258 (30 March 2016)

Welcome to week 258!  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 an Internet title search.

(7 March 2016): “Some Wall Street Vets Are Betting On a Weed Exchange” (http://www.bloomberg.com/news/articles/2016-03-07/america-s-marijuana-exchange-and-the-wall-street-vets-behind-it)

********An interesting article I found after following a link in a more recent (March 24) article (http://www.bloomberg.com/news/articles/2016-03-24/the-pot-business-is-starting-off-even-better-in-oregon-and-washington-than-it-did-in-colorado).

——–“Legal marijuana is a $5 billion business in the U.S., and Steve Janjic figured he’d get a piece of it.  With a commodity exchange.  For a product that can’t be transported across state lines.”  Janjic has “put $1 million into Amercanex Corp., an electronic cannabis-trading platform that handles sales of about 100 to 150 pounds of weed a week.  That’s not exactly blockbuster in a country with an estimated 20 million marijuana consumers.  It may not be too bad, though, in the case of a young exchange for a psychoactive substance transitioning to legitimate, or sort of legitimate, considering it’s illegal under federal law.  Janjic and other Wall Street veterans backing Amercanex take the very long view.”  Creating an exchange has hurdles: “For an exchange to fully function, a commodity has to have standardized specifications and some regulatory oversight . . . so everyone can be assured of exactly what they’re buying and selling . . . [but] Weed comes in a very wide range of quality and potency and prices.”  Adding to the challenge of creating an exchange is that “Buyers and sellers have to be in the same state.  The U.S. government regulates interstate commerce, and selling or possessing marijuana are federal crimes.”  According to Janjic, federal law is “the risk in the game.”

********So, there may be many state exchanges until such time as federal law changes.  Consequently, there may be profit opportunities from learning how Amercanex (http://www.amercanex.com/) functions.  The site has a ticker tape “crawler” at the top of the screen showing prices (and price movements) for various products.  Lots to learn about this emerging market—projected to have $20 billion in sales in 2020—by reading both Bloomberg articles and following the links.

(22 March 2016): “Cover Crops Are Making A Comeback” (http://daily.jstor.org/cover-crops-making-comeback/)

——–“Farmers looking for profits are increasingly turning to an old technique to preserve soil health: cover crops.  The use of cover crops . . . is ancient: even the Roman poet Virgil references cover crops, but the practice is undoubtedly far older.  In recent decades, these living mulches have fallen out of favor, replaced by commercial fertilizers producing repeated commercial harvests without interruption for soil recovery.  Now that commercial yields are declining, some farmers are returning to older methods.  Given the many benefits of properly used cover crops, it’s amazing that their use ever declined.”

********The article upon which this post is based is “Cover Crops and Living Mulches” by Nathan L. Hartwig and Hans Ulrich Ammon.  The link to the article is included in the post.  This seems to be an instance where the exclusive focus on one thing, by ignoring many other things, can undermine the one thing that is cared about.  This is a common problem when one linear relationship is considered and the systemic features are not.  This is so prevalent that it seems like a logical fallacy.  It does seem like an instance of the fallacy of composition (https://en.wikipedia.org/wiki/Fallacy_of_composition).

(23 March 2016): “Energy Transition: Electricity Prices in Free Fall” (https://global.handelsblatt.com/edition/395/ressort/companies-markets/article/electricity-prices-in-a-free-fall)

********Handelsblatt is “The English-language edition of Germany’s leading business daily.”  This article takes a look at the whole constellation of electricity prices in Germany: consumer prices, wholesale prices, prices for conventionally-produced electricity, and prices for a variety of renewably-produced electricity.  Added into the mix are a variety of taxes, fees, and levies.  It is worth reading this article quickly to sense the complexity of the situation and to get an idea why “The electricity market has come apart at the seams” and “the existential threat for German operators of conventional plants.”  The term Rube Goldberg machine (https://en.wikipedia.org/wiki/Rube_Goldberg_machine) comes to mind.

********For another perspective, we have the article “Solar-Panel Installers Face Clouded Future” [SR](http://www.wsj.com/articles/solar-panel-installers-face-clouded-future-1458926502).  Here the story is based on Nevada, where state legislators recently reduced incentives for solar-produced electricity.  Among other consequences, two solar businesses have abandoned the state: SolarCity Corp. and Sunrun Inc.  The North Carolina Clean Energy Technology Center tracks policies on renewable-energy for all 50 states.  You can read its most recent report at: https://nccleantech.ncsu.edu/wp-content/uploads/50sosQ4-FINAL.pdf.

(24 March 2016): “The Uber Model, It Turns Out, Doesn’t Translate” (http://www.nytimes.com/2016/03/24/technology/the-uber-model-it-turns-out-doesnt-translate.html)

——–Many of the companies that have tried to follow on Uber’s success as an on-demand app “have come under stress.  Across a variety of on-demand apps, prices are rising, service is declining, business models are shifting, and in some cases, companies are closing down.”  Is it the end of the on-demand dream?  Although “Investors saw Uber’s success as a template for Ubers for everything” its “success was in many ways unique.  For one thing, it was attacking a vulnerable market.  In many cities, the taxi business was a customer-unfriendly protectionist racket that artificially inflated prices and cared little about customer service.”  Furthermore, cars are parked much of the time and they are the second-most expensive things that most people buy.  “But how many other markets are there like that?  Not many.”  Consequently, “The lesson so far in the on-demand world is that Uber is the exception, not the norm.  Uber, but for Uber—and not much else.”

********A nice examination of some of the necessary conditions for the Uber phenomenon.  Certainly a very expensive lesson for many firms past and present.  Although this seems like another logical fallacy is at work, perhaps it is as simple as finding customers who are currently poorly served because of substantial barriers to entry—in Warren Buffett’s term, wide moats—created by legal and political activity.

********The changes taking place in the labor market, despite the attention given to Uber-like apps, are much broader and examined in “Contract Workforce Outpaces Growth in Silicon-Valley Style ‘Gig’ Jobs” [SR](http://www.wsj.com/articles/contract-workforce-outpaces-growth-in-silicon-valley-style-gig-jobs-1458948608), which is in turn based upon research by economists Alan Krueger and Lawrence Katz.  Unfortunately, I have been unable to identify that research—it would be nice if the media would identify their sources fully (there is no privacy issue, here).  You can learn more about it, though, at: http://blogs.wsj.com/economics/2016/03/28/the-entire-online-gig-economy-might-be-mostly-uber/.  Perhaps the most succinct useful statement is: “There has been a large rise in offline contract work, which has little to do with the rise of apps and Silicon Valley startups.”  This has applied to almost all occupations between 2005 and 2015.

(25 March 2016): “Growing Up in a Bad Neighborhood Does More Harm Than We Thought” (http://www.nytimes.com/2016/03/27/upshot/growing-up-in-a-bad-neighborhood-does-more-harm-than-we-thought.html)

——–New research by Eric Chyn, a doctoral candidate in economics at the University of Michigan, indicates that the “negative effects of a bad neighborhood may be much larger” than previously indicated.  By examining a “natural experiment” growing out of the demolition of high-rise public housing building in Chicago, coupled with a method “Echoing the approach that medical researchers take to clinical trials,” Chyn has drawn attention to the role of “inoculation” against “bad neighborhoods” that may have caused previous studies to understate the negative effects of bad neighborhoods.

********Chyn’s work seems closely connected to that of Raj Chetty, Nathaniel Hendren, and Lawrence F. Katz, which was just published in the American Economic Review of April 2016 (http://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.20150572).  An earlier (and lengthier) version appeared in August 2015: http://www.equality-of-opportunity.org/images/mto_paper.pdf.  The Upshot post concludes with a useful statement indicating the broader relevance of Chyn’s work, i.e., that it “contains insights likely to extend beyond housing policy” and possible takeaways for conservatives and liberals.  Failing to consider “inoculation” stands out for me.  The article contains many useful links, including one to Chyn’s paper.

(26 March 2016): “Business in America: Too much of a good thing” (http://www.economist.com/news/briefing/21695385-profits-are-too-high-america-needs-giant-dose-competition-too-much-good-thing)

********An article that argues that “Profits are too high.  America needs a giant dose of competition.”

——–“Profits are an essential part of capitalism. . . . Firms that ignore profits, such as China’s state-run enterprises, lurch around like aimless zombies, as likely to destroy value as to create it.  But high profits across a whole economy can be a sign of sickness.  They can signal the existence of firms more adept at siphoning wealth off than creating it afresh, such as those the exploit monopolies.”  In the 1990s “American firms faced a wave of competition from low-cost competitors abroad.”  This helped keep profits relatively low.  “Since then the pendulum seems to have swung back.  Huge companies, long the focus of American worries about competition, have not actually got any bigger.  In 2014 the t op 500 listed firms made about 45% of the global profits of all American firms, as they did in the late 1990s.  Instead they, and other companies, have become more focused.  The strategy can be seen as an amalgam of the philosophies of two deeply influential: businessmen: Jack Welch, former CEO of General Electric, and Warren Buffett, the CEO of Berkshire Hathaway.

********Jack Welch “advised companies to get out of markets which did not dominate.  Warren Buffett . . . extols firms that have a ‘moat’ around them—a barrier that offers stability and pricing power.”  To examine the “creeping consolidation” of the economy, The Economist “divided the economy into 900-odd sectors covered by America’s five-yearly economic census.”  It found that “Two-thirds of them became more concentrated between 1997 and 2012” and the “weighted average share of the top four firms in each sector has risen from 26% to 32%.”  It appears that niche sectors.  One of those moat-enhancing tools, of course, is legislation (the invisible foot).  There are many interesting apercus in the article and an interactive tool enables the exploration of 893 industries.  You can read it directly at: http://www.economist.com/blogs/graphicdetail/2016/03/daily-chart-13.

(26 March 2016): “You can finally stop feeling guilty for eating quinoa” (http://www.vox.com/2016/3/26/11306756/quinoa-craze-peru)

********Discovered by JSTOR Daily, where it is referred to as “The economics of quinoa” (http://daily.jstor.org/suggested-readings-pain-grit-and-quinoa/).

——–“In January 2013, agricultural economist Marc Bellemare was browsing the internet when he noticed a raging debate about (of all things) quinoa.  Specifically, whether people in rich countries should feel guilty about eating it. . . . Some commenters feared the West’s quinoa binge would spell disaster for the developing world” with poorer “people in Peru and Bolivia, for whom” quinoa was a staple becoming unable to afford it.  To investigate further, Bellemare decided to take a look at the data, so the hunt was on.  Three years later, he and his co-authors found that “Not only has the quinoa craze benefited farmers in Peru—it’s even benefited quinoa consumers in the region who don’t actually plant the crop.”

********The article provides links to the work Bellemare and his co-authors, as well as some other relevant materials.  Whether the results stand scrutiny or not, the article provides an excellent case of importance of “looking at the data” as opposed to relying (as I often do) on general, data-free reasoning.  The article concludes with an interesting observation and question.  “By the way, there is also the slightly different question of whether the quinoa craze might be affecting crop diversity.  Technically, there are more than 3,000 varieties of quinoa grown in South America . . . But Western appetites have raised demand for just a few strains.”  Will crop diversity fall as a result?  Generally reasoning suggests that it will.

(28 March 2016): “Here’s the U.S. Earthquake Forecast, Now Including the Quakes We Cause” (http://www.bloomberg.com/news/articles/2016-03-28/u-s-quake-forecast-includes-human-induced-temblors-for-first-time)

——–“A cluster of central states surrounding Oklahoma now faces the highest risk of earthquakes induced by human activities ‘such as fluid injection or extraction,’ according to a short-term seismic forecast by the U.S. Geological Survey.  The report, which for the first time includes quakes that may be linked to oil and gas production, comes after an alarming six-year rise in the incidence of quakes throughout the central and eastern U.S. . . . There were more than 1,000 quakes last year with a magnitude greater than 3 on the 10-point Richter scale, up from an annual average of 24 between 1973 and 2008.  The states facing the highest risk from human-induced quakes are, in order, Oklahoma, Kansas, Texas, Colorado, New Mexico, and Arkansas. . . . The link to the energy industry is largely based on wastewater from wells subjected to hydraulic fracturing, or fracking . . . The production process yields a lot of water, which may be disposed of by injecting it into storage wells.  That is the practice suspected in the increased earthquake activity.”

********The website for the USGS can be found at: http://www.usgs.gov/.  Among things of note there is a site for real-time earthquake information: http://earthquake.usgs.gov/earthquakes/map/.  Of direct relevance to the Bloomberg article, is the recently published One-year seismic hazard forecast for the Central and Eastern United States from induced and natural earthquakes (https://pubs.er.usgs.gov/publication/ofr20161035).  The 58-page report is downloadable and provides a lot of information on induced earthquakes.

(29 March 2016): “Craft Wine?  Craft Beer’s Innovation Edge (and What Wine Can Do About It)” (http://wineeconomist.com/2016/03/29/innovation-2/)

********Asheville, North Carolina, the home of craft breweries aplenty, craft ciders, and craft spirits.  What about craft wine?  More vineyards, to be sure, and the home of America’s most-visited winery.  In any event, Mike Veseth has some interesting thoughts about how the business of wine might be informed by recent success of craft beer.

(30 March 2016): “Lester C. Thurow, Economist Who Seized the Spotlight, Is Dead at 77” (http://www.nytimes.com/2016/03/30/business/economy/lester-c-thurow-prominent-economist-is-dead-at-77.html)

——–“Lester C. Thurow, a prominent and provocative economist who earned a dedicated following through his long writing and speaking career, and who was known for his prescient warnings about the growing income gap between rich and poor Americans, died on Friday in Westport, Mass.  He was 77. . . . In his writing, he tried to make the dry and difficult-to-grasp intricacies of the American economy accessible to a mass audience.”  Thurow “decided to devote himself to communicating about economics after he was not offered a job in President Jimmy Carter’s administration,” although he had been an economic adviser during his campaign.  In explanation, he noted: “I decided that if I could not have the king’s ear, I would talk to the public . . . That’s the other way to have an impact on the economic system.”

********Thurow is not the only economist who has made such a decision—Paul Krugman comes to mind (and perhaps for the same reason).  Thurow was the Dean of MIT’s Sloan School of Management from 1987 to 1993.  Arguably his best known book is The Zero-Sum Society (http://www.amazon.com/Zero-Sum-Society-Distribution-Possibilities-Change/dp/0465085881/), which was published in 1970.  There will be broad coverage of Thurow’s life and work in the days to come.  This is what MIT had to say: http://news.mit.edu/2016/prominent-mit-economist-and-dean-lester-thurow-dies-78-0329.

May you have a good week!

Bruce

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