Longreads + Open Thread

Longreads

• Matthew Shaer in the NYT has a great deep dive into the cardboard business. It's a classic commodity product, but like many other commodities it can be an exciting one when there's a secular trend that causes demand to outstrip expectations. Price-sensitive commerce is a duel between big boxes owned by Walmart, Costco, and Target, and many small boxes delivered directly to your door.
• Cassidy Ward at Slashgear wrote a nice history of the Walkman: the journey towards the smartphone as universal personal electronic device started with lots of single-purpose devices. In a good example of enterprise to consumer technology diffusion, its predecessor was a portable recording device.

Chapter Twelve has a retrospective on the short attack on Home Capital Group, a Canadian bank. Activist short sellers play an essential role in markets; frauds suck up a lot of resources directly, and when they collapse the indirect chilling effect hurts other companies' ability to raise. This piece walks through the combination of accurate factual claims, spin, and innuendo behind a specific short-selling campaign. Since the campaign targeted a levered financial institution, it could have worked even without being correct if it induced a bank run. The bank in question had a lot in common with the model of Anglo Irish, which did in fact collapse catastrophically. But pattern-matching is always approximate. However, unfortunately for short sellers, the ability to provoke a bank run is not a free option, since it means that a well-capitalized investor can step in and take advantage of its ability to stop a bank run, which is what Berkshire Hathaway did with Home Capital.

This piece was originally published on April 2, 2021. Two weeks ago, Home Capital accepted an offer to be acquired for 44 CAD/share, close to where it was trading when the short-selling campaign started but up 537% from the depths of where the company traded during its liquidity crisis. It's entirely possible that this acquisition will work out terribly and that the short sellers will be vindicated—a risk short sellers run into is that acquirers, like the rest of the market, can be fooled long enough to part with their money. But it increasingly looks like Home Capital had a model that could have been the raw material for a fraud, but was a decent business instead.

• Here's a short piece summarizing some more detailed research on the question of how much of an economic impact railroads really had. (The full paper is here.) As it turns out, alternative transportation methods like canals had only slightly higher costs. This ends up being a triumph of bubbles and their spillover effects: railroads created a steel industry, which turned out to have other uses in construction and machinery. No industry has dominated US financial markets as much as railroads did at their peak (which, arguably, means that the US's status at the center of the world financial system is due to railroads). It's possible that canals would have had similar spillovers at the same scale, though it's hard to predict how. Railroads's economic benefits to investors were overestimated, but that ended up mobilizing capital to produce things of value elsewhere.
• Matjaž Leonardis has a meditation on complete problems, or problems where finding an efficient algorithm for one problem in the class implies finding an efficient solution for all of them. The existence of these problems turns out to have some interesting ties to the existence of general computing devices, as opposed to single-purpose ones. It turns out to be convenient to restate problems as "given a sequence of ones and zeroes, provide a set of manipulations that produce a new sequence with certain desirable traits," and many problems can be specified that way. But this has surprising consequences, too.

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Books

• Accidental Gods: On Men Unwittingly Turned Divine: Most delightful book of the year. This book looks at deification of specific living people, including cargo cults, Rastafarians, worshippers of Prince Philip, etc. This book definitely has a political point of view about which apotheoses are charming and which are sinister, but the book is packed with notable examples of what turns out to be a surprisingly common phenomenon. A market downturn leads to lots of talk about hero-worship and its downsides, and it's a good idea to study the most extreme form.

Open Thread

• Drop in any links or comments of interest to Diff readers.
• I'm interested in readers' thoughts on the role of short-sellers, positive and negative. Is there any way to get more of their policing function without running the risk that they'll assassinate companies for profit? (Or, alternatively, was a company vulnerable to such an attack really just taking irresponsible risks all along?)

Reader Feedback

Reader Michael has thoughts on this paywalled post about Chinese liquor giant Kweichow Moutai ($):

My mother told me, yes to many outsiders Maotai can taste unpleasant but they haven’t tried the cheaper erguotou. Maotai is like 30 year single malt scotch compared to most types of whiskey. When you have to drink a whole bottle for business in a night, the quality difference matters to both the host and guests.

...

The issue with corruption lies solely in economic incentives. Factory price is 950 RMB while wholesale price (aka ppl with power connections) easily go above 2500 RMB. It’s easy to see how corruption is bound to happen. Shareholders have been pushing the company to raise factory price, but progress is difficult to make. Thirty years of complicated power dynamics, I suppose… Ironically, not jacking up the price is actually theft of national assets. Sadly no corruption case has been that “huge”, in proportion to Maotai’s profit.

...

Wine and western spirits never made it huge in China, especially in terms of business setting. Anecdotally many elders get flush when they drink western liquor but they are fine with Chinese baijiu. When we think about one’s public image, mitigating risk of the flush becomes quite valuable to a product’s value.

Every company is more complicated than it looks!

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