claimed humans in the 21st century still have “Paleolithic emotions.” Basically, “we’re chimpanzees with nukes.” Wait, did he just call you a chimp?

Elsewhere he has claimed that social networks are delivering “outrage that works on the piano key of your nervous system.” The man can certainly turn a phrase. He explains that “technology is getting better and better at hacking human weaknesses.” And you’d better put down that glass, because “we’re drinking from the Flint water supply of information.”

Mr. Harris’s most fevered claim is that social media has taken over politics. “We’re not really in control of world history anymore,” he says. “The technology companies that are shaping our information sense-making environment are in control of every major electoral outcome, and whether people believe conspiracy theories.” And there it is. It isn’t Hillary Clinton’s fault she lost in 2016. It was maybe the Russians and certainly Big Bad Tech. Mr. Harris insists “one side is currently winning by there not being regulation.” You can probably guess which one he means.

Mr. Harris believes “we’ve been manipulated into this multiyear-long hypnotic trance,” and that “we need someone to snap their fingers and wake all of us up out of this.” A savior, a messiah. Might that someone be Mr. Harris?

Alarmism can be a lucrative business.

WSJ: President Donald J. MacGuffin

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https://www.wsj.com/articles/president-donald-j-macguffin-11581278117

Is he a disease or a cure? Like him or hate him, there’s tons of spilled ink trying to assess President Trump’s governing style. To me, the key to understanding Trumpism is remembering why he was elected.

What do I mean? Voters chose Donald Trump as an antidote to the growing inflammation caused by the (OK, deep breath . . .) prosperity-crushing, speech-inhibiting, nanny state-building, carbon-obsessing, patriarchy-bashing, implicit bias-accusing, tokey-wokey, globalist, swamp-creature governing class—all perfectly embodied by the Democrats’ 2016 nominee. On taking office, Mr. Trump proceeded to hire smart people and create a massive diversion (tweets, border walls, tariffs) as a smokescreen to let them implement an agenda of tax cuts, deregulation and originalist judges.

Those reforms have left the market free to do its magic and got the economy grooving like it’s 1999. The daily Trump hurricane—like the commotion over the Chiefs from Kansas—makes the media focus on the all-powerful wizard while ignoring the policy makers behind the curtain.

Alfred Hitchcock called this kind of distraction a “MacGuffin”—something that moves the plot along and provides motivation for the characters, but is itself unimportant, insignificant or irrelevant. It can be a kind of sleight of hand, a distraction, and Mr. Trump uses his own public persona as a MacGuffin in precisely that way. The mobs decked in “Resist” jewelry fall for it every time.

For example, Sen. Bernie Sanders used his remarks during the Senate impeachment trial to point out that the media had documented some 16,200 alleged lies by President Trump. The MacGuffin worked! Mr. Sanders and his peers are focused on the president’s words, while most voters see the real plot unfolding in America—millions of jobs and rising wages.

The president’s success comes from his ability to shrug off critics. My son went to college in the early days of the social justice power grab. He recalls heated discussions in which someone would interrupt him to say, “Sorry, but you don’t get a say—you have white privilege.” My son would shoot right back: “Yeah, I don’t believe in that,” and resume his argument.

WSJ: How I Almost Bought the Knicks

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https://www.wsj.com/articles/how-i-almost-bought-the-knicks-11580673783

Kobe Bryant dropped 61 points on the New York Knicks on Feb. 2, 2009, at Madison Square Garden. The Knicks have been painfully awful for years, appearing in the playoffs only five times since 2000. Here’s a secret: I almost bought the Knicks. Well, “almost” is a stretch.

Sitting bored at my desk at Morgan Stanley in 1994, I got a call from a college friend, John Demitroff, then a G.X. Clarke & Co. bond salesman. “You work for an investment-banking company,” he said. “Could you help Dave DeBusschere and me buy the Knicks?” I think I spit out my coffee.

It turned out that seven years earlier John had overheard that the EF Hutton brokerage firm was raising a $350 million fund to buy National Basketball Association franchises. The next day he read an article about DeBusschere and left a message to pitch him on a business opportunity buying NBA teams. Now this made some sense: No. 22 DeBusschere was an NBA champion, hall of famer, eight-time All Star and even the commissioner of the American Basketball Association when it merged with the NBA in 1976. An old boss had told my friend, “When you see an opportunity, just ask. You never know.”

Sage advice. Amazingly, DeBusschere called back the next day and they met at a downtown New York diner. John explained that he had a buyer (EF Hutton) and needed sellers. DeBusschere knew everyone in the NBA—would he be interested? DeBusschere agreed and they even signed a short partnership deal. And then . . . nothing happened. EF Hutton kited checks and was sold to Shearson Lehman. The partnership unraveled.

Now jump ahead to ’94. The Knicks (along with the Rangers, Madison Square Garden and the MSG Network) were put up for sale by Viacom, which had taken control of its owner, Paramount. That’s when my friend called for help. I was an analyst following tech companies, not even an investment banker; we were just a couple of know-nothing 30-somethings. No matter—I was in.

The first thing I told John was to get “the book.”

WSJ: Phones That Can Read Your Mind

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https://www.wsj.com/articles/phones-that-can-read-your-mind-11580071868

When I first met Larry Page and Sergey Brin around 1999, Google’s accidental billionaire founders (they couldn’t even sell their technology to Yahoo for $1 million) gave a talk about the future of search. Mr. Page rambled for a while, then stopped, grinned and said, “what we really want to do is know what you want before you even think it.” The audience laughed nervously, but that’s been a driving force of technology ever since.

Ad men since “Mad Men” have tried to bend our minds into buying products they’re pitching for their clients. But will we ever get real personalized advertising—ad systems that interact with us closely, in a real-time two-way dialogue about our wants and desires—that it will be a step ahead of our thinking?

I posed this question to advertising giant Martin Sorrell. He built the ad agency WPP in the 1980s based on the “big TV idea,” and today we’re inundated 24/7 with Bud Knight, the Geico gecko and Flo from Progressive. It’s now easy to tune out. Yet with the rise of the “fearsome fivesome” online behemoths—Google, Facebook, Amazon, Alibaba and Tencent—Mr. Sorrell suggests we’ve entered the era of “personalization at scale.”

He defines personalized advertising as “content, not perfect and not tent-pole, tailored to your needs and delivered to you at the time you want and the format you respond to.” He’s even created a purely digital advertising company, S4 Capital, to apply the strategy. Facebook, for instance, figured out the average person spends 1.7 seconds looking at Newsfeed posts on mobile devices, so S4 helped its client L’Oréal create 2-second makeup ads.

S4 also helped Netflix promote its drug kingpin show, “Narcos,” by cutting it into a million different short segments. Surfers at WSJ.com might see ads likening the show to business. Those on a sports or fitness site would see ads with lots of ripped muscles.

It’s the feedback loop that makes it personal.

WSJ: Your DNA Could Catch a Criminal

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https://www.wsj.com/articles/your-dna-could-catch-a-criminal-11578863580

In December, Michigan police arrested Robert Brian Thomas as a suspect in two cases of sexual battery—committed in Florida in 1998. These were the latest of hundreds of cold cases investigated since the Federal Bureau of Investigation’s April 2018 arrest of Joseph James DeAngelo, the alleged Golden State Killer. There are still hundreds of thousands of untested rape kits nationwide, but now technology may make it almost impossible to get away with this crime. Privacy concerns are an obstacle in solving cold cases—but not an insurmountable one.

Here’s a quick recap of how crime DNA is processed. The first step is for law enforcement to check samples against the Codis database, the FBI’s Combined DNA Index System. Codis is limited in its use of only 20 DNA markers, and it has records only for convicts and some prior detainees. Only 14% of sexual-assault DNA is matched to a suspect through Codis.

Fortunately, Ancestry.com has the DNA of more than 15 million users, and 23andMe has 10 million. Neither shares data with law enforcement. But many users upload their results to third-party sites, like GEDmatch and FamilyTreeDNA, to find long-lost relatives. DNASolves is another database recently set up specifically to help solve crimes.

After GEDmatch co-founder Curtis Rogers opened access to law enforcement, investigators uploaded DNA from one of the Golden State Killer’s 50 rape and 13 murder crime scenes from 1974-86. They didn’t find a direct match but discovered enough potential close relatives to search the family tree and narrow down the suspects. They followed Mr. DeAngelo to a store and swiped his DNA off the door handle of his car.

David Mittelman, who runs DNASolves, explains the numbers. Using DNA sequencing, he can analyze a sample for $5,000, which covers DNA extraction, genealogy and manpower. “Hopefully costs will halve in the next three to five years,” he says.

Hundreds more cold cases have been investigated since the Golden State Killer arrest.

WSJ: Tech Will Rule These ’20s, Too

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https://www.wsj.com/articles/tech-will-rule-these-20s-too-11578262248

Does history rhyme? A century ago, the ’20s boomed, driven by consumer spending on homes, cars, radios and newfangled appliances like refrigerators, sewing machines and vacuum cleaners. Most Americans couldn’t afford the upfront cost of a lot of these goods, so manufacturers and retailers invented installment plans. Debt ruled as 75% of cars, furniture and washing machines were bought on credit.

The supply-side policies of Treasury Secretary Andrew Mellon, who pushed for tax cuts in 1921, 1924 and 1926, increased the capital available for new consumer businesses. The consumption boom also sparked a giant service industry: My grandfather ran Kessler’s Refrigeration Service in Brooklyn, N.Y. Lifestyle advertising was perfected on billboards and in tabloids, which, like today, led to complaints about ads’ ubiquity and influence.

And stocks were hot, hot, hot. Radio Corp. of America shares were worth $11 in 1924, $20 in January 1928 and $114 in 1929, with a peak price/earnings ratio of 72. Turns out equities could be bought on installment too—sometimes a margin loan with a measly 10% down payment.

Like the movie “Titanic,” you know how this ends. Speculation. Tariffs. And finally, the crash of Oct. 28-29, where the market dropped 13% on Black Monday and 12% on Black Tuesday, triggering widespread margin calls for debt repayment. That risk is why the Federal Reserve now caps stock margins at 50%. According to legend, it’s also why windows in New York skyscrapers don’t open. By 1932, RCA stock was worth $3.

So what’s next? My fundamental rule for finding growth trends is that you need to see viable technologies today, and then predict which ones will get cheaper and better over time. Microprocessors, storage, bandwidth—all still going strong after half a century.

The fundamental building block of the 2020s will be artificial intelligence, particularly machine learning. Better to ask what it won’t change this decade.