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The stamp collection has been mostly left alone since the last update, but let’s catch up with the few changes.

Life line

Lifeline Scientific, a maker of organ transplant transport kit, was taken over as the business was starting to become profitable. The price was decent if not spectacular, but the return from the distressed buy price is pretty satisfying

Tyratech stock class rotation

Tyratech is one of the more speculative stocks in the portfolio, whose product seem to be slowly on its way to some success. The thesis here is that the price is depressed by enough investors being sick of waiting. Having gone down since I bought, it was ripe for re-weighting up to the portfolio standard weight. The growing gap between the two classes of shares represented another opportunity: despite the big spread, the ask of the restricted share (which gets automatically converted to normal shares within a year or so) was well below the bid of the normal share, so I sold all my normal shares and replaced them with restricted shares. The double share class is due to some obscure US listing rules (it’s a US company listed on AIM) that seem harmless to anyone willing to wait for the conversion.

Toxic radiations?

Kromek was added to on the occasion of a fundraising, allegedly but reasonably plausibly to make the balance sheet bullet-proof for institutional customers. They also seem to be slowly on your way. I invested too early here, which is now less likely to happen due to the introduction of the minimum net income rule (> £1m).

Spaces without people

Another reweigthing was Space & People, which has not been doing too well but seems priced for bankruptcy, which seems unlikely. A modest recovery should provide a handsome return.

Last gas

I finally threw the towel on speculative Slovenian gas explorer Ascent Resources on  news of “first gas” being very close, because I expect operations to encounter a series of possibly price-sinking difficulties.

Bye-bye Minotaur

I have also sold out of Minoan, whose management I’ve lost trust in and which is seemingly perpetually loss making (already breaking two of the portfolio rules). Even if the Crete project works out in the end, they’ll likely manage to squander the proceeds.

Delivery failed

Last stock being waved good-bye is DX Group, a recovery situation which seems to have become hopeless. It would have been better to run the legacy business in run-down mode and stop trying to transform into something else, a common sin of legacy businesses.

Acquisitions

Three stocks were acquired, matching our rule sets and looking like they’re on an interesting path at a reasonable price: Scientific Digital Imaging (scientific instruments), Elecosoft (architecture and construction software) and Airea (carpet manufacturing).

Special case: solar lawyers

As a special situation, PV Crystalox was acquired, because of the option value based on the possibility of a favourable settlement of a contract conflict in their favour with  a blue chip customer, which seemed to be excessively discounted by the market.

The various basic income proposals floating around are often criticized for being unrealistic, and let’s face it, they often are. In a recent column, John Kay is asserting that “either the basic income is impossibly low, or the expenditure on it is impossibly high.”

This includes an implicit dismissal of the Keynesian arguments — that the basic income would create demand that would snowball into economic growth — of some basic income proponents. I happen to agree that this aspect is unlikely to deliver miracles, so let’s assume no such effect here.

Too high

It’s easy to agree that spending half of GDP on basic income would not be acceptable, but it’s also a good problem to have: humans are scarcity animals and do not work well when too far from need, as can be seen in the often sorry state of people benefiting from windfalls (third generation heirs, lottery winners, small “first nations” in rich and guilty countries, etc). Thus a basic income should probably be high enough to remove fear of survival (food and shelter) but not to so high as to remove the need to get out to the world to improve one’s lot.

Impossibly low is desirable…

In Western countries what some would describe as “impossibly low” does provide pretty decent survival standard. The Ikea/Lidl/Primark lifestyle is pretty okay, and way more comfortable than what the richest slice of society could afford a century or two ago. So a basic income in the region of say $500 a month for a tier 1 developed country would probably do the trick (assuming social housing and healthcare are not subsumed into it).

… and possible

Would simple arithmetic work for that? To design a realistic basic income we need some premises:

  • Assume the net expense on welfare remains constant, because it reflects what a society is ready to accept in redistributive pressure. This allows isolating the effect of the basic income as a redistribution technique from other ideas about changing the amount of redistribution (which can be done through any mean).
  • Assume the wealthier members of society (say the top half) do not get richer out of it, that is the (income) tax system is adjusted to increase the tax they pay by the amount of basic income they receive.
  • Some existing welfare mechanisms are abolished (such state unemployment benefits, child benefits) or restricted (e.g. pension age could be pushed forward) as the basic income replaces them.

Then what basic income is possible? It’s simply equal to:

basic income = removed welfare services budget + tax equalisation

Detailed number crunching would be required, but I’d expect it to come to $300-$600 per adult, again for a tier-1 developed country.

The main variable here is what services get replaced (and to what extent) by basic income so it computes at all times.

Radical realism

A realistic scenario is probably better thought with social housing, public education and public healthcare arrangements untouched, but the basic mechanism also applies should someone wish to privatise some or all of these services: then the fewer services are left, the closer you get to a basic income equal to the tax take, though the higher basic income might then buy less, depending on the distributional profile of each service (a most tricky issue on its own).

What are the benefits of a survival income?

A survival basic income wouldn’t abolish poverty, in so far as this is more or less defined as inequality — how much less one has than others, rather than the absolute level of what one has — but still have some interesting properties:

  • Improve the bargaining power of low-paid workers not forced to work for mere survival
  • Remove net tax discontinuities (being a net loser when taking a low paid job)
  • Simplified administration (some)
  • Increased acceptability of redistribution

The welfare illusion

The latter point is perhaps the most neglected while the most powerful point in favour of basic income. It makes no difference in pure economic terms whether the cash flow between the state and the citizen is done through tax or benefit payments, it’s the net that matters.

But, like with the money illusion in the monetary realm, optics matter. This can be observed today in the difference in perception between universal benefits (like child payments and some healthcare in many developed countries) and means tested ones (typically unemployment and safety net income). The former are often popular and well accepted, even by net payers, while the latter are seen as prone to abuse, and divisive. A basic income, even if compensated by tax, would probably quickly become part of the societal furniture.

Even if it was the only benefit, it’s probably worth doing for that alone.

Here’s an app idea: make an app, let’s call it Ubercut, that allows Uber users to shortcut Uber and avoid paying the fat commission.

How would it work?

The app would run in the background on a phone and detect if the regular Uber app is running in the foreground. When it is and both a driver and a punter are using it at the same time, and are within pickup distance, it sends a notification of the type “you guys may want to make a deal” to both parties, e.g. doing the ride but for 90% of the fare suggested by Uber (splitting Uber’s 20% comm) and allows them to communicate, thus bypassing Uber before initiating a transaction. A comprehensive hijack would “read over” both user’s Uber screens to send notifications only when there is an exact match. This could be quite tricky or impossible to implement, but a simple passive version (“running the app at the same time and near in space”) can be done relatively simply, at least in Android.

The contracting parties would lose the benefit of the protection afforded by Uber for on-platform rides, but most such platforms mainly work hard on their disclaimers when it comes to cover unwanted trouble. Third party insurers could also offer cover the weary, for a fraction of an Uber commission. The Uber reputation system would still be operational as this is pure freeloading — no ride are initiated in the app directly (in the simplest version of the concept, one could also couple it with a cheaper or peer-to-peer matching platform).

What’s the benefit?

Disruption! Uber and other trading platforms that are dominant collect economy rent due above the cost of operating the service because of the network effect — it’s a winner take all game. This is a classic market failure. The existence of shortcuts would probably contribute to cap such rents.

Would it be legal?

If Uber lawyers haven’t anticipated that, we can be sure they’d add a ban to their terms if such an app becomes popular enough for them to notice. Would people care? Maybe, maybe not. Could they could sue their clients and drivers succesfully? I know not.

Would it be moral?

Unambiguously yes I’d say, as it is merely about applying Uber’s philosophy (disrupt incumbents, ignore the law, etc) to Uber itself.

Private equity shops are known for buying businesses on the cheap, taking them out of public markets (if they were listed), trimming costs, often throwing the baby with the bathwater by eliminating investment and cutting beyond what makes the company’s product valuable, then loading with debt and then reselling the thin equity slice at a premium based on inflated valuations based on short term accounting effects, which is rarely a good deal.

I think a mirror strategy could work well, as well as being compatible with virtuous and constructive investment:

  1. Buy the minimum stake required to control (change management) a distressed but salvageable listed company
  2. Change management and/or business plan (as normal)
  3. Cut dividends if any, announcing no dividends until turnaround
  4. Reinvest all the cash flow into repaying debt and/or reinvesting in the business
  5. Book capital investments as expenses as much as accounting regulations allow to reduce earnings
  6. Watch the price sink as earnings are zero or negative for the few years that the turnaround requires
  7. Buy more shares at depressed prices (ideally below price paid at #1)
  8. When turnaround complete, watch earnings go positives, reinstate dividends, etc
  9. Sell the fit business at a premium when price as converged with fundamentals

(Inversions from classic private equity shown in italics.)

It’s a form of arbitrage of both classic investor expectations and statistical arbitrage automated strategies that both (over)value short term earnings maximisation, to whom the business will look worse than it really is during the “buy more shares” phase. And as a long term strategy it should be pretty good to other parties like customers and employees.

One thing I think Bitcoin, or a similar blockchain-based token system, may be useful for is to replace centralised social networks, or more broadly messaging systems.

A core if oft forgotten feature of a social network is how it manages spam and other forms of network abuse. One solution may be to exploit altruistic punishment, a tendency people have to want to correct bad actions even if it’s not in their direct private interest to do so. In familiar terms, people seem to enjoy pushing the “dislike” button even if they get no personal benefit.

How could one devise a cryptocurrency transaction type that cab be used to harness this effect?

One possible way is what I’ll call “altruistic destruction”. The basic idea is to have a transaction that can cancel some of the recipients’ funds, that is enriching everybody else, through the reduction of the monetary base. If this is free to the sender, this is open to abuse — though whether such abuse would be common could be a subject to interesting experiments — so a compromise might be simply that both the sender and recipient destroy some tokens. As a base case a simple matched ratio may do. The altruistic destruction transaction semantic would be as follows.

When Alice sends to Bob an altruistic destroy for N tokens,

  • Alice’s account value decreases by M tokens.
  • Bob’s account value decreases by M tokens.
  • where M = min(N, Bob’s balance)

M copes for the case where Bob’s has fewer token than N, assuming the token system does not allow debit balances.

In paper terms, this would be equivalent to burning a bank note with the name of a miscreant on it, where through some magic burning the named banknote would also make a banknote of the same value vanish from the miscreant’s wallet. Economically this reduces the total amount of banknotes in the system thus making holders of the remaining banknotes richer (like simply burning one without magic does) everything else being equal.

For practical use in a spam control system, this would have to be implemented with policies that uses minimum balances as condition of message transmission — a distributed deposit system of sorts.

There may also be other application of that transaction type. The ratio of destroyed tokens between sender and recipient may also be toyed with, but 1:1 may be special in that the cost of inflicting damage is equal to the damage individually, while the social benefit is leveraged: destroying 1 of one’s tokens produces 2 tokens’ worth for the community, and the punishment’s social value is free on top of that.

One of collateral damage effects of the oil price crash of recent weeks has been that airlines who have aggressively hedged their jet fuel requirements face a loss on the hedge. Normally this is not a problem, as the point of hedging is to match anticipated revenues with anticipated costs, but here it may backfire if unsold inventory becomes uncompetitive (at the hedged price) compared to competitors who have not hedged (or hedged less).

This brings the question, how much should ideally an airline hedge its fuel costs?

Hedgie or airline operator?

The first thing is that the airline should resist the temptation to branch out as a macro hedge fund and hedge based on predictions of future oil prices, beyond its current need, e.g. for future flights it hasn’t irreversibly committed to fly yet.

Making macro predictions and running an airline are two very different problems and it is unlikely a single management would be equally good at both. If they’re good at macro prediction, they should close the distracting airline and become an oil trader on a much larger scale, and conversely. Arguably an airline operator will have some idea on the general dynamic of the airline sector, and its fuel requirements, in their geography, but that’s unlikely to be enough to justify making active bets on the broader markets.

Asset liabilities match

So a reasonable fuel is to match the hedge as close as possible to committed fuel liabilities.

The maximum hedge is thus all the fuel required for all the scheduled flights the airlines has to fly, that would be something like all flights with at least 1 passenger booked.

But, in an era of dynamic pricing, the price of seats unsold can be varied in response to supply and demand, and costs. So why hedge unsold tickets at all? This gives the minimum hedge: only hedge the fuel share corresponding to tickets already sold.

This inconveniently would be an exact match only if demand and supply don’t react to fuel costs being pushed to ticket prices, and are not variable for non-fuel factors. So the ideal match is somewhere between those 2 possibilities, without an exact answer being easily attainable.

The simplest for a shrewd airline may be safety in numbers: to hedge as much as (and no more than) their competitors (on comparable routes, etc). Then success remains a result of operational excellence or lack thereof.

Economic intelligence test

For investors in airline shares, there may be more to read in how management justifies their hedging policy — do they get the economics? — rather than how much. And run away from closet hedgies.

Having not made divination posts for a while, let’s make a new prediction, that the price of Bitcoin will go down markedly in classic currency terms in the next 3 to 6 months.

Transaction acceptance means net bitcoin selling

The reasoning is pretty simple: one of the main happenings in the Bitcoin world recently has been increased acceptance at legitimate vendors like Dell, Overstock, Expedia (for hotels) and others. Bitcoiners see that as a success and, ironically, some Bitcoin holders see it as doing something of civic value to buy at vendors that accept Bitcoin.

But what happens when someone buys a laptop from Dell with Bitcoin? There is no sign of Bitcoin becoming used in the business supply chain, where it doesn’t really solve any material interesting problem, so Dell will immediately convert the Bitcoins to dollars to pay their employees and suppliers. Indeed one of the reason vendors are accepting Bitcoin is that payment processing intermediaries make that easy by doing it for them and “removing the Bitcoin risk” from the vendor: they price in dollars (or another classic currency) with the payment gateway, and get dollars paid by classic wire transfer.

What happens on the buyers’ side: will people buy Bitcoins to buy Dell laptops? It seems unlikely. Dell is probably more trustworthy than most operators in the Bitcoin ecosystem, and you don’t want anonymity or pseudonymity when buying a laptop: you want them to know your address and deliver the laptop there. So there’s basically no reason to pay using a classic method to get Bitcoin and then use those shortly at a legitimate vendor. So who’s gonna buy Dell laptops with Bitcoins? My guess is mostly people who for some reason or other had accumulated Bitcoins, legitimately or not, and now have an opportunity to spend it on something more useful than Bitcoin t-shirts, and also see it as a “good” thing for the ecosystem.

And then came momentum

As it happens Bitcoin has been on a downward trend since its peak for several months, and has also seen a further boom in “mining” activity. Bitcoin mining, like its real world namesake, is one of those activities which tends to be structurally loss-making as it’s very hard for rational investors not to be outnumbered by innumerate optimists. Volatility and a downward trend may accelerate some of these past optimists giving up on accumulating mining proceeds, and exiting through transactions, which might provide some comfort (product + civic value) even if nursing a net loss.

Raw momentum regardless of mining (“it’s going down because it’s going down”) will also tend to put a further downward pressure, so basically we have a fundamental trend towards sale of Bitcoin created by transaction acceptance, amplified by momentum and mining dynamics.

Absent any new net buyers of Bitcoin, it’s hard to see how it could go anywhere but down on a simple demand and supply basis. It’s hard to think of a source of new net buyers. Most people who may be interested in Bitcoin at this stage — where it has acquired some maturity but is still an emerging underground tech — have probably already jumped in and are sustaining steady-state flows. I just don’t see any new major demand source coming in to offset transaction-driven sales.

Show me the money

So to quantify the prediction for verification, let’s say that BTC/USD will touch US$ 250 (approximately halve in value from now) for at least one day at reputable exchanges before April 1, 2015.

(Disclosure: I have a few pennies on downward Bitcoin bets at shady blockchain betting operator bitbet.us — not a recommended counterparty or investment. Note that if I win I get my payoff in devalued Bitcoins, which, if my fellow gamblers don’t discount that effect correctly, as I expect them not to, will be a pyrrhic victory.)