Andy Kessler

WSJ: Crypto Is Shedding Its Tether

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https://www.wsj.com/articles/crypto-shedding-tether-stablecoin-backed-john-law-11635103866

The launch of the first bitcoin-focused exchange-traded fund last week proves crypto bulls need to meet John Law. The Scottish gambler, economist and financier is likely why why so few top French banks have Banque in their name. Instead, there is Crédit Agricole, Société Générale and Crédit Mutuel. Law’s Banque Générale, later renamed Banque Royale, issued bank notes out of thin air, then royally blew up in 1720 and destroyed the French economy. The reputation of French banks has never fully recovered.

Law’s connections gave him exclusive rights to trade between France and its Louisiana Territory. The Mississippi Co. was funded by selling new shares of Banque Générale that could be paid for with bank notes issued by—wait for it—Banque Générale. Shares took off, rising from 500 livres to 10,000 livres from January to December 1719. Soldiers had to be sent in to keep order in the frenzied financial district.

Law’s flaw was issuing bank notes willy-nilly, without real backing for their value, to keep the stock price rising. The French government eventually made the huge mistake of making these bank notes legal tender, doubling the French money supply. Inflation raged, hitting a 23% monthly rate in January 1720. By September 1721, shares dropped back to 500, and the French economy imploded.

Fast-forward 300 years. Crypto had a big October, with bitcoin rising from almost $44,000 to a $66,000 peak in anticipation of the ProShares Bitcoin Strategy ETF, which actually doesn’t buy bitcoin—it buys bitcoin futures. Meanwhile the stablecoin issuer Tether Ltd. paid a $41 million penalty after the Commodity Futures Trading Commission found the company had falsely claimed it had adequate dollars in reserve to back its tokens.

The New York attorney general’s office ran a similar investigation over Tether’s claim of 1-to-1 backing with U.S. dollars. It ended, unsatisfactorily if you ask me, with an $18.5 million settlement paid in February and an agreement to produce reports on reserves for tether. Why not dig further? Tether neither admitted nor denied the attorney general’s findings.

I wanted to know more, so I submitted a Freedom of Information Law request with the New York attorney general’s office requesting reserve statements, ledgers and bank records from Tether. It was denied, citing disclosure that would “constitute an unwarranted invasion of personal privacy” and “interfere with law-enforcement investigations or judicial proceedings.” Hmm. And thanks for nothing.

Read the rest here.

WSJ: Failure Was Always an Option for Elizabeth Holmes

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https://www.wsj.com/articles/failure-entrepreneur-innovation-failing-upward-startup-11634480558

As the Elizabeth Holmes trial for alleged fraud at her startup Theranos winds on, the biggest question is: When the company’s blood testing machines didn’t work, why didn’t she change tactics? Real entrepreneurs fail early and often. Ms. Holmes instead was stubborn and chose deception over failure. That’s a shame. Despite today’s IPO and SPAC fireworks, the truth is that in Silicon Valley most ideas fail. Heck, most companies fail. More than half of venture-capital investments are smoking holes in the ground. Fortunately, success often rises from the ashes of ruin.

Some history of failure: Thomas Edison, the “Wizard of Menlo Park” (New Jersey, not California), had the hardest time finding a filament for his incandescent lightbulb. He tried bamboo, cedar and flax until he found that carbonized cotton worked. “I have not failed. I’ve just found 10,000 ways that won’t work,” Edison said. Fail until you succeed beats fake it till you make it.

Then there is the computer mouse. The Douglas Engelbart version of 1968 was a crude wooden block on two wheels with three buttons. Xerox PARC came up with a better mouse using a metal ball and motion sensors. Steve Jobs wanted one, so Apple hired a design firm, which came up with over 25 prototypes, all failures, until a design in 1981 worked. Think of all the failed mice it took to create today’s curved mouse with multiple buttons, a scroll wheel and optical sensors. Speaking of failures, James Dyson made 5,127 prototypes over four years for his “cyclone” vacuum cleaner.

Entrepreneur Stewart Butterfield once tried to build a multiplayer online game but switched to photo sharing, selling Flickr to Yahoo in 2005 for $25 million. Success, but not a home run in Silicon Valley. Mr. Butterfield left Yahoo in 2008 to help found a company called Tiny Speck and build another multiplayer online game called “Glitch.” Persistence! “Glitch” attracted tens of thousands of gamers, but not enough to cover its costs, so Mr. Butterfield killed it in 2012.

Tiny Speck pivoted, which in Silicon Valley means fail and scramble to do something else. The company had built its own crude internal communications system for employees to chat digitally during the development of “Glitch.” Maybe others would use it. Seven months after they started work on Slack, the company announced its preview release. On the first day of the press blitz, 8,000 people requested the preview version. In February 2014 Slack had 16,000 users and by November it had 285,000, with 73,000 paying for it. Now more than 10 million people use it daily. Mr. Butterfield sold Slack to Salesforce for $27.7 billion last year. That’s failing upward!

Then there’s Elon Musk, who very openly noted, “My proceeds from the PayPal acquisition were $180 million. I put $100 million in SpaceX, $70m in Tesla, and $10m in SolarCity. I had to borrow money for rent.”

Read the rest here.

WSJ: Catch Society’s Meltdown on HBO

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https://www.wsj.com/articles/society-meltdown-hbo-white-lotus-mike-white-connie-britton-progressive-woke-11633884922

The best writer in Hollywood right now is Mike White. In 2003 he wrote the film “School of Rock” for his friend Jack Black to star in. After a stretch competing in reality shows like “The Amazing Race” and “Survivor,” Mr. White is back where he belongs. He created, wrote and directed the recent HBO series “The White Lotus.” Set in Hawaii, it chronicles the dysfunction and competing narratives of staff and guests at a luxury resort. It is funny, biting and eye-opening. Mr. White so perfectly dissects society’s mental meltdown, I’m worried he might end up canceled.

Mr. White really shines when writing about the Mossbacher family. The mom, Nicole ( Connie Britton ), is chief financial officer of a search company. The dad, Mark ( Steve Zahn ), has health issues, and their daughter, Olivia ( Sydney Sweeney ), and a friend are pitch-perfect judgy college sophomores, dreaming of utopia while dripping in mockery and ridicule. The dinner conversations are priceless.

After Olivia accuses her mom of “old tribal thinking,” Nicole pushes back. “My feeling is most of these activists, they don’t really want to dismantle the systems of economic exploitation, not the ones that benefit them, which are all global, by the way. They just want a better seat at the table of tyranny.”

Olivia sneers: “Hmm, no, that’s just you, mom.” Nicole then puts her daughter back in her place—something mothers don’t seem to do anymore: “And what’s your system of belief, Olivia? Not capitalism. Not socialism. So just cynicism?”

In another conversation, about expensive jewelry and who deserves wealth, Olivia declares, “Mom, good news. I’m looking around the hotel, and it seems like all of the white, straight men are doing just fine. They are still thriving.”

The mom responds:

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WSJ: Will China Save Evergrande?

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https://www.wsj.com/articles/china-save-evergrande-bankruptcy-real-estate-housing-bubble-market-collapse-11633275348

Is China about to get a lesson in “Too Big to Fail?” Its second-largest real-estate developer, China Evergrande Group, with 1,300 projects in 280 cities, has some $300 billion in liabilities. Evergrande owes investors as many as 1.6 million unfinished apartments, and as far as financial debt, it owes $88.5 billion to banks and bondholders with $37 billion due within a year. It already missed an $83.5 million coupon payment on Sept. 23 and a $47.5 million payment last Wednesday. Evergrande does have a 30-day grace period, so the clock is ticking toward a default.

Is Evergrande too big? Is there an implicit guarantee for Chinese real-estate investments similar to the foolish U.S. implicit guarantee of Fannie Mae and Freddie Mac debt? No one knows—yet.

China is littered with ghost developments and half-finished projects. On a visit to Shenzhen more than a decade ago, I saw empty buildings with homeless people living in the rubble of the lobby. Debt financing is always treacherous.

The press keeps touting a “Lehman moment” and predicting financial collapse. I doubt it—it’s more like Bear Stearns, a loud warning to others heavily in debt. Evergrande’s short-term debt is about 1% of China’s foreign reserves, so a bailout is possible. But China has dozens of large debt-laden real-estate companies, including Sunac, whose bonds investors are busy selling off. Will China let real estate blow up?

The answer is typically this: China doesn’t have a safety net or a robust retirement system, so most Chinese households—as many as 70% (but like most statistics in China, who knows if that’s right?)—put their wealth into real estate. When new buildings are announced, there is a frenzy to buy apartments, even if many remain vacant for years. The thinking goes: Hong Kong prices more than tripled since 2004; surely the same can be true going forward for mainland China. That’s bubble logic.

So while Xi Jinping and the Chinese Communist Party can hammer internet companies and make them pledge allegiance to a “common prosperity” policy, limit videogame play, decimate the after-school tutoring business, and even denigrate television celebrities as “sissypants,” they can’t let real estate fail.

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WSJ: Ilhan Omar’s Idea of Progress

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https://www.wsj.com/articles/ilhan-omar-progress-gross-domestic-product-squad-11632672223

Rep. Ilhan Omar (D., Minn.), along with five other Democrats, recently introduced H.R. 4894, the Genuine Progress Indicator Act of 2021. The bill, only six pages long, is a glaring example of why Congress has a meager 28% approval rating.

The goal is a progressive alternative to gross domestic product, which presumably is an unjust tool to prop up big bad business. “The world needs new economic indicators and economic policies that will prioritize and encourage truly sustainable and equitable development,” Ms. Omar claims. The bill requires that “the head of each Federal agency, the President, the Chair of the Federal Reserve, and Congress shall” use both the genuine progress indicator and GDP when budgeting or forecasting economic activity.

The new measure, a cousin of the United Nations’ squishy World Happiness Report, is likely being proposed to rationalize the progressive multitrillion “infrastructure” spending blowout. The genuine progress indicator aims to blur the lines between entitlement and investment. This is dangerous. As Sen. Kirsten Gillibrand (D., N.Y.) tweeted, “Paid leave is infrastructure. Child care is infrastructure. Caregiving is infrastructure.” No, they’re not.

So what is genuine progress? A 2018 paper in Ecological Economics—regrettably, my subscription has lapsed—defines it as the net of benefits and costs neglected in GDP, things like “inequality, regrettable defensive expenditures, uncounted environmental externalities, depletion of natural resources, and trade-offs with non-work uses of time.” Squishy indeed.

In H.R. 4894, benefits that don’t show up in GDP but would in the genuine progress indicator include “environmental and social factors” addressing “ecological scarcities” and directing “resources to sustainable development without degrading the environment,” you know, things like carbon sequestration and “maintenance of biological and genetic diversity.” Probably on purpose, these are not as easy to measure as lemonade sales or how many widgets roll off an assembly line. I would guess when Democrats are in control, genetic diversity and social factors would rise, and when Republicans are, environmental degradation would send genuine progress spiraling.

Home improvements, especially solar panels, would be a benefit, as would infrastructure like sewers and bridges. OK.

Read the rest here.

WSJ: What Super Bowls Teach Us About Capitalism

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https://www.wsj.com/articles/super-bowl-capitalism-market-brady-buccaneers-tech-antitrust-innovation-11632069545

As they used to say in Oakland, Calif.: The autumn wind is a Raider. Football is back! This season’s NFL championship will be played at SoFi stadium in Inglewood, Calif., the new home of the Los Angeles Rams and Chargers (bye-bye San Diego). On Feb. 3, 2002, Tom Brady appeared in his first Super Bowl—XXXVI, that is 36 for you non-Romans. The New England Patriots beat the St. Louis Rams. U2 played at halftime.

U2 hasn’t put an album out since 2017, St. Louis no longer has a football team, and see if you can spot a trend from some of the companies that each paid $2.2 million to run 30-second Super Bowl ads in 2002: Blockbuster, Circuit City, AOL, CompUSA, HotJobs, RadioShack, Yahoo! and Gateway. Yes, they are the ghosts of Super Bowls past.

The technology companies driving change in 2002 got run over by, well, technology changing. It wasn’t overnight, like a championship team losing its opening game the next season. Technology changes slowly enough that it creeps into our lives, often unnoticed, until you open your junk drawer and pull out that old BlackBerry. Or a 64-megabit flashcard for your one-megapixel Sony camera (later this month you will be able to buy an iPhone 13 with a terabyte of storage.) Or the six-pound IBM ThinkPad with the weird red nub you were issued when you started at McKinsey.

But technology is also about expectations. It is easy for tech investors to get lulled into complacency when they see what is growing, extrapolate forever and, as far as stocks go, pay for future earnings that may never materialize. Some like RadioShack were obvious disasters in the making. Heck, in 1996 Cosmo Kramer conspiratorially asked Jerry Seinfeld, “Why does RadioShack ask for your phone number when you buy batteries?” It doesn’t anymore. Same for Blockbuster. Netflix started mailing DVDs in 1998, and while video streaming was small and blocky at the time, it was clearly coming.

Tom Brady is from San Mateo, Calif. in Silicon Valley and went to—warning: canceled person alert!—Junípero Serra High School. Famously, Mr. Brady was the 199th pick in the sixth round of the 2000 NFL draft out of the University of Michigan. Low expectations at a time of peak stock-market expectations.

Another graduate of Serra High, Barry Bonds, hit his 756th career home run on Aug. 7, 2007, passing Hank Aaron’s record—more of a juiced-player era vs. juiced ball like today’s juiced stock market era.

WSJ: The Market Fails a Breathalyzer

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https://www.wsj.com/articles/low-interest-rate-dow-35000-joby-aviation-carvana-coinbase-beyond-meat-investing-11631464939

Joby Aviation, which plans to begin an electric air taxi service in 2024, is worth more than Lufthansa, EasyJet or JetBlue. Does that seem right? In this market, why not? Heck, earlier this year, Tesla was worth more than the next nine car manufacturers combined, though now only the next six. Beyond Meat, made with pea protein, is worth more than the entire market for peas eaten globally—like the bumper sticker says: Imagine whirled peas. Do fundamentals even matter?

I can go on. Used-car sales platform Carvana is worth more than Volvo, Honda, Ford or Hyundai. Airbnb is worth more than Marriott and Hilton combined. Crypto-exchange Coinbase is worth more than the Nasdaq. I live at the intersection of innovation and disruption, but when companies are worth more than any possible reality, watch out.

How about those meme stocks still getting hyped on Reddit’s WallStreetBets? Those who bid GameStop shares into the stratosphere waved at Virgin Galactic Holdings as they soared by. A year ago, the stock was $6 and it is now $190—some dupes paid $483, game over. Short sellers Melvin Capital, Point 72 and D1 Capital focused on fundamentals and got their assets handed to them. Shorts lost more than $9 billion between January and June.

New Chairman Ryan Cohen, who is driving change at GameStop, may be a retail genius for turning around Chewy, but Redditors may want to put in a call to hedge-fund manager Eddie Lampert, who bought Kmart and merged it with Sears in 2005, as a highly touted “integrated retail” play, combining stores and online sales, eerily similar to the argument for investing in GameStop today. The stock peaked at $135 in 2007. It is now at $0.30 as the company languishes in bankruptcy. A 1970s Sears Johnny Miller leisure suit is worth more.

AMC Entertainment’s stock was scraping $2 at the end of 2020. It is now $50 thanks in part to Robinhood speculators, and the company has smartly raised cash. But what about fundamentals? Theaters are still sparse, and Disney and others are willingly putting blockbusters directly onto their streaming services—ask Scarlett Johansson about Black Widow’s ticket sales. Theaters are the new roller rinks.

Venture capital is cuckoo.

WSJ: A Lesson From a Howler Monkey

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https://www.wsj.com/articles/howler-monkey-travel-dominance-masculinity-parenting-siblings-costa-rica-11630271847

I miss travel, though I definitely don’t miss airports. But slow security lines and overpriced paninis will be worth it again soon, because great life lessons emerge in the oddest places. Way back, my family took a trip to Costa Rica. They have beaches, volcanoes, rafting, ziplines, horseback riding, hikes, hanging bridges. What’s not to like?

Early in the trip, my wife and I, along with our four sons, stayed at an “eco-hotel.” The rooms had little cardboard placards bragging about how much water and carbon they didn’t use, and there were plenty of vegan choices at the buffet breakfast, next to the eggs and bacon. I asked the front desk what “eco-hotel” meant and was told that it was just branding to get Americans and Germans to stay there—they weren’t doing anything different than before they adopted the moniker.

On our first morning, our guide, Alberto, picked us up in his van and unloaded us at some important rainforest, grabbing a tripod-mounted Swarovski spotting scope. He marched us maybe 50 yards in, stopped to set up the scope, and launched into a long-winded description of the very rare and elusive three-wattled bellbird, a favorite of birdwatchers because of its clanging metallic voice. He stared into the telescope, spun it around, huffing and puffing and searching so long that I began to suspect the bellbird was extinct.

The rest of us were bored to tears. After 20 minutes, my eldest started flicking something at No. 2. Yes, sometimes it is just easier to number them. He didn’t like having things flicked at him, but his older brother was bigger, so he started poking at No. 3, who started screaming, “Don’t touch me because I don’t like being touched.” Then No. 3 started picking on our youngest, pushing in the back of his knees so he couldn’t stay standing up.

Alberto kept droning on about mating habits and migratory patterns. As my youngest kept getting bullied, he started sobbing to my wife. This went on for a while until she turned to me and told me to do something about it. I didn’t think she was actually paying attention to Alberto or even interested in the mythical three-wattled bellbird. None of us were. She just wanted the bickering to stop. So what did I do? I reprimanded my eldest for starting the chain reaction. It didn’t matter; within minutes the flicking, touching, sobbing and “do something about this” pleading continued. Ah, the circle of dominance and submission.

Alberto finally found the dumb bird, and we all looked in the field scope at some fuzzy white-and-brown thing that sounded like the banging exhaust pipes of a Ford Pinto.

WSJ: Those Punching-Bag Elites

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https://www.wsj.com/articles/scape-goat-elites-politics-billionaires-taxes-coastal-technocrats-expert-class-obama-clinton-trump-populism-progressives-11629641837

Who are these elites I keep hearing about? Is there some superior set that run everything? “It’s time to hold American elites accountable for their abuses,” former Chicago Mayor Rahm Emanuel blared in the Atlantic on the college-admissions scandal in 2019. Best line: “America’s middle class is Cinderella, and the nation’s elites are her evil stepsisters.” OK then.

So who are they—the “sophisticated, vaccinated crowd” at the Obama birthday bash a New York Times reporter gushed about? Maybe. “You know, I always hear ‘the elite, the elite,’ ” Donald Trump told a 2019 crowd in Grand Rapids, Mich. “I have a better education than them, I’m smarter than them, I went to the best schools, they didn’t. [I have a] much more beautiful house.” Mirror, mirror . . .

America hasn’t had royalty since tossing King George III, but is there some secret cabal of rich, like-minded elites who control everything? An American Illuminati? I keep looking. What I’ve discovered is that “elites” are mostly made-up groups everyone uses as punching bags of envy for whiny complaints.

A federal criminal filing notes that many Oath Keepers, a right-wing group, believe “government has been co-opted by a cabal of elites actively trying to strip American citizens of their rights.” Hillary Clinton wanted to collect “taxes in an equitable manner, especially from the elites.”

Ancient Rome had patricians and plebeians too. Look what happened to them. Same for Florence’s grandi, made famous by Machiavelli. The French foolishly funnel university elites into government. The Chinese Communist Party elites are now cracking down on their rich entrepreneurial elites. And the British still have hoity-toity duchesses and lords and knights and dames.

But we Americans? This is the land of meritocracy, for now anyway. Maybe we just dream up our elites.

WSJ: A Chinese Warning for U.S. Tech

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https://www.wsj.com/articles/china-tech-ant-didi-alibaba-ccp-censorship-antitrust-neo-brandeis-biden-khan-kanter-wu-11629036761

Big U.S. tech companies must be watching with glee as China cracks down on its homegrown technology companies. They are thrilled not only because they are seeing potential global competitors in e-commerce, music licensing, ride sharing, food delivery and more weakened, but because they now have a powerful card to play at home.

It started last October when Jack Ma, founder of Alibaba and its affiliate Ant Financial, complained at the Shanghai Bund Summit that regulators were too cautious: “There is no innovation in this world without risk.” He also said Chinese banks have a pawnshop mentality, requiring collateral before they lend, unlike Ant, which was about to go public, which uses algorithms to assess creditworthiness. Mr. Ma’s criticisms were correct, but he angered the powers that be. Even though shares for Ant Financial’s initial public offering were 870 times oversubscribed, the Shanghai Stock Exchange effectively canceled the IPO in early November. Alibaba stock is down more than a third since then. Ouch.

Never bite the hand that feeds you. Back when Alibaba was private, Mr. Ma benefited when Chinese regulators and the Chinese Central bank forced a spinout of their payment system, Alipay, basically taking away value from existing Alibaba shareholders, like Yahoo and SoftBank, and giving it to Chinese investors. That was a money heist.

Killing the Ant IPO likely damaged the company’s ability to raise capital. It was a dumb move given how fickle global markets are about government control. Ever wonder if capitalism and communism/authoritarianism are compatible long term? We are finding out.

The purge continues. Food-delivery company Meituan was fined $1 billion for abusing its market position. Ride-sharing leader Didi Global was warned to delay its U.S. IPO listing over cybersecurity concerns. It went public anyway, at $14, and then the China State Council announced new rules and a probe of overseas listings. Didi stock is now under $9.

Tencent shares plummeted after a state-owned newspaper said online gaming was “opium for the mind.”