Juice Machines and Red Flags
(Bloomberg View) -- Juice.
Does the world exist? Are our bodies and experiences real? Or is the physical world just a simulation inside the mind of some immense imperceptible intelligence? George Berkeley argued for the nonexistence of the material world, and James Boswell, in his "Life of Samuel Johnson," recalled saying "that though we are satisfied his doctrine is not true, it is impossible to refute it." "I never shall forget," continued Boswell, "the alacrity with which Johnson answered, striking his foot with mighty force against a large stone, till he rebounded from it -- 'I refute it thus.'"
Three hundred years after Johnson kicked that rock, these questions are still with us, though now they are asked by technologists, not theologians. Do we live in a simulation? Has software eaten the world? Is our physical reality the world, or is it just a trivial epiphenomenon of our computer systems? Are our lives lived through our bodies in homes and offices and schools and parties and outdoors, or through avatars on social media websites? Can life be carried out on the blockchain? Is our essential quality as humans reducible to data that can be sold to advertisers? Also: If you want to turn a bunch of chopped vegetables into juice, do you need a QR code and a $400 internet-connected machine, or can you just squeeze the vegetables until juice comes out? Juicero Inc. raised $120 million to bet on the QR codes, and Bloomberg's Ellen Huet and Olivia Zaleski said: We refute it thus.
But after the product hit the market, some investors were surprised to discover a much cheaper alternative: You can squeeze the Juicero bags with your bare hands. Two backers said the final device was bulkier than what was originally pitched and that they were puzzled to find that customers could achieve similar results without it. Bloomberg performed its own press test, pitting a Juicero machine against a reporter’s grip. The experiment found that squeezing the bag yields nearly the same amount of juice just as quickly—and in some cases, faster—than using the device.
There is a video demonstration. I have probably read that paragraph 50 times in the last 24 hours and I still tear up when I look at it. It might be my favorite paragraph in all of tech journalism, though the next paragraph is a strong competitor:
Juicero declined to comment. A person close to the company said Juicero is aware the packs can be squeezed by hand but that most people would prefer to use the machine because the process is more consistent and less messy. The device also reads a QR code printed on the back of each produce pack and checks the source against an online database to ensure the contents haven’t expired or been recalled, the person said. The expiration date is also printed on the pack.
Juicero is thwarted at every turn by the physicality of objects. You can squeeze the juice, without an app! You can read the expiration date, without a QR code! The world keeps infuriatingly intruding on Juicero's orderly software platform. You shouldn't just squeeze the bag of vegetables, because then how will it interact with the database? But you can, because you are a human, and it is a bag of vegetables.
Mat Honan wrote on Tuesday about Facebook, Inc.'s new augmented reality tools:
Yes, someone can create a virtual painting, meant to beautify the city, or leave a virtual note to a loved one that reaches them at just the right moment, in just the right place. But someone else will probably leave a swastika. Because if there is anything to be learned about the modern internet, it is that if you build it, the Nazis will come.
But Facebook made no nods to this during its keynote — and realistically maybe it’s naive to expect the company to do so. But it would be reassuring to know that Facebook is at least thinking about the world as it is, that it is planning for humans to be humans in all their brutish ways.
But the great insight behind Facebook was that "the world as it is" is not the only world, and that human social life, or at least a vast subset of it that is valuable to advertisers, can be replicated virtually. That insight made Facebook a $400 billion company. But it also gave a lot of people a lot of dumb ideas. "Silicon Valley's greatest blind spot," I half-joked on Twitter, is "that human beings have bodies and exist in a physical universe." You can see how Facebook's success would have blinded people to that! It will not surprise you to learn that now "Facebook Aims to Connect Directly to Your Brain." "Speech is essentially a compression algorithm," says Facebook's Regina Dugan, "and a lossy one at that." Facebook's goal is clear: It wants to correct the messy physicality of the world, the lossy algorithms that run on the imperfect platforms of our bodies. And it is getting ever closer to that goal.
Meanwhile, poor Juicero. Even if you can squeeze the bags of vegetables without the machine -- and you can -- you can't buy them unless you have the machine. Also, if you do squeeze them yourself, you might be violating Juicero's terms of service, which specify that "you will not directly or indirectly, defeat, bypass or otherwise circumvent any security or other authentication features," including those on "any consumable media used with the Product(s)." Of course Juicero could probably make a nice living selling $8 juice packs without bothering with a fancy machine. But then it wouldn't be a tech company. One investor told Huet and Zaleski that "their venture firm wouldn’t have met with Evans if he were hawking bags of juice that didn’t require high-priced hardware." You can be a hardware company or a software company or a platform company or a cloud company or an internet-of-things company, but you can't be a food company.
The basic problem with Wells Fargo & Co.'s fake accounts scandal is that a bunch of low-level employees created a lot of fake bank accounts. That is not a very satisfying problem: How can you get mad at all those low-level employees? There were so many of them, and they were so low-level, and they were just trying to get their bosses off their backs. Fortunately there are more powerful people to get mad at. Senior executives at Wells Fargo set the unreasonable goals that drove the low-level employees to make fake accounts. And then they missed red flags about all the fake accounts.
Awkwardly, though, Wells Fargo's regulator missed many of the same red flags:
In a damning, 15-page report published on Wednesday, the Office of the Comptroller of the Currency admitted that its oversight of Wells Fargo was “untimely and ineffective.” The report said the agency failed to spot clues that would have allowed it to connect the dots in one of the most brazen banking scandals of the recent past.
"Even after the regulator confronted a Wells Fargo executive in 2010 about 700 cases of whistle-blower complaints, the regulator did not require the bank to provide adequate analysis." But even "adequate analysis" is not quite what you want! You want the bank to stop doing the bad stuff. The OCC's report notes that it had "focused too heavily on bank processes versus what those processes were actually reporting," which is a lovely description of the difficulty with corporate supervision. You can't catch every problem, so you focus on the meta-goal of setting up good processes to catch problems. But then when you actually do catch a problem, you don't know what to do with it. You spend so much time making sure that there are processes to stop bad things that you forget to actually stop the bad things.
Singing in the rain.
Arconic Inc. Chief Executive Officer Klaus Kleinfeld stepped down on Monday after sending an ill-considered letter to Elliott Management Corp., the activist hedge fund that was running a proxy fight and calling for his removal. The letter "showed poor judgment," said Arconic; Elliott said that it "read as a threat to intimidate or extort a senior officer of Elliott Management based on completely false insinuations." But neither side actually published the letter that caused Kleinfeld to lose his job. "It must be pretty good," I said. Well, now they have, and it's not. Kleinfeld wrote to Paul Singer, who runs Elliott, about Singer's visit to the 2006 World Cup in Germany:
Quite a few people who accompanied you in Berlin in 2006 during and especially after the many matches you attended are still full of colorful memories about this obviously remarkable time; it indeed seems to have the strong potential to become lastingly legendary. How you celebrated your soccer enthusiasm and the "great time" you must have had in your Berlin weeks - unforgettable without a doubt - left a deep impression on them.
He enclosed an official 2006 World Cup match ball, because rich people like to intimidate each other with thoughtful gifts. There's a postscript mentioning "a native American Indian's feather headdress" and singing "Singing in the Rain" in a fountain. It does read like a veiled threat, yes, though you need to fill in a lot of gaps to get there. This is awkward for Elliott, which released the letter, and which needs to simultaneously convey that (1) it doesn't know what Kleinfeld is talking about but (2) it took it as a threat. ("While much of what it says doesn’t make sense, we do understand Dr Kleinfeld to be making veiled suggestions that he might intimidate or extort Mr Singer," said Elliott, threading that needle nicely.)
Also it doesn't read like much of a threat. If the "completely false insinuation" here is that Singer got drunk and splashed around in a fountain after a soccer game singing classics of the American songbook, I mean, who among us? That sounds fun! If there is a darker implication in Kleinfeld's letter, I missed it, though I guess Elliott and Arconic didn't.
This is so beautiful: Jack Meyer, the famously successful manager of the Harvard University endowment in the 1990s, now runs a hedge fund called Convexity Capital Management LP that "has lost $1 billion of its clients’ money over the past few years as once reliable options trades backfired," and has had five down years in a row. This has prompted some introspection in Meyer:
Mr. Meyer has often told smaller endowments and foundations that ask for advice to index 75% of their assets and use board connections to access world-class active managers for a sliver of their portfolios. He says he used to think 80% of active managers didn’t add value but now thinks it is closer to 95%.
Convexity is in that remaining 5%, he said.
I assert that 100 percent of active managers believe that only 5 percent of active managers add value, and that 100 percent of active managers believe that they are in that 5 percent, or at least say so in interviews. Otherwise why come to work every day? But that means that 95 percent of them are wrong. If you're looking for the ones who are wrong, I guess one place to start would be among the ones who lose money five years in a row. (Actually, to be fair, that seems to be a relative performance measure: "Convexity compares its returns with those benchmarks, and could make money for clients when it says it is down and vice versa.") "I just don't think it's time to quit," says Meyer, and of course he is right; the time to quit was back when he was making money.
Here are Paul Brockman, Hye Seung (Grace) Lee, William Megginson and Jesus Salas on family firms:
Consistent with the previous literature, we show that family firms are generally more valuable than their non-family counterparts, and that founder-managed (FM) firms are more valuable than their non-founder-managed (non-FM) counterparts. More important, we provide new evidence that founder-named (FN) family firms have significantly lower market valuations than their non-founder-named (non-FN) counterparts. When we examine the intersection of founder-named and founder-managed family (FN&M) firms, we find that these firms have the lowest market valuations among all family-firm categories (as well as compared with non-family firms). These statistically and economically significant results raise an important question: What is it about the act of naming a firm after its founder that leads to significantly lower market valuations?
Their answer, intuitively enough, is that "founders who have their names attached to firms are more likely to view such firms in terms of personal-use value as opposed to investor-oriented, market-exchange value," and so are less likely to maximize value for investors than founders who don't use their names. Naming your company after yourself, and treating it as a personal possession rather than a public trust, are sort of obviously related activities. Also, rather darkly, they find that the market reacts especially positively when the founder of a founder-named-and-managed firm dies suddenly. In the long run, the market always has its revenge. Here is the related paper.
ETFs and inefficiency.
The basic idea of the index-funds-are-Marxists theory (not to be confused with the index-funds-are-monopolists theory!) is that index funds make markets less efficient by causing stocks to move in lockstep: If everyone buys stocks because they're in the index, then no one is doing the fundamental work to decide which stocks are worth more than other stocks. Here's Bloomberg's Dani Burger on a recent study of exchange-traded funds:
A single percentage point increase in ETF ownership has demonstrable effects on an individual stock, the researchers found. Over the ensuing year, correlation to the share’s industry group and the broader market ticks up 9 percent, while the relationship between its price and future earnings falls 14 percent. Meanwhile, bid-ask spreads rise 1.6 percent and absolute returns grow 2 percent.
The correlation stuff is a standard part of the Marxism story, and the absolute returns stuff is perhaps related to pseudo-Jesse Livermore's argument that more efficient diversification should push up stock market valuation. But the bid-ask spread stuff is new to me. Burger goes on:
Fewer trades occur, so liquidity in single stocks deteriorates, raising transaction costs. That only further discourages professional traders, so the price discrepancies remain without the informational arbitrage to close the gaps.
Making matters worse, the reduced interest in individual equities also results in less analyst coverage, the researchers argue.
This model -- that no one trades stocks because they are trading ETFs instead, which makes liquidity in the stocks rarer and more costly -- is very familiar from our endless discussions of people worrying about bond market liquidity. One classic bond-market-liquidity story is that if everyone trades bonds by trading ETFs, rather than the underlying bonds, then underlying-bond liquidity will dry up and the ETFs will present a "liquidity illusion" to investors. The very modest equivalent of that for stocks is a 1.6 percent increase in bid-ask spreads.
People are worried about unicorns.
This seems like bad security:
For years, cybersecurity startup Tanium Inc. pitched its software by showing it working in the network of a hospital it said was a client, according to people familiar with the matter and videos of the demonstrations. That and other efforts helped the company grow quickly, notching a valuation of $3.5 billion and a big investment from Andreessen Horowitz, one of Silicon Valley’s most prominent venture firms.
But Tanium never had permission to present the demos, the hospital said, meaning a company selling security actually was giving outsiders an unauthorized look at information from inside its customer’s system.
"We apologize for any concern that has caused," says Tanium. We talk a lot around here about how there's no real pressure on private tech unicorns to go public: These days you can get pretty much whatever you need -- massive funding, secondary liquidity, name recognition, whatever -- in the private markets. Cybersecurity seems like a good proof of that thesis. Sure, investors, stereotypically, want transparency and audits and public-company governance standards. But shouldn't customers also want that, if they are trusting you with their most sensitive information? Apparently not.
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Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
To contact the author of this story: Matt Levine at firstname.lastname@example.org.
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