Paul Kedrosky's Infectious Greed

Farming as the Next Big Thing

pk — Thu, 09 Jul 2009 10:37:26 PDT

Agricultural investing is getting a lot of attention lately. A few examples follow:

1) It’s interesting to see a major university endowment get behind the idea of farm investing in a fairly significant way:

George Washington University’s investment office, which manages the university’s $1 billion endowment fund, will lift farm investments to 10 percent of its portfolio, said Rodney Lake, an analyst at the university.

…The university’s investment office sees 10 percent to 15 percent as “the appropriate rate of return prospect” on its agriculture investments, according to Lake.

More here.

2) On a related note, one fund manager is arguing that free-range goats in Australia may deliver a 12% rate of return:

The goats are harvested by fencing off watering holes that are accessible via “tiger traps” which can be shut to trap the animals, Hannen said. Land can be bought for A$10 ($7.96) an acre, and the project’s biggest investments are in fencing and water supply, he said.

“Goats being goats, basically you have a low-cost enterprise in an arid land, and the world is becoming more arid,” Hannen told the conference. “You have to keep probing at the frontiers.”

3) Finally, there has been a good grounded (literally) discussion of farmland investing over at Bogleheads recently:

I have 300 tillable acres "custom farmed". That refers to hiring the labor and machinary of farmers to perform the various services: planting, spraying, combining the corn and soybeans. This is active management on my part. The net returns on these acres are the highest and were roughly 10% last year(based on the current value of the land, using the value of what I actually paid for the land I get 16%).

The other 220 tillable acres are rented out on a "cash rent" contract to a AAA corporate client. Based on the current market value of this land I get a 7% return. The returns based on what I actually paid are higher, for 138 of these acres the return is actually 20%.

More here.

Readings

pk — Thu, 09 Jul 2009 09:53:09 PDT

Michael Lewis on A.I.G. (Vanity Fair)
White House Economist Austan Goolsbee Answers Your Questions (NYTimes)
Pickens winds down wind farm plans (AP)
An Update on the Economic and Fiscal Crises: 2009 and Beyond (Brookings)
RMB 1.5 trillion in new Chinese lending — can we turn this thing off? (Pettis)
Map of current and planned power dams in Iceland (Source)
For Federer and Roddick, a Contrast in Serving Styles (NYTimes)
Jamming transitions in air transportation networks (arXiv)

Live from Allen & Co.

pk — Thu, 09 Jul 2009 09:04:19 PDT

For those of you interested in the canoodling of the kids at the over-hyped Allen & Co media conference this week – few things set my teeth more on edge than media people talking to media people -- a couple of Twitter feeds of people attending, plus the obligatory event hash tag:

Usain Boldt. 200m. 19.59 in the Rain.

pk — Wed, 08 Jul 2009 19:30:37 PDT

Usain Boldt. 200m. 19.59s in the rain yesterday in Lausanne. Astonishing.

Analysis here.

BP: Beyond Petroleum and Back Again. Plus the Lorax Trap.

pk — Wed, 08 Jul 2009 10:51:43 PDT

There is an interesting article in today’s FT describing BP’s trip “beyond petroleum and back again”. Having staked out the greener high ground of being the multinational oil company most devoutly search for alternative energy solutions, it is now seemingly retrenching, what with close its London office devoted to some such programs, as well as reputedly refocusing internally on petroleum and natural gas investments.

The piece carries many morals. First, it shows that alternative energy remains no cakewalk. Despite the massive capital budget of BP, and despite its vested interest in diversifying beyond fossil fuels, it has struggled to get even a fraction of its revenues from anything other than petroleum and natural gas. Second, the story reminds how difficult it will be for oil incumbents to avoid the Lorax trap of ever-enhancing extraction technology, thus making the eventual depletion curve for resources sharper and more calamitous.

Either way, the piece does contain the following nice figure comparing oil reserves claimed by various MNOCs worldwide:

What’s a Petabyte?

pk — Wed, 08 Jul 2009 10:29:22 PDT

Nice image from online backup service Mozy putting 1 petabyte of storage in context. Click for a larger version with more examples.

Hugh Hendry: China is No Santa Claus; Fed isn’t Doing Enough

pk — Tue, 07 Jul 2009 13:21:49 PDT

Good interview with Hugh Hendry of Eclectica Asset Management in London. He’s bearish on gold and equity, but a fan of equities. He also thinks the Fed isn’t doing enough. My favorite quote? Hugh says China is like an investor in a Madoff fund (i.e., the U.S.

Agree or disagree, Hugh is a smart guy and worth listening to.

The Gnostic Truth of Real Estate

pk — Mon, 06 Jul 2009 12:17:17 PDT

A favorite quote of mine about real estate popped up in a Tom Vanderbilt essay revisiting Thorsten Veblen's classic Theory of the Leisure Class. The quote comes Richard’s Ford’s Independence Day:

…the one gnostic truth of real estate: that people never fund or buy the house they say they want. A market economy, so I’ve learned, is not even remotely premised on anybody getting what he wants. The premise that you're presented with what you’ve might’ve thought you didn’t want, but what’s available, whereupon you give in and start finding ways to feel about it and yourself.

As Vanderbilt writes, for the first time in real estate history that truth broke down in the last decade, with requisite calamities ensuring.

America’s Fiscal Train Wreck and Cassandra’s Curse

pk — Mon, 06 Jul 2009 11:54:05 PDT

Crossing administrations and decades, America’s bipartisan fiscal cluster-f**k has reached a kind of apogee (or nadir, depending on your point of view). Solving it requires a bipartisan solution, which means one almost certainly will not come. This, of course, makes the U.S.’s fiscal problem the world’s problem -- which the world will solve via the blunt force of steadily shunning the dollar.

Here is Merrill’s Rich Berner today on the subject’s frustrating history:

Warning about these challenges has long been a staple for economists. Five years ago, for example, I summarized my concerns about our coming fiscal problems, along with the interplay among them and unexpected longevity, inadequate thrift and saving infrastructure, mediocre education outcomes, and inadequate energy policy (see America's Long-Term Challenges, May 21 and May 24, 2004). I was merely the latest in a long line of alarmists; for example, Pete Peterson famously noted more than 20 years ago that "America has let its infrastructure crumble, its foreign markets decline, its productivity dwindle, its savings evaporate, and its budget and borrowing burgeon. And now the day of reckoning is at hand" (see "The Morning After," Atlantic Monthly, October 1987). The Congressional Budget Office (CBO) has since 1997 - under directors from both sides of the aisle - carefully laid out ever-more depressing fiscal scenarios in its annual Long Term Budget Outlook, the latest of which appeared last week.

If this has been coming for decades, why haven’t politicians listened? Back to Berner:

The problem, ironically, is that the day of reckoning hasn't come. This has seriously undermined doomsayers' credibility and, more importantly, it has made the electorate and elected officials complacent about the threat from unsustainable fiscal policies. Some even proclaimed that "deficits don't matter."

It’s Cassandra’s Curse: Predict the worst and have it not come true on schedule and in s democracy politicians ignore you, right up until they can’t and it’s (likely) too late.

More here.

Xingjian Riots: The Energy Connection

pk — Mon, 06 Jul 2009 11:37:32 PDT

There is an important energy (read: oil & gas) connection to the current riots in China’s Xinjiang province. While the region had been independence-minded, that is no longer conceivable to the Chinese leadership, with sad and unsurprising current results:

“The Chinese didn’t want to let Xinjiang be independent before, but after they built all the oilfields, it became absolutely impossible,” said one Muslim resident in Korla, who asked not to be named for fear of retribution by government security agents.

Backgrounder on the Uyghur people (Wikipedia)
140 killed in Western China after riots and security crackdown (Times)
Xingjian oil boom fuel Uyghur unrest (FT)

Most Depressing News of the Day: Airline Edition

pk — Mon, 06 Jul 2009 11:15:11 PDT

The most depressing news of the day? This London/L.A. flight nugget from ace airline analyst Rick Seaney:

There are reports of a “massive influx in bookings” on flights from London to Los Angeles as British fans head for Michael Jackson’s memorial service in LA’s Staples Center.

A word of warning: if you can still find a flight at this late date and time (the memorial service begins at tomorrow at 10am), you will pay a premium - as much as $2,300 per airline ticket.

Plus, unless you have a ticket to the service, the LAPD is not going to let you anywhere near Staples - you may not even be able to see the arena from outside the broad perimeter the cops are setting up (though I have seen these memorial service tickets being offered for fantastic sums on eBay).

The Fog of War, Remembering Robert McNamara

pk — Mon, 06 Jul 2009 10:50:28 PDT

With the death of former U.S. Secretary of Defense, a clip from one of my favorite documentary films of all time, Errol Morris’s The Fog of War:

You can find the full Fog of War video here.

Readings

pk — Mon, 06 Jul 2009 10:27:38 PDT

Volatile Swings in Oil Prices Hobble Industry (NYTimes)
Incandescent Bulbs Return to the Cutting Edge (NYTimes)
Dollar under pressure, as Shanghai Companies Sign First Yuan Settlement Deals (Bloomberg)
May 'actual' chip sales show W-shaped trend (EETimes)
California Dreamers (The Atlantic)
A Salute to the Wheel (Smithsonian)
Death of a dystopian, the life and legacy of J.G. Ballard (Reason)
Rethinking the likelihood of videos becoming popular on YouTube (Slate)

Solving the Peter Principle? One Word: "Darts"

pk — Fri, 03 Jul 2009 16:19:37 PDT

There is a fun new working paper out from some Italian scientists that models the Peter Principle. The principle says, of course, that people climb in an organization until they reach their level of maximum incompetence.

How would that happen? Well, the authors argue it should be expected in any organization where the following two conditions hold:

The best member are rewarded with promotions
Competence in a new position is not highly correlated with competence at a prior level

The authors simulated the preceding in a pyramidal organizational form using a mathematical agent model. Here is the outcome:

Here we show, by means of agent based simulations, that if the [above two conditions] actually hold in a given model of an organization with a hierarchical structure, then not only the "Peter principle" is unavoidable, but it yields in turn a significant reduction of the global efficiency of the organization. [Emphasis mine]

Granted, this shouldn't be surprising news, one would think, to anyone who has spent any time around large organizations. A disproportionate number of the positions always seem filled by people who elicit a WTF? reaction from reasonable-minded observers.

So, do we just live with it? After all, we can hardly get around elevating the best people, and it isn't unreasonable to think that one's experience in a former position doesn't adequately prepare for the new one.

Not necessarily, according to the authors:

...the best strategies to improve, or at least not to diminish, the efficiency of an organization, when one ignores the actual way of competence transmission, are those of promoting an agent at random or of randomly alternating the promotion of the best and the worst members. We think that these results could be useful to guide the management of large real hierarchical systems of different nature and in different fields.

Whoa, it turns out calling someone's promotion "random" is a compliment. Who knew darts could be so handy at promotion time?

Source:

The Peter Principle Revisited: A Computational Study
Authors: Alessandro Pluchino, Andrea Rapisarda, Cesare Garofalo

When is a Failure Not a Failure? When It's an Iraq Oil Auction

pk — Fri, 03 Jul 2009 16:00:16 PDT

The failed Iraq oilfield auctions this week have become a litmus test for Iraq, for oil analysts and for the ever-nervous global oil market. Iraqi officials refuse to see the disappearance of most bidders and the completion of only auction (with a single bidder) as a failure. Instead, they are hawking the crowd-pleasing idea that multinational oil companies are greedy mouth-breathers that balked at the hard bargain being driven by righteous Iraqis who control so much valuable, marginal oil supply.

For their part, of course, oil companies think that the Iraqi oil auctioneers are nuts. The proffered risk/reward premium for exploration, development and production in an unsafe country with minimal infrastructure and maximal political flux was near zero. But in their zealotry to demonstrate resource nationalism to an uneasy electorate, Iraqi officials scared off most sane bidders, making the only successful buyer in this first round a bid backstopped and subsidized by the Chinese government -- and one that still required a huge price concession.

Here is a nice summary snippet from IHS on where this means the sorry process goes from here:

Without Iraq offering a better risk/reward ratio to investors it will have to undertake all investment and development itself—a process that will be slow, laborious, and under-funded, and will result in volumes nowhere near those targeted and years from their hoped-for schedule.

Iraq needs to look not only at the reward side of its offering, however; it can make significant progress on lowering the investor risks. The government needs to direct its attention to passing a national hydrocarbons law in order to lay down a clear legal framework for the deals and give them greater political legitimacy than what is just—effectively—a mere pledge of contract allegiance from the currently serving ministers. This would also lower the political risk in Iraq, as the law in itself would require some form of broader political understanding between the leading factions and thereby to some extent bind much of Iraq's political forces into taking responsibility for long-term hydrocarbon policy.

More here and here.