Term Sheet: Nov. 30, 2016 - btbirkett@gmail.com - Gmail
....Data service Tracxn Technologies counts 800 "fading or dead" startups in India. And third quarter venture funding in the country was down by 70% over the same period last year, according to ValuePenguin.
Wednesday, November 30, 2016
Many Boom-Time Startups Are Fizzling Out - Bloomberg
Many Boom-Time Startups Are Fizzling Out - Bloomberg
...Declines in the venture capital market are hitting startups of all sizes, but the ones left particularly vulnerable are the thousands of young companies that raised seed funding during headier times just a year or two ago.
The seed frenzy peaked in the first quarter of 2015 when more than 1,500 startups raised their first rounds of capital, according to research firm PitchBook Data. Many of those companies are now running out of cash, and most won’t be able to get more.
...Declines in the venture capital market are hitting startups of all sizes, but the ones left particularly vulnerable are the thousands of young companies that raised seed funding during headier times just a year or two ago.
The seed frenzy peaked in the first quarter of 2015 when more than 1,500 startups raised their first rounds of capital, according to research firm PitchBook Data. Many of those companies are now running out of cash, and most won’t be able to get more.
Tuesday, November 29, 2016
Maudlin - Trump Tax Questions
But there were many good questions and comments and some thoughtful disagreements, so I want to address a few of those. And I will specifically go into why I seemingly deviate from core conservative principles regarding taxes. It’s all about debt and the consequences of debt – that’s the overriding factor for me. And I’ll try to make the case that there are times when we just have to make hard, even philosophically unpalatable, choices.
Some comments I will excerpt; others I will characterize in general terms; and where appropriate I’ll copy and paste whole comments. So let’s jump in.
Allen Jones · Univ. of Arkansas
Please explain further corporate tax rate of 15% on income above $100,000 with "no deductions period." Sounds like a 15% tax on sales. What do you mean no deductions? Are operating expenses deductions?
Allen, this was probably the most-asked question, and since you asked it most concisely, you get the recognition for it.
No, this is not a sales tax. It is a 15% tax on corporate income. That is normal GAAP accounting income. There are something like 3,400+ different, legal, congressionally mandated corporate tax loopholes and deductions. (I can’t find the exact number right now.) Many of those tax loopholes apply to only one company or one very small industry and are favors from a Congressman or Senator to their main constituents. So when I say no deductions, I mean get rid of every one of those loopholes. I know, I know – I will be goring practically every business’s ox in some way or other. And that’s the problem: Too many people think their industry deserves some breaks and one little loophole is not that big a deal, and the next thing you know there are 3400 of these puppies. And then you find General Electric paying less income tax than I do while making multiple billions of dollars a year.
I might be run out of Texas, because this would likely mean axing the oil depletion allowance, too. Normal depreciation would still apply. For those who are worried about R&D expenses, I would allow accelerated depreciation on R&D, because those are truly expenses, at least in my mind. But the point here is to have as few loopholes as possible (with the only exceptions to be those that clearly, directly create jobs). I will readily admit to not being an accounting expert, but I have looked at a few balance sheets. Corporations would have to pay taxes on what they report to their shareholders or their bankers or even to themselves. Fifteen percent is not that big of a deal in the grand scheme of things. It is actually slightly lower than the current effective rate (depending on which source you go to). I think that under this plan we would actually take in more taxes because we would see corporations come from around the world and domicile here in the United St ates. And businesses would not go to such drastic lengths to avoid reporting income, so total corporate taxes would increase.
Glen Travers -· London, United Kingdom
VAT is a drag on growth – look at UK and EU – as well as difficult for the unhappiest group in all our economies. This insidious tax is an admission of failure by politicians who promise reductions in income tax in return for proposing a “fairer” direct tax instead of controlling populist unaffordable promises.
Glen, I totally agree with you: a VAT will be a drag on growth. There was a lot of pushback from many readers on the concept of the VAT. So let’s use your question as a springboard into the subject.
First, if you asked me 10 years ago if I would ever even think about a VAT in the US, I would’ve said, “Not no, but hell no. Double hell no!” We were still at a point in 2006 where we could have brought the budget under control, got our hands around the entitlement problems, flatlined spending along the lines of Clinton/Gingrich, and dealt with both the deficit and the debt.
However, that is not what we chose to do. And now we find ourselves between the devil and the deep blue sea. The devil is the national debt, and the deep blue sea is the crisis that we are sailing into if we don’t figure out what to do about that debt. The chart below goes through 2014, and if it were extended to the end of this year it would show national debt at $20 trillion.
At some point, Glen, debt in and of itself is a drag on growth relative to income. The economic literature is pretty consistent on that. A debt-to-GDP ratio of 40% is not an issue; but US government entities owe a total of $23 trillion, or over 120% of debt-to-GDP – and that amount is rising every year. We look a lot more like Italy than any of us would care to contemplate.
While I agree that a VAT is a drag on growth, that is not the problem in Europe. It is their debt, plus their sclerotic regulatory systems and ungodly heaps of rules and regulations that are destroying jobs and inhibiting new small businesses from starting.
As I keep preaching, when (not if) we have the next recession, the debt will balloon to well over $1.5 trillion and probably closer to $2 trillion. It won’t take long to get to $ trillion, and then we’ll be spending $600–$800 billion of taxpayers’ money just to pay the interest at what I think will be normal rates. Now, if you prefer to use the CBO’s projected interest rates, then add another $300 billion a year, pushing total interest outlays to $1 trillion a year. (The CBO is assuming a much stronger economy than I would at that level of debt. If I am wrong, then the interest payments will be much higher…)
We have amassed well over $120 trillion in unfunded liabilities, and if we don’t get our entitlement spending under control, the debt is only going to get worse – much worse. That reality brings up the next, generalized question.
John, you know the only real way to solve the crisis is to cut spending across the board. Cut everything. You have to slash entitlements and defense spending and get rid of whole government departments. We have to learn to live within our budget. Stop being part of the mainstream and deal with the real problem: too much government spending.
(And there was also the Libertarian variation on that theme: Starve the beast; don’t feed it.
To everyone who voiced sentiments along those lines: I get it. I agree with you. If it were in my power, I would do it. But it’s not.
There’s a song running through my mind right now. It’s the chorus from Kenny Rogers’ classic song, “The Gambler”: “You got to know when to hold ’em, know when to fold ’em…”
Philosophically, I am still as much a small-government guy as I was back in the ’80s. A small-L libertarian. I want government to do only what is necessary to keep the game fair, do the things that we need to do as a group, which can mostly be done on the local level – and for God’s sake keep its thumb off the scales.
We fought those battles in the ’80s and ’90s and made huge progress – and we truly lost at a national level when the Republicans took over under Bush II. We Republicans became the party of big government. And while you can get many Millennials and Gen Xers to nod in agreement with the principle of a small government, for them that does not include doing away with government-assisted healthcare, which by definition means a pretty large government. And don’t even try to touch the hot third rail of Social Security. Bush II actually tried to deal, just marginally, with relatively simple problems with Social Security and got slapped down by both parties.
Tell Boomers and others they can’t have their Medicare? Or their other “entitlements”?
The simple fact is, a majority of the voters in this country want Social Security and healthcare and expect healthcare to be provided to those who can’t afford it. They want pre-existing conditions to be ignored by insurers. And a whole slew of other things.
I do believe there is a way to get healthcare spending under control and put our entitlement problems on a glide path to being solved, even as we fully acknowledge that our demographics are working against us. But there is no way it can be done without money. It is going to take a great deal of government spending, no matter how you slice it. The government has only three sources of revenue: taxes, borrowing, and monetization. Borrowing money runs up the debt, and we are getting very close to the point where ballooning debt becomes debilitating. More on monetization later.
That means we have to somehow increase revenues if we are going to pay for all that needed spending and bring the debt under control. I don’t like it, but those are just the facts.
So then we come to the crux of the matter: How do we raise the necessary revenue in a manner that will still allow us to grow the economy as much as possible? I think the preponderance of economic literature suggests that consumption taxes are in general less of a drag on growth than income taxes.
Consumption taxes include value-added taxes (VATs) and sales taxes. Then there is a whole school of thought built around the so-called Fair Tax, which is a national sales tax that would be added on to all retail sales in addition to state sales taxes. Proponents of the Fair Tax would then eliminate all federal income taxes (including the alternative minimum tax, corporate income taxes, and capital gains taxes), payroll taxes (including Social Security and Medicare taxes), gift taxes, and estate taxes.
I can go along with this scheme in principle, but in practice I think the equivalent of a 30% sales tax (which is what the Fair Tax would amount to when combined with state and local sales taxes) would send a lot of the economy underground. Just my opinion. When you can deal with your plumber or favorite restaurant for 30% less by paying cash, the temptation looms pretty large.
I’ve traveled all over the world, and those countries with high retail taxes or controlled exchange rates end up becoming cash societies to the extent possible. The Argentines and the Greeks and the Italians are lifetime grandmasters at surviving in such an economy. Call me cynical, but at 30%, I think a lot of my neighbors would quickly master the game, too.
A VAT, or any of its sisters, has the advantage of being taxed at the business level on the incremental value added to products at each stage of production. It is thus a great deal harder to avoid, so everybody pays. Or almost everybody. It would actually capture a lot of the current underground economy.
So why not make the VAT large enough to get rid of all the other taxes, as the Fair Tax folks suggest? For me, it’s is a purely political decision. The VAT is a regressive tax. That means it generally falls more heavily on those with lower incomes. And progressives and liberals will hate that. So we have to come up with a compromise. That means we’re still going to have to have an income tax, but we need it to be as low as possible. My suggestion is 20% on all income over $100,000. (See last week’s TFTF for details.)
To make the VAT less of a regressive tax, I propose that we make it large enough so that we can eliminate the Social Security tax. That immediately gives all lower-income earners a 6% pay raise. Plus, it lowers business costs 6%. That takes away a lot of the regressive nature of the VAT.
Not starting to pay income tax until you clear $100,000 and not being taxed for Social Security doesn’t mean that those who make between $50,000 and $100,000 don’t pay taxes. They pay taxes in the form of the VAT, plus their local taxes; so their tax burden should not be a lot different than it is now, and they might even see something of a tax cut.
Remember, the object here is not just to cut taxes but to figure out how to get more tax revenue with the least possible pain to the overall economy. If your family has ever been faced (as mine has on several occasions) with a significant increase in expenses or decrease in income, you know you had to make some tough choices. On the national level, too, somebody is going to have to pay more, and somebody is going to get less. I remember that when I was starting out in business in my 30s, there were days when I darkly joked, “I’ll pay what I have to, and everybody else will have to wait.” That included my wife and kids and what they wanted or even needed. Reality’s a bitch sometimes.
We have a reality to face up to now. And that is our national political process. We have to figure out where to get the money to pay for what our citizens say they want. If a Republican president and Congress do not enact legislation that gives voters something approximating what they feel they need, Republicans will be thrown out and Democrats will be given another chance. Let me tell you straight up that the economists advising the Democrats will not only give us a VAT, they will give us high progressive personal income taxes, and the corporate tax will not come down that much. They simply don’t buy my economic view of the world. They are neo-Keynesians through and through. Think Europe on steroids … even as we watch Europe getting ready to implode over the next four years.
There are a number of objections along the lines of, “If we do what you propose, it will hurt me. It’s not fair.” Well, in many cases I agree and sympathize with you. But at this point in the game, our whole political and economic situation is “not fair;” and we’re left with only difficult (but necessary) choices. One especially poignant objection came from a reader who had converted his entire pension plan to a Roth IRA, paid his taxes, and now I was, proposing a VAT that would make him pay his taxes again. He is quite right that this is unfair to him. But I don’t know what to do. It is simply not possible to devise a system that is fair to everyone in every way. We have to make some tough decisions. The needs of the many must outweigh the needs of the few. And I say that with a full understanding that, as Ayn Rand discovered and explained, the needs of the individual are what give rise to the need and possibility for value judgments to begin with.
That is the problem with making decisions in a government that is as big and complex as the US system is. We have let its growth get out of control, and going back would be so unbelievably disruptive in terms of lives and fortunes and jobs and futures that the reverse trip is simply not possible. We can’t rewind the clock. As The Gambler told us, “Every hand’s a winner and every hand’s a loser.” We have been dealt the hand we have, and we have to figure out how to play it to make it a winning hand. Folding is not an option.
And thus we come to the heart of the matter with regard to my VAT proposal. If we don’t bring the budget deficit beneath the nominal growth rate of GDP (which is unlikely to go above 4% in the near future), our debt will explode during recessions; and we will ultimately face a debt crisis. Those never end well. The choices we will have at that point will be far fewer and even more stark.
Let’s wargame our situation for a few minutes. What will happen if we increase taxes and cut spending enough to get the deficit and debt under control? Getting there will take compromises along the lines of what Clinton and Gingrich did, but I truly hope we’re capable of them. With our debt as large as it is, we are going to be in a somewhat slower-growth economy; but if we get rid of enough shackles on growth and get the incentive structure right with the proper tax mix, the American entrepreneur can probably get us out of the hole we’re in without its getting too much deeper.
With the amazing new technologies that are coming along, we can probably get to a point where we can in fact grow our way out of our debt problem over the next 10 to 15 years.
What happens if we don’t? The more benign outcome is that we end up looking like Japan. We grow the debt to the point where we actually have to monetize it. Perhaps not the end of the world but certainly not the high-growth, job-creating machine we would like our economy to be. The income and wealth divide would deepen, and if you think there was pushback in the last election, just wait. We might see even higher taxes and a slower-growth economy; and entrepreneurs, established businesses, and investors would just have bigger headaches. Remember, that’s the best possible outcome if we don’t deal with our deficit and debt.
What happens to the value of the dollar in that scenario? Six years ago I would have confidently told you it would go down. Now, as I observe the Japanese experience (and even though I recognize a number of differences between our economies), I suspect that the dollar might rise, not fall. Or rather, it wouldn’t fall relative to the other global currencies, and not nearly as much as my hard-money friends seem to think. We would truly find ourselves in a world for which we have no historical analog.
If the country with the world’s reserve currency starts printing money merely to service its debt because people don’t buy its debt, and in a world where most other major economies are also in trouble (as I logically assume they would be), then where are we? And remember, this would be a future in which total global debt would be in the $500 trillion range and global GDP would top $100 trillion. Monetizing $1–2 trillion a year (we are talking 10+ years out) – roughly the equivalent of what Japan is doing today – might be like spitting in the ocean. Money will be far more fungible and liquid and movable in the financial-technology world that we are evolving to. It would be the height of hubris to think we can know with any degree of certainty what would happen.
Now I don’t think the failure-to-act scenario will happen, but we’re in wargame mode, so we have to think the unthinkable. Maybe the world decides it wants another reserve currency or substitutes something new. We don’t know. Lots of things are going to be possible in 10 years that we have no clue about today. In such a scenario, the dollar could in fact lose a great deal of its purchasing power. That would create a great deal of uncertainty and volatility, and I can see a global deflationary debt scenario unfolding, followed by massive monetary creation.
I guess the critical factor for me is that I can see no scenario where we don’t deal with the deficit and the debt and enjoy a positive outcome. It’s a binary choice to me. So I choose to suggest what I think is the only politically possible thing to do; and that is to restructure the tax code, balance the budget with an increase in taxation, roll back as many rules and regulations as we can, hope we get the healthcare issue right – and then see what happens.
Let me end with a story. I was on a plane going from New York to Bermuda and had been lucky enough to be upgraded to first class. It was 1998 – just a few days after the resolution of the Long-Term Capital Management crisis. The markets had seen a rather harrowing time.
The gentleman who was seated next to me ordered Scotch as soon as the wheels were up and basically indicated to the stewardess to keep them coming. You could see that he was emotionally shaken. I engaged him in conversation after a few drinks, and when he found out that I was allied with the hedge fund business and coming from New York, he assumed I knew a lot more about the world than I did. It turns out that he was the vice-chairman of one of the largest banking conglomerates of the time. We all know the name.
He began to relate to me the deep background story of what had gone on for the past few weeks, culminating in that famous meeting called by the New York Federal Reserve, where the president of the New York Fed told everybody in the room to play nice in the sandbox. And to whip out their checkbooks. This gentleman had been in the meeting and knew the whole story. I knew I was hearing something special, so I just sat and listened and made sure the flight attendant kept bringing Scotches for him. He seemed to open up more with the downing of each one.
Finally, he turned and looked me in the eye and said, “Son, we went to the edge of the abyss, and we looked over. And it was a long way down. It scared every one of us to the depths of our soul.” And then he ordered another Scotch and laid his head back and tried to rest.
As I look back on that 1998 crisis, which we all thought was so huge at the time, it brings a smile. We were talking hundreds of millions that had to be ponied up by each of the big banks, several billions of dollars total. It was manageable within the private system. Just 10 years later, in the 2008 crisis triggered by the housing bubble, we were talking hundreds of billions if not trillions in losses, and the private system was not capable of dealing with it.
If we don’t handle our debt problem, the crisis into which we’ll plunge will resolve the debt in one way or another – and the ensuing turmoil will make 2008 look as minor as 1998 does today.
I do not want to my children to wake up in a world where we are frog-marched to the edge of the abyss and forced to look over. We still have the opportunity to secure the future for our children, but only if we seize the moment. If we don’t, it will be unusquisque pro se – every man for himself.
A few thoughts on investing in an environment like this (since investing in the economy is supposedly what this letter is mostly about). With all the current and emerging challenges we face, investing will still be difficult even if we deal with our debt issue, but those challenges will be far more agreeable than the extraordinarily difficult choices we’ll be left with if we don’t handle the debt. With the tools and strategies that we have available to us today and with even more powerful tools being developed for the future, I think investors who are properly prepared can figure out what to do in either scenario. But average investors who are expecting the future to look somewhat like the past? They’re going to be severely damaged. Their retirement futures are going to be ripped from them. And they are going to be profoundly unhappy.
None of that has to be, of course. Things might turn out just fine. But I have a strong suspicion that the massive move we are seeing from active management to passive management strategies in the past year is going to turn out to be one of the all-time worst decisions by the herd. But that’s a topic for another letter.
And thus we come to the heart of the matter with regard to my VAT proposal. If we don’t bring the budget deficit beneath the nominal growth rate of GDP (which is unlikely to go above 4% in the near future), our debt will explode during recessions; and we will ultimately face a debt crisis. Those never end well. The choices we will have at that point will be far fewer and even more stark.
Let’s wargame our situation for a few minutes. What will happen if we increase taxes and cut spending enough to get the deficit and debt under control? Getting there will take compromises along the lines of what Clinton and Gingrich did, but I truly hope we’re capable of them. With our debt as large as it is, we are going to be in a somewhat slower-growth economy; but if we get rid of enough shackles on growth and get the incentive structure right with the proper tax mix, the American entrepreneur can probably get us out of the hole we’re in without its getting too much deeper.
With the amazing new technologies that are coming along, we can probably get to a point where we can in fact grow our way out of our debt problem over the next 10 to 15 years.
What happens if we don’t? The more benign outcome is that we end up looking like Japan. We grow the debt to the point where we actually have to monetize it. Perhaps not the end of the world but certainly not the high-growth, job-creating machine we would like our economy to be. The income and wealth divide would deepen, and if you think there was pushback in the last election, just wait. We might see even higher taxes and a slower-growth economy; and entrepreneurs, established businesses, and investors would just have bigger headaches. Remember, that’s the best possible outcome if we don’t deal with our deficit and debt.
What happens to the value of the dollar in that scenario? Six years ago I would have confidently told you it would go down. Now, as I observe the Japanese experience (and even though I recognize a number of differences between our economies), I suspect that the dollar might rise, not fall. Or rather, it wouldn’t fall relative to the other global currencies, and not nearly as much as my hard-money friends seem to think. We would truly find ourselves in a world for which we have no historical analog.
If the country with the world’s reserve currency starts printing money merely to service its debt because people don’t buy its debt, and in a world where most other major economies are also in trouble (as I logically assume they would be), then where are we? And remember, this would be a future in which total global debt would be in the $500 trillion range and global GDP would top $100 trillion. Monetizing $1–2 trillion a year (we are talking 10+ years out) – roughly the equivalent of what Japan is doing today – might be like spitting in the ocean. Money will be far more fungible and liquid and movable in the financial-technology world that we are evolving to. It would be the height of hubris to think we can know with any degree of certainty what would happen.
Now I don’t think the failure-to-act scenario will happen, but we’re in wargame mode, so we have to think the unthinkable. Maybe the world decides it wants another reserve currency or substitutes something new. We don’t know. Lots of things are going to be possible in 10 years that we have no clue about today. In such a scenario, the dollar could in fact lose a great deal of its purchasing power. That would create a great deal of uncertainty and volatility, and I can see a global deflationary debt scenario unfolding, followed by massive monetary creation.
I guess the critical factor for me is that I can see no scenario where we don’t deal with the deficit and the debt and enjoy a positive outcome. It’s a binary choice to me. So I choose to suggest what I think is the only politically possible thing to do; and that is to restructure the tax code, balance the budget with an increase in taxation, roll back as many rules and regulations as we can, hope we get the healthcare issue right – and then see what happens.
Let me end with a story. I was on a plane going from New York to Bermuda and had been lucky enough to be upgraded to first class. It was 1998 – just a few days after the resolution of the Long-Term Capital Management crisis. The markets had seen a rather harrowing time.
The gentleman who was seated next to me ordered Scotch as soon as the wheels were up and basically indicated to the stewardess to keep them coming. You could see that he was emotionally shaken. I engaged him in conversation after a few drinks, and when he found out that I was allied with the hedge fund business and coming from New York, he assumed I knew a lot more about the world than I did. It turns out that he was the vice-chairman of one of the largest banking conglomerates of the time. We all know the name.
He began to relate to me the deep background story of what had gone on for the past few weeks, culminating in that famous meeting called by the New York Federal Reserve, where the president of the New York Fed told everybody in the room to play nice in the sandbox. And to whip out their checkbooks. This gentleman had been in the meeting and knew the whole story. I knew I was hearing something special, so I just sat and listened and made sure the flight attendant kept bringing Scotches for him. He seemed to open up more with the downing of each one.
Finally, he turned and looked me in the eye and said, “Son, we went to the edge of the abyss, and we looked over. And it was a long way down. It scared every one of us to the depths of our soul.” And then he ordered another Scotch and laid his head back and tried to rest.
As I look back on that 1998 crisis, which we all thought was so huge at the time, it brings a smile. We were talking hundreds of millions that had to be ponied up by each of the big banks, several billions of dollars total. It was manageable within the private system. Just 10 years later, in the 2008 crisis triggered by the housing bubble, we were talking hundreds of billions if not trillions in losses, and the private system was not capable of dealing with it.
If we don’t handle our debt problem, the crisis into which we’ll plunge will resolve the debt in one way or another – and the ensuing turmoil will make 2008 look as minor as 1998 does today.
I do not want to my children to wake up in a world where we are frog-marched to the edge of the abyss and forced to look over. We still have the opportunity to secure the future for our children, but only if we seize the moment. If we don’t, it will be unusquisque pro se – every man for himself.
A few thoughts on investing in an environment like this (since investing in the economy is supposedly what this letter is mostly about). With all the current and emerging challenges we face, investing will still be difficult even if we deal with our debt issue, but those challenges will be far more agreeable than the extraordinarily difficult choices we’ll be left with if we don’t handle the debt. With the tools and strategies that we have available to us today and with even more powerful tools being developed for the future, I think investors who are properly prepared can figure out what to do in either scenario. But average investors who are expecting the future to look somewhat like the past? They’re going to be severely damaged. Their retirement futures are going to be ripped from them. And they are going to be profoundly unhappy.
None of that has to be, of course. Things might turn out just fine. But I have a strong suspicion that the massive move we are seeing from active management to passive management strategies in the past year is going to turn out to be one of the all-time worst decisions by the herd. But that’s a topic for another letter.
I was truly saddened to learn this week that my old friend Howard Ruff had passed away. He was 85 and suffering from Parkinson’s. Howard Ruff is a name that my younger readers (under the age of 40) will likely not recognize, but those of us who were around for the investment world of the ’70s and ’80s were certainly influenced by Howard. He was one of the true founders of the investment publishing world and was clearly the rock star in the ’70s and ’80s. His main newsletter was called the Ruff Times. This title was appropriate, as his first three books were Famine and Survival in America (1974), How to Prosper During the Coming Bad Years (1979 – NYT #1), and Survive and Win in the Inflationary Eighties (1981) – all solidly in the gloom and doom camp. Howard believed (as of his 1979–1981 writings) that the United States was headed for a hyperinflationary economic depression and that there was a danger that both government and private pension plans were about to collapse. His mailing list grew to over 200,000 subscribers (unheard of for a newsletter at the time), and he had a following that was amazing. He was part of the hard-money crowd and rode the wave of gold and food storage, preparedness for the coming crisis, throughout the ’70s and into the ’80s. He made a series of remarkable calls, and people thought he knew what he was talking about. I think that sometimes even Howard himself did. (You can read a fuller reminiscence by our mutual friend Mark Skousen here. (Also includes a link to a New York Times piece on Howard.)
I remember the first time I saw him. I was at an investment conference in New Orleans (the “gold conference” which in its heyday would have 4,000 attendees and was founded by another legend, Jim Blanchard), and I noticed a small crowd (100 people or so) focused on an individual in a hallway. It was Howard holding court, answering questions, just being his entertaining self. And people leaning in to listen – enraptured. I saw that scene repeated at other times during that and other conferences, all throughout the ’80s.
And then things changed. The markets changed, and Howard’s message didn’t. His subscriber list began to shrink. The crowds got smaller (and older). You have to understand, Howard was a complicated man. He went through multiple bankruptcies and came back to make millions. He was passionate about everything he did. The business setbacks were simply opportunities to move on to something else. Onward and upward. He was always upbeat.
He was a devout Mormon who had 14 children, 79 grandchildren, and 48 great-grandchildren at the time of his passing.
Sometime in the middle of the last decade I was speaking at an investment conference in Las Vegas. Howard called me and asked if he could come down from where he lived in southern Utah to give me a copy of his new book (which he wanted me to review). You can’t tell a force of nature no, so I told him to come on down. We agreed to meet at a booth on the exhibit floor in the afternoon. The floor was rather busy, and I was talking with friends and attendees at the back end of the aisle. I looked down the aisle and saw Howard walking toward me, and it wasn’t until he was about 10 feet from me that I realized that no one had stopped him to have a chat. Howard was still the same person, but the world had moved on, and he had not moved with it. I vividly remember thinking sic transit gloria. That lesson, the thought that it could happen to anyone, has been seared into my brain over the last 10+ years.
He wrote a biography in which he talked about his successes and failures, and we compared notes on his career and mine from time to time when we had opportunities to get together. I had jumped in near the beginning of the investment publishing business but on the management side, and I didn’t begin to really write my own material until the late ’90s. Howard was glad to mentor me and freely talk about his ups and downs.
He shared what he considered to be his biggest mistake. In the early ’80s, and certainly by the mid-’80s, he began to realize that inflation was truly not coming back and that gold might be challenged. But he had well over 100 employees and a subscriber base that would rebel if he changed his tune. Changing his message meant he would have to lay off scores of people, including many friends and family members, and he just couldn’t bring himself to do it. “I knew it, in my heart, but I just couldn’t get myself to damage the company that badly.”
We had that conversation several times. I have had the unique advantage of being friends with a number of writers and publishers over the last 35 years. I’ve seen writers get big and then fade. Other seemingly stay on top of their game, riding the wave wherever it takes them. The biggest mistake that leads to downfalls is believing in your own investment magic (or, as we are wont to say in Texas, believing your own bullshit). Howard was a true, one-of-a-kind marketing genius; and if he had changed his tune when he knew he needed to, he would have lost half his readers, but he would have built his list back up. The lesson: Be true to what you know and believe, and let the chips fall where they may. Don’t tell the people what they want to hear, Howard would say, but what you really think. Just make sure you believe it.
Tech Digest - Thanksgiving, Famine, and the Fasting Mimicking Diet - btbirkett@gmail.com - Gmail
...Calories stored as adipose tissue don’t go bad. Feasting wasn’t gluttony, it was a deadly serious survival skill. Those who lacked the instinct to put on as much weight as possible when food was plentiful were less likely to survive and pass on their genes to us.
In the mid-1700s, the scientific revolution associated with the Enlightenment began to change the nutritional landscape. Before then, almost 100% of most populations engaged in subsistence agriculture and hunting. By 1776, when the American nation was formally created, only 90% of the US population worked in agriculture. A hundred years later, only half were agricultural workers. Today, less than one in a hundred Americans work in agriculture, yet we produce enough surplus to export more than $150 billion in food products annually.
This profound technological transformation changes the purpose of our holidays and traditions. More importantly, it makes genetic mechanisms that used to benefit us obsolete and potentially life threatening. Today, for the first time in history, obesity kills more people than malnutrition.
In recent decades, it has become clear that our genomes deal differently with hunger and plenty. One metabolic state is activated when we are consuming just enough calories to keep us alive. The other is activated during those periods when calories are abundant.
For decades, research has been focused on the metabolic state induced by hunger. It’s called calorie restriction and, when coupled with essential nutrients, it has significant health benefits.
In animals, calorie restriction with optimal nutrition (CRON) significantly improves health and increases life spans. CRON improves human health as well, and we believe it would also extend human life spans. We don’t know for sure because almost nobody can handle the permanent nagging hunger that CRON inflicts.
I’ve written a lot about the dietary breakthrough developed by biogerontologist Valter Longo, director of the USC Longevity Institute. Briefly, Longo’s fasting mimicking diet (FMD) entails five consecutive days of artificial famine. This is not calorie restriction, which entails just enough food to survive. Longo’s diet is five consecutive days consuming about one-third of normal caloric intake.
In the long run, such low levels of nutritional intake would lead to dangerous weight loss, malnutrition, and eventual death. Five days of hunger followed by a return to the feasting state, however, provides profound health benefits.
This indicates to me that CRON is not the optimal diet for health or longevity. Instead, we need to experience both the famine and feasting metabolic states, just as our ancestors did.
Fortunately, Longo’s work seems to show that the periods of hunger needed to reap the benefits built into our genomes are mercifully short. For people who are already at optimum bodyweight, five-day FMDs once or twice a year probably suffice. If you’re not close to ideal body weight, you can benefit from more frequent FMDs.
Long-term human trials haven’t yet been done, but animals that are periodically put on FMD live longer with fewer serious diseases—including diabetes and cancers. Short-term human trials show the same improvements in biomarkers as animals.
It’s clear to me that Longo and colleagues have created a diet that makes use of our genomes’ ability not just to survive cycles of famine and feast but to utilize both.
During the FMD, our genomes activate autophagy or “self-eating.” Our bodies begin to look for the components that are unnecessary and nonfunctioning. They are selectively broken down and the nutrients they contain are utilized.
For example, Longo measured T cells—the immune system’s defense against cancers and other diseases. At any one time, about a third of your T cells are old and nonfunctioning. So, they’re broken down and utilized for their nutritional content during the FMD.
When you’ve finished the FMD and are eating in modern feast mode, your stem cell processes quickly kick in and replace those missing T cells. So, you have a supercharged fully functioning immune system, perhaps for the first time. This may explain why cancer rates in animals fall after FMD, but there is another possibility.
Our mitochondria are essentially a symbiotic species of bacteria. These aliens within come entirely from your mother’s supply and have their own short circular DNA rings called plasmids. When they are working properly, they communicate with one another and the genome, creating the intelligent energy grid that powers our bodies.
Unlike T cells and other cells, mitochondria replicate through fission, splitting into additional mitochondria in the same way that bacteria replicate. This is called mitochondrial biogenesis and it is critical to life.
Like T cells, mitochondria get old. This is a major problem because mitochondria function like batteries. On one side of an inner membrane is an area of low ion concentration. On the other side is a higher concentration. This difference in ion levels powers the production of the energy molecules our bodies require: adenosine triphosphate.
The problem is that old mitochondria leak. Ions escape and result in the formation of free radicals or reactive oxygen species. Though free radicals play necessary and important biological roles, the unintended production of these molecules is responsible for a great deal of accelerated aging and disease.
Some scientists believe the health benefits of CRON are the result of clearing out old mitochondria through autophagy. Specifically, this process of recycling malfunctioning mitochondria for their nutrient value is called mitophagy.
This view is reinforced by research showing that calorie restriction activates the creation of new mitochondria, presumably to replace those that have been cleared out by mitophagy. This may also explain why short-term FMD does not lead to a loss of muscle tissue, which is an unfortunate side effect of long-term dieting.
If you’re comfortable extrapolating menus based on data in the published journal article (which you can download here), you can replicate the FMD yourself. If, however, you would like more specific guidance, Longo has created the company Prolon, which sells pre-packaged foods that let you do a cycle of FMD without cooking or calculation.
Personally, my nutritional biologist wife and I enjoy creating our own FMD menus, which are heavy on highly spiced Indian food and bulky nitrate-rich vegetables. For many, however, this is impractical. If you’re interested in trying Longo’s FMD, the Prolon website that sells the components is here.
In the mid-1700s, the scientific revolution associated with the Enlightenment began to change the nutritional landscape. Before then, almost 100% of most populations engaged in subsistence agriculture and hunting. By 1776, when the American nation was formally created, only 90% of the US population worked in agriculture. A hundred years later, only half were agricultural workers. Today, less than one in a hundred Americans work in agriculture, yet we produce enough surplus to export more than $150 billion in food products annually.
This profound technological transformation changes the purpose of our holidays and traditions. More importantly, it makes genetic mechanisms that used to benefit us obsolete and potentially life threatening. Today, for the first time in history, obesity kills more people than malnutrition.
In recent decades, it has become clear that our genomes deal differently with hunger and plenty. One metabolic state is activated when we are consuming just enough calories to keep us alive. The other is activated during those periods when calories are abundant.
For decades, research has been focused on the metabolic state induced by hunger. It’s called calorie restriction and, when coupled with essential nutrients, it has significant health benefits.
In animals, calorie restriction with optimal nutrition (CRON) significantly improves health and increases life spans. CRON improves human health as well, and we believe it would also extend human life spans. We don’t know for sure because almost nobody can handle the permanent nagging hunger that CRON inflicts.
I’ve written a lot about the dietary breakthrough developed by biogerontologist Valter Longo, director of the USC Longevity Institute. Briefly, Longo’s fasting mimicking diet (FMD) entails five consecutive days of artificial famine. This is not calorie restriction, which entails just enough food to survive. Longo’s diet is five consecutive days consuming about one-third of normal caloric intake.
In the long run, such low levels of nutritional intake would lead to dangerous weight loss, malnutrition, and eventual death. Five days of hunger followed by a return to the feasting state, however, provides profound health benefits.
This indicates to me that CRON is not the optimal diet for health or longevity. Instead, we need to experience both the famine and feasting metabolic states, just as our ancestors did.
Fortunately, Longo’s work seems to show that the periods of hunger needed to reap the benefits built into our genomes are mercifully short. For people who are already at optimum bodyweight, five-day FMDs once or twice a year probably suffice. If you’re not close to ideal body weight, you can benefit from more frequent FMDs.
Long-term human trials haven’t yet been done, but animals that are periodically put on FMD live longer with fewer serious diseases—including diabetes and cancers. Short-term human trials show the same improvements in biomarkers as animals.
It’s clear to me that Longo and colleagues have created a diet that makes use of our genomes’ ability not just to survive cycles of famine and feast but to utilize both.
During the FMD, our genomes activate autophagy or “self-eating.” Our bodies begin to look for the components that are unnecessary and nonfunctioning. They are selectively broken down and the nutrients they contain are utilized.
For example, Longo measured T cells—the immune system’s defense against cancers and other diseases. At any one time, about a third of your T cells are old and nonfunctioning. So, they’re broken down and utilized for their nutritional content during the FMD.
When you’ve finished the FMD and are eating in modern feast mode, your stem cell processes quickly kick in and replace those missing T cells. So, you have a supercharged fully functioning immune system, perhaps for the first time. This may explain why cancer rates in animals fall after FMD, but there is another possibility.
Our mitochondria are essentially a symbiotic species of bacteria. These aliens within come entirely from your mother’s supply and have their own short circular DNA rings called plasmids. When they are working properly, they communicate with one another and the genome, creating the intelligent energy grid that powers our bodies.
Unlike T cells and other cells, mitochondria replicate through fission, splitting into additional mitochondria in the same way that bacteria replicate. This is called mitochondrial biogenesis and it is critical to life.
Like T cells, mitochondria get old. This is a major problem because mitochondria function like batteries. On one side of an inner membrane is an area of low ion concentration. On the other side is a higher concentration. This difference in ion levels powers the production of the energy molecules our bodies require: adenosine triphosphate.
The problem is that old mitochondria leak. Ions escape and result in the formation of free radicals or reactive oxygen species. Though free radicals play necessary and important biological roles, the unintended production of these molecules is responsible for a great deal of accelerated aging and disease.
Some scientists believe the health benefits of CRON are the result of clearing out old mitochondria through autophagy. Specifically, this process of recycling malfunctioning mitochondria for their nutrient value is called mitophagy.
This view is reinforced by research showing that calorie restriction activates the creation of new mitochondria, presumably to replace those that have been cleared out by mitophagy. This may also explain why short-term FMD does not lead to a loss of muscle tissue, which is an unfortunate side effect of long-term dieting.
If you’re comfortable extrapolating menus based on data in the published journal article (which you can download here), you can replicate the FMD yourself. If, however, you would like more specific guidance, Longo has created the company Prolon, which sells pre-packaged foods that let you do a cycle of FMD without cooking or calculation.
Personally, my nutritional biologist wife and I enjoy creating our own FMD menus, which are heavy on highly spiced Indian food and bulky nitrate-rich vegetables. For many, however, this is impractical. If you’re interested in trying Longo’s FMD, the Prolon website that sells the components is here.
Monday, November 28, 2016
China’s New Tool for Social Control: A Credit Rating for Everything
China’s New Tool for Social Control: A Credit Rating for Everything
Beijing wants to give every citizen a score based on behavior such as spending habits, turnstile violations and filial piety, which can blacklist citizens from loans, jobs, air travel
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China's government is building what it calls a "social credit system" to track individual behavior and assign ratings to citizens. Here's how it will work. Video: Menglin Huang. Photo: Dave Tacon for The Wall Street Journal
HANGZHOU, China—Swiping her son’s half-fare student card through the turnstile here one Monday afternoon, Chen Li earned herself a $6 fine and a reprimand from a subway-station inspector for not paying the adult fare.
A notice on a post nearby suggested more-dire consequences. It warned that infractors could be docked points in the city’s “personal credit information system.” A decline in Ms. Chen’s credit score, according to official pronouncements, could affect her daily life, including securing loans, jobs and her son’s school admission.
“I’m sure if it comes up, I can explain,“ Ms. Chen said, saying she picked up the card accidentally. “It was unintentional.”
Hangzhou’s local government is piloting a “social credit” system the Communist Party has said it wants to roll out nationwide by 2020, a digital reboot of the methods of social control the regime uses to avert threats to its legitimacy.
More than three dozen local governments across China are beginning to compile digital records of social and financial behavior to rate creditworthiness. A person can incur black marks for infractions such as fare cheating, jaywalking and violating family-planning rules. The effort echoes the dang’an, a system of dossiers the Communist party keeps on urban workers’ behavior.
In time, Beijing expects to draw on bigger, combined data pools, including a person’s internet activity, according to interviews with some architects of the system and a review of government documents. Algorithms would use a range of data to calculate a citizen’s rating, which would then be used to determine all manner of activities, such as who gets loans, or faster treatment at government offices or access to luxury hotels.
The endeavor reinforces President Xi Jinping’s campaign to tighten his grip on the country and dictate morality at a time of economic uncertainty that threatens to undermine the party. Mr. Xi in October called for innovation in “social governance” that would “heighten the capacity to forecast and prevent all manner of risks.”
The national social-credit system’s aim, according to a slogan repeated in planning documents, is to “allow the trustworthy to roam everywhere under heaven while making it hard for the discredited to take a single step.”
Thus far, the pilot data-collecting systems aren’t yet tied together into what Beijing envisions as a sweeping system, which would assign each citizen a rating. It isn’t clear that Ms. Chen’s ticket infraction made it into any central system, although the notice warned that fare-dodgers risked being marked down starting Jan. 1; a station agent said only repeat offenders are reported.
Some Shanghai districts such as this one are rolling out early versions of a ‘social credit’ program that aims to rank citizens based on various behaviors. PHOTO: DAVE TACON FOR THE WALL STREET JOURNAL
Zan Aizong, a Hangzhou human-rights activist, sees the system, once it’s fully operational, as an Orwellian exercise to keep closer tabs on a populace already lacking basic liberties such as freedom of speech. “Tracking everyone that way,” Mr. Zan said, “it’s just like ‘1984.’ ”
Blacklisted
China’s judiciary has already created a blacklisting system that would tie into the national social-credit operation. Zhuang Daohe, a Hangzhou legal scholar, cites the example of a client, part-owner of a travel company, who now can’t buy tickets for planes or high-speed trains because a Hangzhou court put him on a blacklist after he lost a dispute with a landlord.
“This has had a huge impact on the business,” said the client’s wife. “He can’t travel with clients anymore.” Added Mr. Zhuang: “What happens when it punishes the wrong person?”
Hangzhou officials didn’t respond to inquiries.
Another government system blacklists badly behaved tourists.
Driving the social-credit system are the State Council—China’s cabinet—and the central national-planning agency. A blueprint the cabinet published in 2014 stated it aimed to “build sincerity” in economic, social and political activity. It stressed the need for fair and clean government and for punishing polluting factories and bribe-takers.
Blacklists will expose offenders and restrict them from certain activities, while well-behaved citizens will earn access to “green lanes” that provide faster government services, the blueprint said. Citizens in jobs deemed sensitive—lawyers, accountants, teachers, journalists—will be subject to enhanced scrutiny, it said.
Flags promote a 'Sincerity Management Model Street' in a cafe in Shanghai, where ‘sincerity displays’ at some restaurants show video feeds from kitchens. PHOTO: DAVE TACON FOR THE WALL STREET JOURNAL
The State Council and national-planning agency didn’t respond to requests for comment.
China’s government must overcome technological and bureaucratic obstacles to build a system that can monitor 1.4 billion people. Government departments often guard their information, undermining efforts to build a unified database, and their systems often aren’t compatible, said Meng Tianguang, a political scientist at Beijing’s Tsinghua University who advises the government on applying “big data” to governance issues but isn’t directly involved in the social-credit system.
“Whether we can actually pull this off, we’re in a state of uncertainty at the moment,” Mr. Meng said. “Either way, it’s better than the traditional era,” until recently, he said, “when we had no data and policy was based on the judgment of individuals.”
The Shanghai government on an official website has identified scores of violations that can incur credit penalties in its pilot system, including falling behind on bills and breaking traffic rules. State-media reports list penalties for not being filial to one’s parents. (Under Chinese law, parents over 60 may sue children for not visiting regularly or not ensuring they have enough food.)
Penalties for low scorers will include higher barriers to obtaining loans and bans on indulgences such as luxury hotels, according to state-media reports.
The Shanghai system appears to still be in an early phase. Residents can check their social-credit records, but records reviewed by The Wall Street Journal did’t show any nonfinancial data. Shanghai city officials didn’t respond to inquiries.
Despite official-media warnings and propaganda promoting sincerity, dozens of people interviewed in Shanghai weren’t aware of the social-credit plan. Many agreed more should be done to enforce higher moral standards, bemoaning habits such as spitting, cutting in line and being cold to strangers in need.
Research by Yang Wang, a Syracuse University expert on internet behavior, has shown Chinese internet users, accustomed to the idea of government snooping, are less concerned with online privacy than Americans. The most common word for privacy, yinsi, didn’t appear in popular Chinese dictionaries until the mid-1990s, he notes.
Behavior reports
In the tree-lined Yangjing neighborhood, subdistrict authorities maintain a database that gives a hint as to what elements of a broader social-credit system might look like. The database collects reports on locals’ behavior from residential committees, said Yuan Jianming, the head of the Yangjing Sincerity Construction Office.
Slogans promote sincerity along a Shanghai road. PHOTO: DAVE TACON FOR THE WALL STREET JOURNAL
Since mid-2015, the office has published a monthly “red list” of exemplary residents. Zhu Shengjun, 28, a high-school teacher, was named on a September red list. He said he didn’t know why. While he supported efforts to encourage better behavior, he hesitated at the idea of linking that with financial consequences, saying “it seems like too much of a stretch.”
The office also maintains a “gray list” of people behaving badly—throwing garbage out of windows, say—but the office hasn’t decided whether to publicize it, Mr. Yuan said.
In an area with a population of roughly 170,000, only around 120 have made Yangjing’s red list. Officials there complained to Chinese media this year that limited data sharing between departments was hampering efforts to rate people.
Businesses, too, get surveillance in pilot cities, where anyone can look up records on registered companies, though the records are sometimes incomplete. One objective: turning around what leaders see as a crippling lack of trust among citizens from decades of corruption and bare-knuckle competition.
So the social-credit system aims not just to collect data on individuals for official use, it seeks data on the behavior of businesses to analyze and show the results to consumers.
One example is food safety, a major issue since anger erupted over melamine-tainted milk powder that killed six infants in 2008. Subsequent scandals, including the sale of waste oil scooped up from gutters for reuse in restaurants, have continued to fuel mistrust.
Yangjing officials offer a solution: touch-screen displays they installed this summer in some restaurants. The screens, part of a local social-credit pilot system, offer an unusual level of transparency for China. Lit up with slogans—“Join heart to hand, be a model of sincerity” reads one—they display information about where ingredients came from and when waste oil was last picked up. Customers can watch videos on a mobile app showing chefs working, and the system displays the eatery’s health-department rating.
Diners eat near a restaurant 'sincerity display' showing a video feed from kitchen, health ratings and other information. PHOTO: DAVE TACON FOR THE WALL STREET JOURNAL
One recent Monday at Jujube Tree, a vegetarian restaurant, the food-safety console was partially obscured by poster board. Manager Wang Dacheng said it was because the system had erroneously downgraded the restaurant’s health rating, and local officials couldn’t fix it. “We have a lot of return customers. What if they come in and see that?” Mr. Wang said. He said he supported the system but was wary of its being applied without better controls.
Yangjing officials didn't respond to inquiries.
For initial social-credit efforts, local officials are relying on information collected by government departments, such as court records and loan and tax data. More-extensive logging of everyday habits, such as social-media use and online shopping, lies with China’s internet companies, including e-commerce giant Alibaba Group Holding Ltd.
A credit-scoring service by Alibaba affiliate Ant Financial Services—one of eight companies approved to pilot commercial experiments with social-credit scoring—assigns ratings based on information such as when customers shop online, what they buy and what phone they use. If users opt in, the score can also consider education levels and legal records. Perks in the past for getting high marks have included express security screening at the Beijing airport, part of an Ant agreement with the airport.
“Especially for young people, your online behavior goes towards building up your online credit profile,” said Joe Tsai, Alibaba’s executive vice chairman, “and we want people to be aware of that so they know to behave themselves better.”
Alibaba shares aggregate data about online sales with China’s statistics bureau but doesn’t divulge personal data unless required to by law, for example in criminal investigations, Mr. Tsai said.
The local-government trials aren’t known to be tapping private-sector data, although the social-credit system blueprint designates internet data as a “strategic national resource” and calls for internet companies to contribute data, without getting into specifics.
Whether private and public data systems will be combined is still being hammered out, said Zhu Wei, a China University of Politics and Law scholar who has advised the government on social-credit efforts.
In an October speech screened to 1.5 million officials, Alibaba Chairman Jack Ma urged law-enforcement agencies to use internet data as a tool to identify criminals, according to posts on a Communist Party social-media feed. He didn’t mention sharing Alibaba’s user data. His comments raised eyebrows for broaching the notion that internet companies might share data with government agencies. Alibaba declined to make Mr. Ma available for comment. “We believe the application of machine learning and data analytics for the purpose of crime prevention is consistent with our core values: solving society’s problems,” the company said.
In an interview Nov. 1 with state media, a deputy head of China’s central-planning agency, Lian Weiliang, noted that much of the government’s credit-related data were stuck on “isolated islands” and said a central data platform had been established to encourage information sharing. He said the platform had collected 640 million pieces of credit information from 37 central-government departments and various local governments.
The agency said the government has stopped untrustworthy people, identified by the court system, from buying airline tickets 4.9 million times.
Some advisers to the government, such as Mr. Zhu and Mr. Meng, said they were skeptical the system would meet the 2020 deadline because of the immense task of integrating data and keeping information secure.
In Hangzhou, where Ms. Chen used her son’s pass, residents can check their social-credit records at a government-services center. Records the Journal viewed showed only whether people had kept up with health-insurance and social-security payments—a far cry from the central government’s goals.
—Kersten Zhang, Alyssa Abkowitz and Qian Junya contributed to this article.
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