196 (21 January 2015)

Welcome to week 196!  The articles below caught my attention this week.  Please note that what are intended to be relatively objective “briefs” are preceded by dashes (——–), whereas additional material or relatively subjective comments are preceded by asterisks (********).  The links to articles preceded by [SR] require a subscription to be read in their entirety, although complete articles may frequently be found by a title search.

In addition, you can find a pdf of this issue, a cumulative pdf for issues 1-156, and a cumulative pdf for issues 157-present at: https://sites.google.com/site/brucedeanlarson/the-invisible-forces.

(15 January 2015): “Pot Sellers Lobby Against Medical Marijuana in Washington State” (http://www.businessweek.com/articles/2015-01-15/pot-sellers-lobby-against-medical-marijuana-in-washington-state)

——–“Washington state’s first recreational marijuana stores opened last July” but in 1998 “voters passed a ballot initiative offering pot smokers legal protection against prosecution if they had a doctor’s note saying they needed the drug for medical reasons.”  Medical marijuana is lightly regulated, whereas recreational marijuana is subject to a tax and licensing regime that “mandates extensive product testing and package labeling for marijuana products.  That’s made recreational pot about 50 percent more expensive than medical marijuana.”  In light of this cost differential, “retailers are hiring lobbyists to push state legislators in Olympia to regulate medical cannabis.  They want medical marijuana to meet the same safety standards as recreational pot and say customers who aren’t true patients should have to buy the high-tax retail product.  Some [medical] dispensaries are bringing in their own lobbyists to make sure they don’t get squeezed out.”

********It is ironic that medical marijuana is subject to less-restrictive regulations than recreational marijuana.  I find the lobbying efforts of both groups to be interesting but not surprising.  Some who are in the business to make money will want to ensure that their product is not selling at a disadvantage, while others in the business will want to ensure that they hold on to the advantages they have.

(16 January 2015): “Ocean Life Faces Mass Extinction, Broad Study Says” (http://www.nytimes.com/2015/01/16/science/earth/study-raises-alarm-for-health-of-ocean-life.html)

——–In a study recently published in the journal Science, “A team of scientists, in a groundbreaking analysis of data from hundreds of sources, has concluded that humans are on the verge of causing unprecedented damage and the animals living in them.”  According to the authors, “Some ocean species are certainly overharvested, but even greater damage results from large-scale habitat loss, which is likely to accelerate as technology advances the human footprint. . . . Fragile ecosystems like mangroves are being replaced by fish farms, which are projected to provide most of the fish we consume within 20 years.”  In addition, “Bottom trawlers scraping large nets across the sea floor have already affected 20 million square miles of ocean, turning parts of the continental shelf to rubble. . . . Mining operations, too, are poised to transform the ocean.  Contracts for seabed mining now cover 460,000 square miles underwater, the researchers found, up from zero in 2000.”

********Oceanic degradation will be much more difficult to see, given current technology, than terrestrial degradation, so the externalities associated with ocean-based market transactions will be even more difficult to address.  This reminds me of the classic 1864 book Man and Nature: Or, Physical Geography as Modified by Human Action, by George Perkins Marsh (http://smile.amazon.com/Man-Nature-Geography-Weyerhaeuser-Environmental/dp/0295983167/).  Who will write the book for our oceans?

(16 January 2015): “Swiss Franc Soars After Central Bank Drops Cap” (http://www.nytimes.com/2015/01/16/business/swiss-national-bank-euro-franc-exchange-rate.html)

——–“Switzerland stunned the markets on Thursday by abandoning a crucial part of its effort to hold down the value of its currency, concluding that the strategy was too risk and too costly given the enormous forces pushing in the other direction.”  The move comes at a time when “The European Central Bank is expected to announce a major new stimulus program next week [the week of Monday, January 19th] to pump money into the region’s troubled economy, which is creating downward pressure on the euro. . . . the Swiss leaders’ abandonment of its target was taken as a bet that easier money from the European Central Bank is on the way, and potentially on a vast scale.”  The Swiss move was unexpected, catching traders by surprise.  Hit especially hard was FXCM, “an online currency trading house based in New York City . . . The company said it had a negative equity balance of about $225 million” and my be “in breach of some regulatory capital requirements.”  Nick Hayek, the CEO of the Swatch Group, a Swiss watchmaker, described the action as “a tsunami: for the export industry and for tourism, and finally for the entire country” of Switzerland.

********The article is accompanied by a wide-ranging ten-minute interview with Christine Lagarde, the Managing Director of the International Monetary Fund.  The newspapers this week were strewn with articles and reports on the consequences of the action of the Swiss National Bank.  For one, there were paper losses of hundreds of millions of dollars by Citigroup Inc. and Deutsche Bank AG, as well as the rescue of FXCM Inc. by a $300 million lifeline from Leucadia National Corp. [SR]( http://www.wsj.com/articles/swiss-franc-move-cripples-currency-brokers-1421371654).  Then there are the Swiss matchmakers.  “Swiss watchmakers are particularly vulnerable to a strengthening franc.  This is because most of their costs are in Switzerland as they have to produce at least 60% of the value of their watches at home to qualify for the coveted ‘Swiss-made’ label.” [SR]( http://www.wsj.com/articles/luxury-watchmakers-bemoan-swiss-move-1421422156).

********In one final response to the Swiss move, there was the Saturday column by Jason Zweig, “Still Want To Trade Currencies?” [SR](http://www.wsj.com/articles/still-want-to-trade-currencies-1421457514).  He notes that “Individual investors hurt by the turmoil [of the Swiss move] lost sight of the most important question they must ask: What is my basic advantage in financial markets dominated by professionals?  The sensible answer is that all individuals can still choose to do what most professionals no longer can: Invest for the long run without having to measure  their performance moment to moment in a mad race to beat the market.  But if, instead, you use borrowed money to speculate in markets you don’t understand, you have taken your basic advantage and distorted it into a lethal disadvantage.”  Zweig that goes on to state the distinction between investing and speculating made by investment icon Benjamin Graham in 1934: “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return . . . Operations not meeting these requirements are speculative.”  Zweig then goes on to conclude, in light of recent events, “In short, most individuals who trade foreign currency aren’t investing at all; they are speculating, pure and simple.”  Perhaps this also applies to parents who devote funds to the athletic training of their children, as developed in the article that follows.

(17 January 2015): “The Rising Costs of Youth Sports, in Money and Emotion” (http://www.nytimes.com/2015/01/17/your-money/rising-costs-of-youth-sports.html)

——–Former professional athletes John Amaechi (basketball), Mike Trombley (baseball), and Travis Dorsch (football) “agree on one thing: The way youth sports are played today bears no resemblance to their childhoods, and the money, time and energy that parents spend [on them] is probably misplaced.”  Dorsch is now an assistant professor at Utah State University and his research that sports spending “has grown so high—up to 10.5 percent of gross income in his research—that it is hurting family harmony.”  The financial costs of special training opportunities, like private coaching for quarterbacks at $400 per hour, are easy to quantity, but “There are also the injuries and the psychological scars.”  Still, many parents think that investments in sports for their children are justified.  But Mark Hyman of George Washington University observes that such parents are “highly misinformed.  The percentage of high school kids who go on to play in college is extremely small . . . What I tell parents is if you want to get a scholarship for your kids, you’re better off investing in a biology tutor than a quarterback coach . . . There’s much more school dollars for academics.”

********The comments by John Amaechi were especially interesting to me.  He seems like someone I’d like to have a cup of coffee with on a regular basis.  I found the amount of money that some parents invest in the athletic development of their children to be surprising.  I do wonder what additional “payoffs” parents are deriving from these investments?

(17 January 2015): “Energy efficiency: Invisible fuel” (http://www.economist.com/news/special-report/21639016-biggest-innovation-energy-go-without-invisible-fuel)

********This article is part of the Special Report: Energy and technology, which appeared in The Economist.  You can see all five parts—this is the last part—of the 12-page report at: http://www.economist.com/printedition/specialreports; Special Reports from prior years can also be found there.  Although each part provides useful information—the energy industry continues to undergo dramatic technological change, the material on energy efficiency—the “fifth fuel”—caught my attention in particular.

——–“The cheapest and cleanest energy choice of all is not to waste it.  Progress on this has been striking yet the potential is still vast.”  The largest chunk of “final energy consumption, 31%, is in building, chiefly heating and cooling.”  In the past architects did not focus on energy use—usually “Energy efficiency has been nobody’s priority: it takes time and money that architects, builders, landlords and tenants would rather spend on other things.”

——–Although the energy market has been subject to turmoil, there are reasons for optimism.  “A virtuous circle is emerging which is confounding the doomsters.  It rests on five elements.  The first is abundant energy, above all from new solar technology . . . The second part of the circle is storage.  Batteries are getting cheaper, more powerful and more prevalent . . . the third element: distribution.  Consumers are now in a position to be small producers and storers of energy.  This creates resilience in the network, along with greater efficiency and more innovation. . . . The fourth part of the circle is intelligence.  The internet has made it possible for its users to generate, store and manage data efficiently.  Now processing power and algorithms will do the same for electricity. . . . The fifth and final part is finance.  Business models for new energy systems are now proven, both in the rich world and in emerging economies.”  [Emphasis added.]

********It is easy to see why energy incumbents who are unwilling or unable to rethink their businesses are so concerned about renewable energy and a host of other technologies that are under development or on the horizon.

********At the end of the print article I noticed the next three Special Reports: Universities (February 14th); America’s Hispanics (March 14th); and Family companies (April 4th).

(19 January 2015): “Insurance via Internet Is Squeezing Agents” (http://www.nytimes.com/2015/01/19/technology/insurance-via-internet-is-squeezing-agents.html)

——–“To the list of jobs threatened by the Internet, add one more: insurance agent.  Technology start-ups, and companies from the insurance industry, are introducing websites that sell or promote a range of insurance including auto, homeowners and small commercial policies.  These portals, which promise savings by showing consumers many price quotes so they do not have to shop site by site, are putting pressure on insurance agents, who collect 10 percent or more of their policyholders’ payments.”  With companies like Google, with its wealth of detailed consumer information, getting involved,  “people in the [insurance] industry and Silicon Valley say it is only a matter of time” before a dent is made “in the armies of intermediaries that are the backbone of the trade.”  Jennifer Fitzgerald, the CEO and founder of the online insurer PolicyGenius, notes: “A lot of people are waking up to the fact that it’s a massive industry, it’s old-fashioned, they still use human agents and the commissions are pretty big . . . It’s ripe for—I hate to use the word—disruption.”

********Ms. Fitzgerald clearly indicates a way to identify industries subject to technological incursion.  Still, in a business like insurance, which tends to be highly regulated by states, there do seem to be some significant challenges.

(19 January 2015): “NC tax break that helped rebuild downtown up for debate” (http://www.citizen-times.com/story/news/local/2015/01/18/nc-tax-break-helped-rebuild-downtown-debate/21968469/)

——–“The [North Carolina] law allowing state credits [for the rehabilitation of historic buildings] expired Dec. 31 are legislation to extend them passed the state House earlier in the year but did not make it through the Senate.”  Local and state groups have said that the credits were essential to revitalizing areas in downtown Asheville and elsewhere.  Buncombe County, in which Asheville is located, “has led North Carolina in the use of state credits, with 68 projects involving renovation expenses of $102.4 million qualifying since 1998, according to the Department of Cultural Resources.”  Although a variety of groups are pushing the state General Assembly to renew the law, perhaps with a narrower scope, important opposition remains.  Senator Bob Rucho, a Republican representing Mecklenburg County and the co-chair of the Senate Finance Committee, notes: “It shouldn’t be that the state should be involved in that kind of distribution of picking winners and losers.”

********The article provides some of the most explicit statements I’ve seen about the principles guiding some of the state legislators.  Interestingly, a good deal is made about the notion of tax fairness, “level playing fields,” and picking winners and losers.  According to Brian Balfour, the director of policy at the conservative Civitas Institute in Raleigh, tax credits “put substantial amounts of money into to pockets of a few developers and homeowners . . . but mean that all other taxpayers have to pay just a bit more to make up the difference.”  It is an interesting argument that has embedded in it the assumption that tax credits are, per se, inefficient.

********The online version of this article has a map showing historic buildings in Asheville that have received tax credits.

(20 January 2015): “How Forbidding Foie Gras Increased the Appetite for It” (http://www.nytimes.com/2015/01/20/upshot/how-forbidding-foie-gras-increased-the-appetite-for-it.html)

——–“A lot of people didn’t know they wanted foie gras ice cream sandwiches until California made them illegal. . . . Foie gras was banned in California in July 2012, on the ground that it was cruel to force-feed a duck to fatten its liver.  But now it is back: On Jan. 7, a federal judge unexpectedly threw out the state’s ban, saying it conflicted with federal laws governing poultry.”  With the ban lifted, California restaurants have rushed to put the item back on their menus.  Ariane Daguin of the specialty food supplier D’Artagnan, notes: “We saw an up in volume two years ago when the ban went into effect . . . People wanted to see what the brouhaha was about.;  Now what is happening is all the chefs who are our friends and have been buying other things from us want to put foie gras back on the menu.”

********The following article mentions the importance of generating and transmitting information in relation to demand.  Media attention, even if negative, can draw attention to an item that would otherwise be “off the radar.”  The article caught my attention because my hometown in Wisconsin was well known for its “Watertown Stuffed Geese,” which were produced in great quantity during the early 20th century.  You can learn more about them at: http://www.watertownhistory.org/articles/stuffedgeese.htm.  The illustration itself is worth a look.

(21 January 2015): “Builders’ New Power Play: Net-Zero Homes” (http://www.wsj.com/articles/builders-new-power-play-net-zero-homes-1421794129)

——–“Net-zero” homes generating more electricity over the course of a year than they use are starting to go more mainstream.  Once viewed as a niche product for the wealthy, some builders are now looking to build such homes for a broader market.  One such producer is Meritage Homes Corp., which operates in nine states and “has constructed 50 net-zero homes since 2011 and intends to build 50 this year alone.”  C.R. Herro of Meritage says that it “can achieve net-zero status in homes costing as little as $200,000 in certain markets.  Thus, the key to more mainstream acceptance . . . is not price but informing more home buyers of the benefits of net-zero homes.”  Herro notes: “Net-zero is technologically and financially solved . . . It’s now a matter of the consumer catching up to that potential.”

********A 5,800 square-foot net-zero home is currently on display outside of Las Vegas as part of an annual series by the National Association of Home Builders.  This suggests that larger builders are becoming more receptive to building net-zero homes on a larger scale.

May you have a good week!


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