Hardly Boring

Vol.06 Issue 01 | 06 January 2019 Things that make you go

Hardly Boring

"Would it have been worth while, To have bitten off the matter with a smile, To have squeezed the universe into a ball To roll it towards some overwhelming question, To say: “I am Lazarus, come from the dead, Come back to tell you all, I shall tell you all”— If one, settling a pillow by her head Should say: “That is not what I meant at all; That is not it, at all.”" – T.S. Eliot, The Love Song of J. Alfred Prufrock "It is terribly rude to tell people that their troubles are boring." – Lemony Snicket, The Blank Book

"Science, my boy, is made up of mistakes, but they are mistakes which it is useful to make, because they lead little by little to the truth." – Jules Verne, Journey to the Center of the Earth "But you perceive, my boy, that it is not so, and that facts, as usual, are “We kind of ran out of time...,” very stubborn things, overruling all Musk said, attributing the rough theories." ride to problems with a paving – Jules Verne, Journey to the Center of the Earth machine. “The bumpiness will not be there down the road. It will be as smooth as glass..." "Is the Master out of his mind?’ she asked me. – LA Times, December 19, 2018 I nodded. ‘And he’s taking you with him?’ I nodded again. "...it is important that there not be some ‘Where?’ she asked. sort of house of cards that crumbles I pointed towards the centre of the earth. if one element of the pyramid of Tesla, ‘Into the cellar?’ exclaimed the old servant. SolarCity and SpaceX falters." ‘No,’ I said, ‘farther down than that." – Elon Musk – Jules Verne, Journey to the Center of the Earth January 06, 2019 - Hardly Boring

Things that make you go

Table of Contents

THINGS THAT MAKE YOU GO HMMM...... 3 China Faces Industrial Slump As ‘Credit Crunch’ Deepens In Asia...... 27 China’s Xi Jinping Says Taiwan Must Be Unified With Mainland...... 29 Sydney Housing Slump Deepens As Prices Drop Most Since 1980s ...... 30 The Far-Reaching Consequences Of Opal Tower ...... 31 The Malaysia Scandal Is Starting To Look Dire For Goldman Sachs...... 33 Empty Homes And Protests: China’s Property Market Strains The World...... 36 New Year, Old Problems For Italy’s Banking Sector ...... 38 Interviews With Paul Tudor Jones, Louis Bacon, Bruce Kovner...... 40 If Macron Fails, Europe Fails...... 43 In 2019, The ‘Techlash’ Will Go From Strength To Strength...... 44 CHARTS THAT MAKE YOU GO HMMM...... 47 WORDS THAT MAKE YOU GO HMMM...... 50 AND FINALLY...... 51

0303 40 50

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THINGS THAT MAKE YOU GO HMMM...

HARDLY BORING

ith traffic in the seemingly ever-expanding Wmajor metropolis unbearable, the public figure had reached breaking point. Something needed to be done to ease congestion and make not just his daily commute, but also those of countless other inhabitants of the city he called home, a far less stressful affair.

As the man made his way to his place of work one morning he jotted down an idea which simply came to him in a flash of inspiration (there was no need for him to steer the vehicle in which he was traveling so his hands were free); an alternative means of navigating from point A to Point B which would take the passenger – wait for it – ...underground!

Yes! By building a network of tunnels under the city, surely it would be possible to ease the stifling congestion above ground and build a better way for those commuting on a daily basis to reach their place of work?

Imagine that for a moment.

A network of subterranean tunnels criss-crossing the city, filled with commuters moving quickly and with a minimum of hassle from their homes to their places of work and back again.

This was futuristic stuff.

The cost of the tunnel would be measured in the millions (not billions), and construction would begin underneath land already owned making the initial exercise fairly simple to get under off the ground.

Initially, despite concerns from neighbours about undermining and vibrations causing subsidence of nearby buildings, construction began on a short tunnel which was to prove the idea viable. Once the public had bought into this seemingly fanciful idea, it would be easy to raise both the capital and the support necessary for its expansion.

Trial runs were carried out (to much fanfare, it has to be noted) while construction was still under way, with a series of celebrities attending and taking their turn in being transported the short distance along the length of the rudimentary tunnel.

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The year was 1861.

That’s right, 158 years ago, with a then-astronomical 200,000 people entering the City of London on foot each day (alongside the inhabitants of countless carts, cabs and omnibuses), Charles Pearson (a former Member of the British Parliament) hit upon the revolutionary idea of an underground system of tunnels which would ferry commuters back and forth between work and home and around the City, thus alleviating congestion on the streets above.

The eminent engineer, Sir John Fowler, a The Metropolitan Railway specialist in railway and railway infrastructure 1863 construction, was tasked with making Pearson’s King’s dream a reality and The Metropolitan Railway Cross was born. Portland Road Edgeware The initial 3.75 mile line was opened to the Road Gower Street public on January 10, 1863, carrying some Baker 38,000 passengers that day and 9.5 million Street Farringdon Street during its first year of operation. Paddington (Bishop’s Road) The following year, that number increased to 3.75 Miles 12 million. Source: Wikipedia

Initially, the trains used to carry passengers were steam rolling stock, although the line had R been built with minimal air ventilation due to 1873 the fact that The Metropolitan Railway had R R G R been designed with smokeless locomotives in A B B R E mind. R L N H R However, this was one futuristic promise which N B H G failed to cross the divide between fantasy and B R

H reality on schedule (hey, these things happen) A R and so passengers were exposed to smoke- B H G filled stations and carriages. R

This minor health hazard failed to deter enthusiasm for the venture, however and, within a decade the line had expanded dramatically.

The obvious solution to the problem (or so it seemed in the 1880s) was to electrify the system and that is precisely what The City & South London Railway proposed in 1890.

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The approved line would run 3.25 miles Central London Railway (electriﬁed) between Shepherd’s Bush and the City and 1892 be called The Central London Railway.

Chancery The line opened in 1900 with a flat fare Oxford Bloomsbury Lane Marble Circus Liverpool Arch Street of 2d (to any of you not familiar with the Queen’s Road Lansdowne Tottenham British currency system pre-decimalization, Road St. Martin’s Davies Court Road Le Grand Royal ‘d’ signified ‘pennies’. Well ofcourse it did.) Stanhope Street Exchange Shepherd’s Notting Terrace which led to the Daily Mail christening the line Bush Hill Gate ‘The Twopenny Tube’ (oh, and ‘twopenny’ is pronounced ‘tuppenny’). Source: Wikipedia

The future – an era of electric-powered, mass underground transportation had arrived.

A hundred and eighteen years ago.

Now, at this point, I think it’s safe to assume that you’ve all twigged who and what I’m going to talk about as we slip gracefully into another year of Things That Make You Go Hmmm... but, before I get into Elon Musk, Tesla and The Boring Company (as well as SpaceX and Solar City), I want to explain why I’ve chosen this particular subject as my starting point for 2019 and to make an impassioned plea:

Without wishing to spoil the ending of the firstThings That Make You Go Hmmm... of the year, I believe that, when the final chapter of this particular tale is written, it will show that what started out as a mission to change the world ended up as a gigantic fraud – likely the largest of our and many other lifetimes.

Not only that, but it will be held up as the apotheosis of all that can go wrong when capital has zero cost and investment is channeled into ventures unworthy of providing a home for savings

However, that is merely my opinion based upon what I’ve seen, and filtered through the lens of my own experience over the last three-and-a-half decades immersed in finance..

I’m not saying I’m right (I could be totally wrong – something I’ll be perfectly happy to admit should the day arrive when I feel I ought), I’m saying what I believe to be true.

In laying out my opinion, I seek not to attack those who have processed the same information as I have and yet reached totally different conclusions. They are as entitled to theirs as I am to mine.

Sadly, when talking about Tesla and Musk, it has seemingly become impossible to do so without sinking swiftly into invective and ad hominem attacks on those taking the other side of the debate so, if you are a fan of Musk or a believer in Tesla then please do one of two things for me;

1) Read this with an open mind and feel free to disagree with every. Single. Word.

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2) Resist the temptation to simply write these thoughts off as the ramblings of a crazy person or a non-believer

I welcome any and all respectful disagreement on the whole Musk/Tesla universe because I’ve been desperately searching for how this can be anything other than that which I believe it to be for what seems like an eternity now and I’d love for someone to explain to me where and why I’m wrong in a way I can understand – without using the words “you just have to believe in Elon” because, frankly, I don’t.

The rest of this article will be written with tongue firmly in cheek and with the sarcasm dialed up to 11 so please take that as a trigger warning if needed. Read on at your own risk...

OK, so let’s get this party started.

On December 17, 2016, while sitting in traffic, Musk sent out a tweet to his millions of acolytes followers:

“Traffic is driving me nuts. Am going to build a tunnel boring machine and just start digging...”

Now, in truth, Musk didn’t exactly ‘build a tunnel boring machine’, he bought one. In fact, he bought two; Godot and Line-Storm, (you gotta give ‘en names) and then modified the latter (hilariously and brilliantly adding the ability to control one with an X-Box joystick).

With Godot being an off-the-shelf drilling machine, it would be handicapped by its lack of Musk magic but Line-Storm would be blessed with a little sprinkle of the South African entrepreneur’s pixie dust and that would make it twice as fast as conventional equipment

The third boring machine (named Prufrock – Proof-Rock, get it?) would be developed from scratch by Musk and The Boring Company team and would be ready at some yet-to-be-determined future date but once finished it would, of course, be “10-15x faster than conventional Tunnel Boring Machines” (TBMs).

Sigh.

(Incidentally, did you know that T.S. Eliot, the English poet who, at 22 wrote the masterful poem ‘The Love Song of J. Alfred Prufrock’ is also widely- recognised as having been the first to coin the phrase ‘bullshit’ to describe fanciful statements? No? Just thought I’d mention it.)

Prufrock will (supposedly) use Tesla batteries which will, of course, also render it “3x more powerful than conventional TBMs”. Of course.

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Musk’s foray into tunnel boring and his outlandish claims about the improvements he would be able to bring to machinery which the world’s finest engineers had been incrementally improving since the first TBM (the Mountain‘ Slicer’) designed by Henri-Joseph Maus, was commissioned by the King of Sardinia to dig the Fréjus Rail Tunnel between France and Italy through the Alps in 1845, raised many eyebrows – the vast majority of them adorning the faces of those who know a thing or two about what is and isn’t possible when boring tunnels.

This pattern has played out regularly and a recent article by Filip Piekniewski called ‘Elon and the Collective’ does an excellent job of explaining it:

(Filip Piekniewski): Elon Musk is a polarizing figure. His ideas frequently come about in casual conversations. People are often amused and impressed by his achievements. I must admit, a few years back I thought he is literally the next Steve Jobs, only actually better, since he was onto so many things... I admired SpaceX, thought that Tesla cars had many great solutions in them...

At some point in 2015 or 2016 Elon started talking outrageous stuff in the domain of AI, a domain of my own expertise, which I could tell right away was total bullshit. And then I began looking at all this stuff in detail. Doing some math here and there. Reading various opinions. As a result, my opinion on Musk and many of his ideas has changed somewhat substantially.

At this point, I can pretty much say with confidence that 90% of his stuff is utter BS, and the remaining 10% is perhaps impressive but still questionable.

Filip goes on to debunk Musk’s wild pronouncements on colonizing Mars, flying from Shanghai to New York in 30 minutes and, as you’ll see below, The Hyperloop in simple, straightforward fashion through the use of common sense and, well, science, but the point he makes about the creeping realization amongst those into whose field of expertise Musk incrementally strays is on point (as you’ll see).

Musk’s ‘vision’ of a Hyperloop is, like those underground tunnels, yet more futuristic ‘technology’ from the past:

(Filip Piekniewski): Vactrain or Goddard train is not a new idea. It has been around for more than 100 years, and over all those years nothing ever came out of it.

There are several reasons why this idea only looks good on paper: it is outrageously expensive and superbly fragile. Let’s start with the first: maintaining vacuum in a large structure poses quite a few challenges. The atmosphere at sea level presses with a force of ~1kg per square centimeter. That is 10 Tons per square meter! In order to withstand such constant inward force structures have to be extremely strong.

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To understand what kind of forces we are talking about here, take a look at this video of a train car tanker imploding.

The largest vacuum chamber currently maintained is the Large Hadron Collider, and I don’t have to argue here that it is extremely expensive.

The structure is underground in a protected tunnel under constant supervision and maintenance.

To build any meaningful hyperloop, one would have to build an extremely solid pipe, take the air out (which itself would cost a fortune) and pray that nothing happens that could compromise the structure at any point (such as e.g. the mundane problem of thermal expansion).

Any small structural issue would rapidly propagate catastrophically and destroy the entire tube. Now we are asking to put inside capsules moving at ~300m/s. It is again, a dream.

There is no way that would be economically and technically feasible and we did not even get to how these capsules would be boarded, how would the maintenance be performed etc.

And frankly we have airplanes... They travel at ~300m/s, in thinner atmosphere (pressure at cruising altitude is roughly 1/3 of that at the sea level). Luckily 11km above the ground there are rarely any solid bodies that could penetrate the hull, which being a pressurized cylinder gets extra mechanical strength. And finally, all one needs to land a plane is a strip of flat pavement.

This is exactly the reason why Goddard Train aka”hyper-loop” idea was dead for the past 100+ years while aviation flourished beyond anything the Wright brothers could have imagined...

This passage is important because, on December 10 18, 2018, Musk unveiled the fruits of The Boring Company’s labours in typically hyperbolic fashion to a hand-picked and excitable audience.

First up, here’s what was promised at the launch of TBC back in 2016:

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...and here are the thoughts on his plan at the time from a man, into whose world Musk bulldozed (almost literally):

(Curbed, May 2017): What Musk’s concept video shows is what looks like a modern-day, traffic-clogged street where a handful of vehicles elect to slip below the surface to travel below ground. Assuming all of these vehicles are electric Teslas to address any environmental concerns, the fact remains that car congestion is caused by just one thing: cars. What Musk’s video doesn’t show is the gridlock created when all these vehicles try to “merge” down into the subterranean highway at the same time. It’s no different than an above-ground highway. At all.

For one local who works on transportation solutions, hearing Musk’s talk on Friday was almost too much to bear. Brent Toderian is the former chief planner for the city of Vancouver (where TED is held) and took to Twitter to air his concerns, namely the fact that Musk’s proposal was distracting from the very real issues cities are facing...

Toderian’s tweets dismissed Musk’s ideas out of hand and then focused on what he viewed as the real dangers of such fanciful notions – the level of oxygen they suck up; oxygen that could be used to seek real, practical solutions to the problems Musk highlights.

Fast forward a couple of years from the big reveal and here’s what the world was given by Musk and The Boring Company (picture, right).

Yes, the reality was a Model X with training wheels attached that would keep it between a pair of guide rails as it rumbled unevenly through the mile-long tunnel (think Coney Island wooden rollercoaster technology) – a far cry from the 150mph rocket ship ride Musk promised his adoring fans.

Yes, these things have to start somewhere. Yes, it will no doubt get better but, the cumulative comedown from so many grandiose promises even managed to overcome hardcore Musk fans:

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(Gizmodo): Back when the concept was first announced, Musk promised that the Loop would utilize fully autonomous 16-passenger vehicles gliding along at speeds of 150 miles per hour. But the system that was demonstrated last night featured just regular Tesla cars driven manually on an underground one-mile track. And at an underwhelming speed of just 35-50 miles per hour.

Laura Nelson of the LA Times had this to say about her experience in The Loop:

(LA Times): The trip through the tunnel took about two minutes, illuminated by the car’s headlights and a strip of blue neon lights tacked to the ceiling. The Model X rolled on two molded concrete shelves along the wall, which were so uneven in places that it felt like riding on a dirt road.

...while the Associated Press offered another similarly damning perspective:

(Associated Press): The car jostled significantly during the ride, which was bumpy enough to give one reporter motion sickness while another yelled, “Woo!”

Musk was reportedly making excuses throughout the night about why his system looked nothing like what he promised. And his concept now relies on every person having their own car...

Yes, once again, the excitement generated by Musk via extravagant promises gave way to a more sobering reality and this time, even his staunchest defenders were no longer misty-eyed.

In an article which was genuinely titled “What the Actual Shit Was That?”, Jalopnik columnist, Michael Ballaban unloaded on Musk and The Boring Company’s underground fiasco:

(Jalopnik): Elon Musk and his Boring Company made quite a bit of a splash out in Los Angeles last night, but instead of grandiose visions of ThE FuTuRe, we got what some were derisively comparing to a Disney tram mashed up with an SUV. And the questions go wildly downhill from there.

... It’s not like mass transit at all, and in a lot of ways, it’s definitively worse.

Let’s start with the notion that this is some sort of revolutionary idea. But it’s so not that I actually got a chuckle out of it this morning. This isn’t some revolutionary transit idea... this is already significantly worse than a bus, because a bus can seat a lot of people, and a Tesla Model X can seat five, maybe seven in a pinch.

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And the Tesla bus is underground, which has the advantage of not having to worry about existing surface-level infrastructure or weather (which isn’t really a huge problem with trains), and the massive disadvantage of having to dig enormous tunnels underground, which even Elon acknowledges must be improved, somehow:

So already this is not only worse than an already-existing idea, but it’s also not really “mass” transit. It’s just a guided Tesla bus.

And if you thought that was a trifle barbed, here’s what came next:

(Jalopnik): Press materials from the Boring Co., after all, point to an imagined capacity of 4,000 cars per hour, which, if you figure four adults per vehicle, gives a Boring Co. tunnel a capacity of 16,000 people per hour, as Wired notes.

Which sounds great as well, if you don’t think about it too much.

But if you do think about it, even a little bit, you realize that 16,000 people per hour is not really an impressive figure.

Here’s what the director of the Hungarian transport museum felt moved to ask about the whole charade in a single, pithy tweet:

Dear @elonmusk! Metro line 3 in Budapest has a train per every 150 sec in peak hours, capacity is 28200 ppl per hour. To provide this capacity with 5-seat cars, you would need 3 Teslas in every 2 seconds (94 cars/min). How is this is an innovation and not a scam?

How indeed?

So, The Boring Company’s big reveal was almost universally seen, not for what Musk desired, but for what it really was, and his excuse that they had “run out of time” was dismissed with appropriate opprobrium.

This is a very important shift.

If Musk is now to be held to his promises by a media who have been made to look like slavering fools after their lavish praise has turned out to be misplaced at best and utterly naive at worst, then he is in trouble. Big trouble.

However, with each and every one of those chosen to be present for The Great Reveal still drifting off into the night, scratching their heads in stunned disbelief at what they’d just witnessed, there was one other big Boring Company unveiling which was preoccupying investors – one that occurred two days prior to the public demonstration and this one was neither planned, nor under Musk’s control. It did, however, dig another mighty hole:

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(WSJ): Elon Musk’s tunnel-digging venture, the Boring Co., is being pulled into the billionaire entrepreneur’s controversial practice of spreading overlapping assets across his disparate technology firms.

...The entrance of the two-mile-long Boring test tunnel is being constructed in Hawthorne, Calif., at the headquarters of another Musk-controlled company, Space Exploration Technologies Corp., partly by SpaceX employees using equipment purchased with SpaceX funds, people familiar with the matter said.

The arrangement alarmed some longtime investors in SpaceX, including its largest outside backer, Peter Thiel’s Founders Fund, some of the people said. The investors learned in recent months that despite the diversion of SpaceX resources and staffing to the fledgling Boring startup, it was Mr. Musk who was in line to receive almost all of any future profits, these people said.

The investors questioned SpaceX about why their investment dollars into a company ostensibly devoted to launching satellites and carrying humans to Mars were instead partly used to start a separate company that principally benefited Mr. Musk. When the Boring Co. was earlier this year spun into its own firm, more than 90% of the equity went to Mr. Musk and the rest to early employees, the company has said.

...The Boring Co. has since given some equity to SpaceX as compensation for the help, a move that hasn’t been previously reported or publicly disclosed. SpaceX hasn’t formally notified its investors of the exchange. Some investors say they aren’t aware of it.

SpaceX received about 6% of Boring stock, “based on the value of land, time and other resources contributed since creation of the company,” said a SpaceX spokesman. He declined to comment further on the circumstances surrounding the transaction.

Whether (as some skeptics have suggested) the stock grant to SpaceX was made after the transaction came to light or not, this kind of move by Musk is not without precedent (as anybody who followed the Solar City story will be more than aware) and it serves to simultaneously strengthen the case of the bears who cry ‘Fraud!’ (myself amongst them) and weaken that of those who hold Musk up as an example of all that is good in the world of technology and beyond.

However, whether there were shady goings-on at The Boring Company and SpaceX or not is (largely) irrelevant (SpaceX’s biggest backer, Peter Thiel’s Founders Fund claimed to have no problem with the 6% share transfer), the entire Musk empire is dependent upon the success (or failure) of Tesla.

Back in 2016, when the Solar City merger was announced, the Wall Street Journal had this to say about the deal:

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(WSJ): Since October 2014, SolarCity Corp. has tried to lure individual investors Elon Musk’s Empire to the solar-power business by pitching $214 million of what it calls “solar bonds” through the company’s website.

The biggest buyer by far, though, was rocket maker Space Exploration Technologies Inc., including $90 million of $105 million sold last month.

The bonds were an “excellent investment,” billionaire entrepreneur Elon Musk said in an interview. And he knows more about the companies than anyone. Mr. Musk is their largest shareholder, the chairman of Source: Wall Street Journal SolarCity and chief executive of SpaceX.

Mr. Musk, 44 years old, has built a business empire like no other in the world, fueled by his voracious appetite for risk and unyielding confidence. The three companies he leads—SolarCity, SpaceX and car maker Tesla Motors Inc. —are worth nearly $50 billion combined.

...Along the way, Mr. Musk has helped financially support his companies in ways that are as unconventional as he is.

In addition to the bond purchases, he has taken out $475 million in personal credit lines, buying shares of SolarCity and Tesla when they needed capital, securities filings show.

The credit lines are secured with about $2.51 billion of Mr. Musk’s shares in SolarCity and Tesla, based on their closing prices Wednesday.

Few top executives use their shares as collateral for personal loans because it can be risky to other shareholders and also raises concerns that the executive’s personal interests could conflict with the company’s interests.

If the stock price slides, that could trigger a margin call requiring the executive to sell the shares or put up more collateral to repay the loan.

In securities filings, Tesla has disclosed the possibility of margin calls related to Mr. Musk’s loans, which it said “may cause the price of our common stock to decline further.”

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These margin loans are an existential threat to the entire house of cards the web of companies Musk has built and the failure of Tesla would send ripples through all the other related companies.

It is for precisely this reason that Tesla has become such a battleground between bulls and bears over the last year.

Here’s a remarkable chart of the stock price over the course of 2018:

Tesla Dec 29 2017 - Dec 31 2018 +15% 380 +31% +35% 370 +15% 360 +12% +41%

350

340 +13% +6.8% 330 +17% 320 -8% +15% +21% 310 -12% 300

290 -21% -22% 280

270 -10% 260 -31% -15% -30% -20% 250 Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: Bloomberg

As you can see, the overall performance of the stock (+6.8%) belies the turmoil which saw EIGHTEEN double-digit percentage moves (ten up and eight down).

What is so illustrative of the pitched battle between bulls and bears is the swift about-turns after each big move. Every one of those double-digit percentage moves was met with a move of similar magnitude in the opposite direction almost immediately.

In fairness to Tesla, in a year that saw carnage across the auto industry, the Fremont-based manufacturer outperformed just about all its peers:

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(UK Daily Telegraph): Concerns on the future of the auto industry saw more than £100bn wiped off the value of the world’s biggest listed carmakers last year.

With only three exceptions, the share prices of the 15 largest publicly traded car manufacturers all plunged.

...At the start of the year the 15 carmakers that account for the bulk of the 80m cars sold globally each year had a combined market value of just shy of £700bn. However, this had fallen to £588bn as the year drew to a close.

The biggest loss was recorded by Mercedes owner Daimler, which suffered a £22bn drop after two profit warnings. Ford also lost £13bn on concerns about its dependence on the US market and late entry into the electric and self-driving car sectors. Volkswagen fell by almost £12bn...

However, as 2019 began, Tesla was on deck with its Q4 delivery numbers and much was riding on them after what bears dubbed The Immaculate Quarter in Q3 when the company swung to profit and, as always, Tesla didn’t disappoint (everybody):

(Bloomberg): No sooner did Elon Musk put a raucous 2018 behind him than a new worry erupted for Tesla Inc.: a potential ceiling in demand for its cars.

Tesla’s shares plunged on the first day of 2019 trading after Tesla Deliveries Q3 2017 - Q4 2018 the company unexpectedly 80k announced it was cutting Model 3 Unit Deliveries Model X Model S prices by $2,000. The move,

designed to partially offset a 60k reduction in the federal tax credit for its electric vehicles, underscored the key challenge 40k in what is likely to be a pivotal year for the company and its chief executive officer. The 20k carmaker also said Wednesday that fourth-quarter deliveries 0 fell just short of analysts’ Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Source: Bloomberg, Company Statements estimates.

The 63,150 Model 3s handed over to customers in the fourth quarter trailed the roughly 63,700 average analyst projection...

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Yes, coupled with what was admittedly a fairly minor miss as far as Model 3 deliveries were concerned, Tesla cut the price of its cars by $2,000 as the $7,500 federal tax credit applicable to all Tesla vehicle purchases was cut in half at midnight on December 31, 2017.

And just in case you were wondering whether the reduction of the tax credit would be that big a deal to Tesla sales, here’s a little reminder of what happened in Hong Kong when the government removed tax subsidies on Tesla purchases back in 2016:

(WSJ): Tesla Inc.’s sales in Hong Kong came to a standstill after authorities slashed a tax break for electric Tesla Sales in Hong Kong Dec 2015 - Apr 2016 3,000 vehicles on April 1, demonstrating

how sensitive the company’s 2,500 performance can be to government incentive programs. 2,000

Not a single newly purchased Tesla 1,500 After subsidy removed model was registered in Hong Kong in sales fall to precisely zero April, according to official data from 1,000 the city’s Transportation Department 500 analyzed by The Wall Street Journal.

0 In March, shortly after the tax change Dec 15 Jan 16 Feb 16 Mar 16 Apr 16 Source: SmartKarma was announced and ahead of the April 1 deadline, 2,939 Tesla vehicles were registered there—almost twice as many as in the last six months of 2016...

Tesla doesn’t break out vehicle sales by country or region and declined to discuss specifics in Hong Kong. But it acknowledged in a statement a slowdown, calling it “expected” after the tax change and a “short-term” challenge.

“Tesla welcomes government policies that support our mission and make it easier for more people to buy electric vehicles; however, our business does not rely on it,” Tesla said.

Once again, all the evidence surrounding that last statement from the company would seem to suggest it’s false, but no matter.

The company’s shares began 2019 as they finished 2018 with a double-digit percentage move (this time in a southerly direction), gapping down 10% at the open before rallying back a little (chart, next page).

The reason? Well, yet more disparities between Musk’s pronouncements about Tesla’s business and... um... this little thing called ‘reality’.

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Tesla had been sold as a ‘production problem’ story, in that the company couldn’t Tesla January 2, 2019 make cars fast enough to keep up with 317 demand. Supposedly, there were 420,000 (snigger) eager buyers waiting in line to 312 buy Model 3s once the company was able to ramp production to the promised level

(5,000 per week by the end of 2017 – for 307 starters).

Unfortunately, as is his wont, Musk 302 compounded the company’s production problems with a typically bombastic 297 statement: 09:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00 13:30 14:00 14:30 15:00 15:30 16:00

Source: Bloomberg (Futurism): Founder and CEO Elon Musk assured investors during an Tesla Model 3 Production Ramp 2017 earnings call for the company’s 5,000 Model 3 production has started with low volumes but will grow exponentially until we achieve second-quarter of 2017 on full production. A similar production ramp will follow with each available option. Wednesday that [the company being unable to meet demand] will not be the case.

“What people should absolutely have zero concern about, and I mean zero, is that Tesla will Production Rate Per Week Per Rate Production achieve a 10,000 unit production week by the end of next year,” said Musk. “I think people should really 0 not have any concerns that we August September October November December Source: Tesla won’t reach that outcome from a production rate.”

Somewhat cagily (I’m sure he thought) Musk wasn’t promising a sustained 10,000 per week production level but rather that the company would attain a single week of five-figure production by the end of 2018.

Based on the numbers just in, the average weekly production level over the quarter was roughly 4,700 – and you should have zero concern about that.

Even at the time of his pie-in-the-sky promise, some of Musk’s most ardent fans such as Fred Lambert at Electrek called bullshit were a little skeptical:

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(Electrek): For those familiar with Musk’s way of speaking, especially when it comes to Tesla, a publicly-traded company, the statement is surprisingly strong since the CEO most often preface those kinds of predictions with things like “my best guess” or “I might be wrong”.

But in this case, Musk showed no doubt and the market heard him since Tesla’s stock rose 6% in pre-market trading.

Of course, the following year, Musk would go on to prove beyond a shadow of a doubt that statements of any kind need not be subject to the consideration “especially when it comes to Tesla, a publicly- traded company...” but we’ve covered that story already. Let’s stay on topic.

The signs that Tesla was going to struggle to make its numbers in Q4 (and after The Immaculate Quarter) were evident weeks ahead of the announcement with one highly peculiar observation being made by one of Musk’s most vocal (as well as most sardonic and, it has to be said, smartest) critics, Tesla Charts, who charted the Inside EV estimate of cumulative Model 3 deliveries against those registered in the National Motor Vehicle Title Information System (NMVTIS) database (which represents 93% of the nation’s DMV data) and found, much to his surprise, a gap of some 35,000 vehicles which means that, for example, either the numbers have been over-reported due to some form of incompetence at Tesla, or cars have been delivered but not registered in the tens of thousands (the law in California, Tesla’s biggest market in the US, mandates that all VINs be registered within 20 days) or those cars have been delivered to overseas jurisdictions or there is a massive fraud being perpetrated.

(read this thread for more on how this could be a big, fat red flag)

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All across the country, evidence is piling up of random locations being used to store thousands of Tesla vehicles (see picture, right, of the company’s 550 E. Louise Avenue lot in Lathrop, CA). Significant numbers of dusty, idle cars have been filmed in parking garages, empty Sears lots and random industrial sites all around the country as accusations of fraud swirl around Tesla.

(See HERE for a list of some 4000 inventory cars courtesy of Machine Planet and Shorty Air Force)

Now, fraud is certainly a bold call (and an idea we’ll return to before we end today), but if the tweet, right, is anything to go by, it’s certainly not as far-fetched as Branch Elonians would have you believe.

It’s rare that someone would boast on a platform viewed by hundreds of millions about committing tax fraud (to have been eligible for the $7,500 federal tax credit, cars needed to have been physically delivered and in service prior to the Dec 31 reduction to $3,750), let alone implicate a $60bln $53bln company, but we live in strange times.

‘The Scott Davis’ subsequently deleted first his tweet and then his entire Twitter account but, unfortunately, such things live on in this day and age.

A tweet that wasn’t deleted, was the one, right, from Elon himself in which he committed Tesla to covering any tax credits that may have been lost despite ‘good faith efforts’ on the part of the customer to take delivery prior to year-end (something one can apparently do via Twitter as CEO, Chairman and largest shareholder of a publicly-listed company).

Any good faith efforts, however, didn’t seem to extend to those of Tesla’s service department to fix faulty Tent Tough™ Tesla Model 3s.

Tales of woe piled up on Twitter (I could fill pages but just take a ride through #TSLAQ on Twitter and you’ll find all the evidence you need) as poor paint jobs, panel gaps, leaking roofs, frozen computers, undercarriages being ripped off in snow, faulty wipers and continuing autopilot issues plagued the faithful, many of whom who maintained that, despite all that ailed it, their Model 3 was a great car.

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There are none so blind as those who will not see.

As mentioned, Tesla’s stock was hammered during the first trading session of 2019, finally closing the day down almost 7%, but it was the reaction to the numbers of a few die-hard Elon fans which raised eyebrows.

Loop Ventures’ Gene Munster sounded as though someone had run over his axolotl as he tried to put some kind of positive spin on the numbers when asked by a friendly CNBC anchor but good old Fred Lambert of Electrek, as always, accentuated the positive as you can see from the headline above, right.

Incidentally, if you take a look at the image chosen by Fred to illustrate how great everything is going at Tesla, you’ll see two cars quietly charging surrounded by empty stalls in a bucolic setting.

Contrast that with the image, right, captured at a real-world charging station where the number of cars recorded in line was 15 and the wait time supposedly some four hours (here’s the video for any doubting Thomases amongst you).

The reason for this is once again captured perfectly by @TeslaCharts in the third image at the bottom of the page; the lack of investment in the infrastructure required to support expanding sales of the company’s cars.

Russ Mitchell of the LA Times had this to say about Tesla’s latest delivery numbers:

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(LA Times): Tesla started the new year by releasing data that throw its growth story into doubt...

Sales growth...slowed dramatically. After a bang-up second quarter that saw unit sales more than double over a year earlier, the growth rate slowed in the fourth quarter to 8%, with total sales of 90,700 vehicles.

Sales of the new Model 3 electric sedan – crucial to Tesla’s reputation as a growth stock – fell well below analyst expectations, rising 13% in the fourth quarter, to 63,150. The consensus expectation was for a 17% boost.

Perhaps most worrying of all, from a financial standpoint, the company cut prices $2,000 on all vehicles sold in the U.S. – the Model S, the Model X and the Model 3. That move, which the company said is meant to offset expiring federal subsidies for zero-emission vehicles, could boost demand but at the cost of revenue, cash flow and profit margins.

Meanwhile, the FT offered a few thoughts of their own:

(FT): Producing at scale is no longer enough. Mr Musk is finally reaching the moment of truth for his would-be mass market electric car: Can he get the price to a low enough point to generate truly widespread demand, while still generating the sort of profit to justify his company’s valuation? After all, Tesla is still worth more than General Motors, which sold about 40 times as many cars last year.

Based on the evidence released on Wall Street’s first trading day of the new year, the signs are hardly encouraging. By rights, Tesla should have had a blowout quarter at the end of last year. It has finally been producing enough Model 3s to start eating into its demand backlog, and has sorted out the worst of its delivery bottlenecks.

The pressure will not let up as the year goes on. The federal tax credit will halve again in the second six months, before disappearing altogether in 2019. As the incentives evaporate, there is a risk that the dream of a true mass-market electric car will recede ever further into the distance.

The idea of Tesla ‘reaching the moment of truth’ is an interesting one and it brings us nicely to the conclusion of this, the firstThings That Make You Go Hmmm... of 2019.

The ‘truth’ (in my opinion) is that Tesla will prove to be a fraud. A gigantic, almost unfathomable fraud.

I also believe the fraud will be uncovered within the confines of the current calendar year... and it will matter. It will matter because these things tend to be exposed as tides turn and the tide that has swept all risk assets higher for a decade is most definitely on the ebb.

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I haven’t had time to go into the ever-expanding number of lawsuits in which Tesla is becoming embroiled as it fails to refund deposits, refuses to pay contractors and breaches warranties (but you’ll find all the evidence you need of these issues and so many more in the depths of Tesla Twitter) and I haven’t even had the space to fully cover the SEC, the new, ‘independent’ additions to the Tesla board (Musk friends/fans/Tesla investors), the replacement for Elon as Chair (a former board member), Azealia Banks or the increasing frequency with which senior executives are deserting the company. (see the complete, astonishing list which is diligently maintained by Paul Huettner which you’ll findHERE ).

I haven’t touched upon insider sales ahead of the disappointing results, the fact that, with EV sales climbing 40% in Norway, Tesla only managed a 1.6% increase in sales or gone anywhere near the competition which is about to get as serious as we all knew it would:

(Green Car Reports): As much as they evangelize Tesla, it turns out Tesla owners may be looking for an upgrade.

Klaus Zellmer, Porsche’s president and CEO for North America, disclosed in an interview that the company’s upcoming 2020 Taycan electric sports car could be sold out for a year with pre-orders from customers who have put down $2,500 deposits.

Then he added that most of the pre- orders are from Tesla owners.

Teslas are fast, silent, and sporty, but they’ve gotten a reputation for having interiors that don’t live up to the plush quality of other luxury cars.

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Not so Porsches, which have impeccably finished interiors with individually customizable option upgrades, such as suede headliners and custom-colored dashboard pads.

Porsche has also endowed the Taycan—formerly known as the Mission-e, after the concept car that previewed it—with the world’s first mass-production 800-volt battery pack, which will allow it to charge more than twice as fast as a Tesla at a Supercharger—adding about 240 miles in less than 15 minutes.

Or there’s this...:

(Maxim): The I-Pace is at once the best EV yet introduced and is the best Jaguar ever. It merges astounding EV capability, Jaguar-like handling and the stylish practicality of a contemporary SUV...

The I-Pace’s performance includes a 4.5-second 0-60 mph acceleration time and a top speed of 124 mph. These are numbers that Tesla’s vehicles can match or beat. And nevertheless, the I-Pace is better...

...the I-Pace is able to deliver the kind of vigorous driving experience expected of a vehicle wearing Jaguar’s ‘Leaper’ emblem.

That means hours of hammering over mountain passes and continuous laps of the race track, as Jaguar provided by letting us drive the I-Pace through southern Portugal and to prove it at the same Algarve International Circuit where we recently tested the Aston Martin Vantage sports car.

Teslas easily tear off astounding acceleration runs, but their electric drive systems aren’t robust enough for this kind of continuous hard use without reverting to a low-power ‘protection mode.’

I could write pages more about this story but I’ve taken up enough of your time already – and, anyway, you can bet a signed dollar we’ll be revisiting the Tesla story multiple times throughout the next twelve months because, as I stated at the outset, I believe this to be one of the biggest, most important stories of the year for the reasons outlined above.

Tesla is the poster child for years of malinvestment, for yield-seeking, for celebrity culture, for the green movement, for excess valuation, for over-hyped growth stories and for our misplaced and wilfully blind love affair with technology.

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Do I hate the environment? No. Do I have a personal vendetta against Elon Musk? No. Am I in the pocket of Big Oil? No. Do I passionately want Tesla to fail just because I’m an evil man? No. Am I a FUDster? No.

When this is all over, the people who will be hurt here are not the financial types who analyze Tesla like a thousand other companies we’ve looked at over the years and see something we recognize. No. It will be the people who bought into a dream with good intentions and have been duped into believing in something that was never there to begin with.

Tesla has kickstarted the movement towards clean vehicles and made them cool, which is great and, one day, I hope we do live in a world where electric cars are the norm but, for now, we have a quintessential showman/celebrity CEO selling a bogus dream and playing a classic confidence game.

Did it begin that way? I doubt it, but without blind confidence in Musk, the game is over and you can see it fraying amongst all but the most ardent of believers.

The difference between those who believe but don’t know, and those who 525 2025 Y A 2017 D 2018 know and don’t believe can be summed up 600 9 by looking at the Tesla 5.25% bonds due in 2025 because, while Musk believers 8 will buy the equity in their droves, they 500 tend not to play in the bond market with the more sophisticated investors and, 7 unlike the sideways thrashing about we witnessed in the Tesla equity price 400 in 2018, the yield on the Tesla bond (in 6 red) and its spread to treasures (in blue) both moved steadily higher through the 300 5 year as the risks to Tesla continued to A O N D A A O N D increase. 2017 2018 B

Amidst all the wild pronouncements, taunting, doxxing, lawsuits, ‘pedo guy’ tweets, funding secured declarations and SEC-baiting, lie an endless stream of broken promises by Musk – promises which, when broken, are simply glossed over or ignored by Musk and Tesla and (thus far) forgiven by the flock.

However, in closing, it’s only fair that I acknowledge the fact that there is one tweeted promise that Musk has had the good grace to follow through on and its the one that started this whole thing.

Whichever way you look at it, Elon Musk has sure as hell dug himself a hole.

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K, so before I get into what you’ll find waiting for you in the remaining pages of this edition of OThings That Make You Go Hmmm..., a quick shoutout to shortsellers in general and the TSLAQ community in particular.

Shortselling is a tough, tough discipline. It’s not for the faint of heart, nor is it for the uninformed or those naive in the ways of financial markets.

You can have the right stock and the right short thesis but, if you get your timing slightly wrong and don’t know how to manage your risk effectively, lose everything before you are eventually proven right.

Shortsellers choose to expose themselves to unlimited losses and so they have to work harder and be more certain about their positions than those who simply play the long side where downsides are quantified and potential profits infinite.

Somehow, this practice has become synonymous with evil men and women hiding in the shadows trying to subvert justice and democracy and bring down poor, innocent companies. Shortselling is “un-American”, the naysayers declare.

Over my career, I’ve sold short on many occasions and experienced both great success and spectacular failure.

Shortsellers tend to go away when their premise is proven to be false because of that whole unlimited downside thing. All the CEO of a company in the crosshairs of shortsellers has to do is execute and prove them wrong.

It really is that simple.

If the success of your business disproves the short investment case, those positioned against your business will close out their positions and move on that day. I guarantee it.

Doxxing them, taunting them, suing them or rousing the mob against them only serves to raise the red flags higher and attract others to the short side. Refusing to answer boring boneheaded genuine, intelligent questions about your business and resolving suspicion is another guaranteed way to place yourself in the firing line.

The TSLAQ community (as it has become known) generally have one thing in common. No, they’re not all in the pocket of Big Oil. They are a group of men and women with a diverse but deep range of expertise and who, for the most part, fit the mold described by Filip Piekniewski in his article – they have largely ignored Musk until he wandered into their field and made declarations which caused them to say “oh hell, no”.

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Accountants, CFAs, hedge fund managers, auto industry execs, scientists, AI experts, rocket scientists, engineers. The common thread tying these folks together is a belief that the world is being lied to about something and that rankles with them so much so that they are mobilized to speak out. In the age of social media, that is a powerful movement – one which, in this case, has resulted in the creation of the Shorty Air Force (who fly over Tesla facilities to provide video evidence of what they believe to be unexplained behaviour) and the Shorty Ground Force (who have scoured the country and dug up thousands of cars sitting idle in out-of-the-way lots across America). This, ladies and gentlemen, is real research.

TSLAQ is sarcastic, snarky and heavily skewed to the bear side but, despite the accusations from the bulls that they are “the worst human beings on the planet” I have found them to be smart, funny, engaged, resourceful, practical and, between them, blessed with a level of knowledge which dwarfs that of Musk himself.

Special thanks go to: Mark Spiegel, Tesla Charts, elmerFUDD, Skabooshka, MachinePlanet, Luis Carruthers, Nikola’s Stache, Jin SEO, Deepak CFO, Paul Smith, Scooter, Elon Says, Ed Humilitatem, Contrarian Short, QuirkyLlama, Paul Huettner, Polixenes, el gato malo, KillingMyCareer, Gavran, InvestorGator, CrowPointPartners, Latrilife, NetflixAndLamp, Ben K, Diogenes Disolved Special Committee, and the much-lamented Montana Skeptic (apologies to anyone I’ve missed but there are hundreds of contributors and you’ll find them all in #TSLAQ. Jump in!).

OK, so coming up we have a few articles that touch on stories featured in Things That Make You Go Hmmm... in 2018 such as Australia’s deepening housing slump, Italy’s failing banks, China’s continuing slowdown and the backlash against Big Tech.

We’ll also take a look at the escalating 1MDB scandal, China’s property market, the perilous situation facing Emanuel Macron and the interestingly-timed declaration by Xi Jinping that Taiwan must be unified with the Mainland.

We take a trip down memory lane for interviews with a series of greats including Paul Tudor Jones, Louis Bacon, Bruce Kovner, Jim Grant, Ralph Acampora and Marty Zweig and we revisit my conversation with Marc Cohodes ahead of my visit to Alder Lane Farm in a couple of weeks.

Stan Druckenmiller joins us to offer his thoughts on the U.S. economy, his investment strategy for stocks and bonds and President Trump’s attempts to sway Federal Reserve policy and we open the year with charts featuring Netflix content, the cause and effect of QT and a recent CFO survey.

That’s it from me for another week. All that remains is to once again thank you all for your continuing support for Things That Make You Go Hmmm... and to wish you a healthy, happy, prosperous and safe 2019 and remember, if you disagree with every word I’ve written this week, don’t hate me for my beliefs on Tesla – change my mind! Please. UNTIL NEXT TIME...

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CHINA FACES INDUSTRIAL SLUMP AS ‘CREDIT CRUNCH’ DEEPENS IN ASIA: UK DAILY TELEGRAPH

hina is sliding into a manufacturing recession as a wave of bond defaults sweep through Cthe corporate sector, signalling yet further trouble for the battered global economy. The official PMI survey for December slumped below the boom-bust line to 49.4. New export orders slid to crisis levels of 46.6 last seen in the depths of the Chinese currency scare of 2015.

“The worst is yet to come,” said the Japanese bank Nomura. An autumn boost from Chinese exporters is fading: they have already front-loaded shipments to the US to beat a possible jump in tariffs by the Trump administration.

The Japanese bank warned in its 2019 outlook that China is leading much of east Asia into a ‘credit crunch’ as global liquidity drains away, with property slumps and outright deflation in several countries over the next few months.

This will lead to the “third and final wave of a bear market”, followed by a roaring recovery in the second half of the year as Beijing abandons attempts to deleverage and the US Federal Reserve abandons monetary tightening. “It is always darkest before dawn,” said Rob Subbaraman, Nomura’s emerging markets chief.

“We expect the current account surplus, export-reliant economies – Greater China, Korea, Singapore, Thailand and Malaysia – all of which have high private debt, to be at the core of this turmoil,” he said.

The picture is already darkening rapidly in Hong Kong where property prices dropped by 3.5pc in November, the steepest one-month fall since the Lehman crisis in late 2008.

The enclave is being squeezed by the strong US dollar and Fed rate rises. Three-month LIBOR rates have doubled to 2.78pc over the last year. This has forced up HIBOR rates used to price swaths of property lending in Hong Kong.

The cyclical ups and downs of China’s economy have become a crucial factor for the global economy, determining commodity prices and emerging market growth rates. The current slowdown is a key reason why the eurozone has hit a brick wall, with both Italy and Germany flirting with possible recession.

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This is fully understood by ‘global macro’ hedge funds but not yet by the broader public, or all too often by the policy classes in the West who still rely on old ‘pre-China’ notions of how the world works.

The strains are mounting in China’s corporate sector. Defaults tripled to a record 119 in 2018, according to Wind Information. The Ningbo property developer Yinyi Co is the latest to run into trouble as liquidity evaporates, failing to redeem its three-year bonds last week.

The scale of defaults is still relatively small at $17bn this year. Moreover, the willingness of regulators to let companies fail is arguably a good sign. The reflex until 2014 was to put together some sort of rescue to shore up confidence, disregarding endemic moral hazard.

Yet the Communist authorities are walking a fine line as they seek to deflate a credit bubble that has pushed the ratio of corporate debt to GDP from 95pc to 160pc in a decade. The managed slowdown is proving hard to stabilise. The task is made almost impossible by an escalating trade war with the US, one that is mostly a nuisance so far but could turn deadly serious in 2019.

The People’s Bank has cut the reserve requirement ratio four times over the last year to shore up the banking system. This stimulus has yet to gain much traction in the real economy. Janus Henderson says its measure of ‘real M1’ money growth - stripping out noise - has collapsed to zero on a six-month basis.

The Capital Economics gauge of underlying economic growth dropped to 5pc last month based on a range of proxy indicators. This is far worse than the ‘smoothed’ official figures.

Capital Economics expects the rate to drop to 4pc by mid-2019 before fiscal largesse feeds through, and even then the rebound will be a much reduced version of earlier stop-go boomlets. “Policy stimulus should put a floor beneath growth before the year is out but won’t drive a strong recovery,” it said.

A blizzard of data suggests that China’s industrial sector buckled abruptly in November, although services are holding up better so far. Chinese car sales fell 16pc from a year ago. Air cargo contracted. Industrial profit growth dropped to minus 1.8pc.

The damage is evident in this year’s crash of the CSI 300 index of equities, down 32pc since late January. All ten industrial sectors have seen deep falls...

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CHINA’S XI JINPING SAYS TAIWAN MUST BE UNIFIED WITH MAINLAND: BLOOMBERG

hinese President Xi Jinping suggested that mainland China and Taiwan enter into “in- Cdepth democratic consultations” and work toward unification, in the clearest sign yet that he wants to settle the 70-year dispute during his tenure.

“China must and will be united, which is an inevitable requirement for the historical rejuvenation of the Chinese nation in the new era,” Xi told a gathering in Beijing to mark the 40th anniversary of a landmark Beijing overture to Taipei after the U.S. and China established relations. The two sides have been ruled separately since Chiang Kai-shek moved his Nationalist government across the Taiwan Strait during the Chinese civil war.

Xi’s speech was peppered with references to familiar domestic themes and promises to leave the self- governing island’s political system intact. He urged Taiwan to “share the glory of national rejuvenation,” a reference to his nationalist “Chinese Dream” slogan.

“The difference in systems is not an obstacle to reunification or an excuse for separation,” Xi said.

He suggested that “political parties and people from all walks of life on both sides of the strait elect representatives” to engage in talks on the future of their relationship, saying an agreement that both sides belong to “one China” must be upheld in negotiations. He cited the “one country, two systems” arrangement that preserve Hong Kong’s liberal political and economic system after its return from the British as the intended model.

Xi also sent a warning to advocates of Taiwan’s independence, who include supporters of Taiwanese President Tsai Ing-wen. “It’s a legal fact that both sides of the strait belong to one China, and cannot be changed by anyone or any force,” Xi said. While the president said “Chinese don’t beat Chinese,” he noted that the mainland was “not committed to renouncing the use of force.”

Taiwan’s benchmark Taiex index extended declines, falling as much as 1.6 percent as of 12:05 p.m., amid a broader slide across the region driven by worsening manufacturing data in China and Taiwan as well as continued trade jitters.

“I don’t think the speech was negative,” said David Lu, vice president of the equity department at Taishin International Bank in Taipei. “Tsai Ing-wen took a hard stance and Xi Jinping was quite soft, for example saying Chinese won’t hit Chinese and that the two sides should build a mechanism for economic exchanges.”

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Xi’s speech comes a day after Tsai -- who has refused to accept the “one China” framework -- used her New Year’s address to warn against continued threats from China. Her remarks signaled that she would continue to take a firm line toward Beijing despite her recent election losses to Taiwan’s more Beijing- friendly Kuomintang, Chiang’s former party.

This October also marks the 70th anniversary of the Communist Party’s takeover of China, an occasion that Xi has been using to solidify his stewardship after repealing presidential term limits last year. The anniversaries come amid increased tensions with the U.S., whose moves to support Taiwan have drawn China’s ire.

On Jan. 1, 1979, China stopped decades of regular artillery bombardment of Taiwan-controlled islands off the mainland. In a historic overture, it issued a public letter to the Taiwanese known as the “message to compatriots in Taiwan,” calling for an end to military confrontation across the Taiwan Strait and saying it would open communication between the two sides...

SYDNEY HOUSING SLUMP DEEPENS AS PRICES DROP MOST SINCE 1980S: BLOOMBERG

he downturn in Sydney’s property market is set to deepen this year as tighter lending Tstandards and the worst slump in values since the late 1980s cause nervous buyers to sit on the sidelines.

Average Sydney home values have fallen 11.1 percent since their 2017 peak, according to CoreLogic Inc. data released Wednesday -- surpassing the 9.6 percent top-to-bottom decline when Australia was on the cusp of entering its last recession.

Nationwide, dwelling values declined 4.8 percent in 2018, marking the weakest housing market conditions since 2008, CoreLogic said.

“Access to finance is likely to remain the most significant barrier to an improvement in housing market conditions in 2019,” CoreLogic’s head of research Tim Lawless said. Weak consumer sentiment toward the property market is “likely to continue to dampen housing demand.”

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Sydney was the epicenter of a five-year boom and prices are still about 60 percent higher than they were in 2012. That means few existing homeowners are underwater, and the major banks -- which dominate about 80 percent of the mortgage market -- have plenty of buffer before losses would bite.

Yet with some economists tipping a further 10 percent fall in prices in Australia’s most populous city, policy makers are growing nervous. The central bank is worried that a prolonged downturn will drag on consumption and warned last month that the major banks risked amplifying the slump if they all pulled back credit at the same time.

Australia’s prudential regulator last month announced it was dropping a cap on interest-only mortgage lending, loosening credit curbs that have contributed to the downturn.

Across the country, house prices have now fallen 5.2 percent from their October 2017 peak. Sydney led last year’s declines, with values dropping 8.9 percent, followed by a 7 percent fall in Melbourne, according to CoreLogic.

With elections expected in May, and the main opposition Labor party pledging to curb tax perks for property investors if it wins, confidence is likely to be hit further, Lawless said...

THE FAR-REACHING CONSEQUENCES OF OPAL TOWER: NEWS.COM.AU

ould Australia be on the brink of a building quality crisis that causes a meltdown in apartment Cprices and harms the very fabric of Australian cities? Cracking in Sydney’s four-month old Opal Tower caused the building to be evacuated and left 51 units unsafe to occupy. The specific reasons for cracking in this case are still being investigated. But, experts say, the conditions that permitted the problem apply across large parts of the industry.

On Sunday, the New South Wales Government announced a safety audit of private building certifiers and constrution sites to attempt to restore confidence in the state’s residential skyscrapers. But it could be too little, too late.

The building industry is rife with rushed jobs, shortages of skilled tradespeople, relentless cost pressure and regulations that are not being enforced. Falling house prices this year likely exacerbated the rush as developers tried to finish projects before their competitors.

The pipeline of higher-density developments is still near record highs, as the next graph shows. As these buildings are finished and occupied, we may discover the horrendous structural failures inside Opal Tower are the first of many. If so, the impact on Australian real estate could be devastating.

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Apartment defects are common in Australia — one study found 85 per cent of all newer apartments have defects, most often leaks. To some extent this is expected; houses and offices also tend to have cracks and leaks. I live in a house that moves and has cracks, and I expect the same is true of most of us.

Buildings will normally have more quality problems than something like a car. They are not precision-made inside factories. Buildings are unique, made on their own sites with their own drainage and soil conditions. They are put together by a diverse group of people, mostly working outdoors, in a range of conditions. Expecting perfection is unrealistic.

What is important is that faults are minimised and fixed swiftly. It is also crucial that incentives are designed so developers and builders know they will suffer if their work is shoddy.

“They are complex buildings, they are big, we haven’t done these things before and they’ve been built quickly because there’s a boom on. But there is a whole structural problem with the way in which we produce these buildings,” said University of NSW City Futures Research Centre director Bill Randolph.

The incentives were “split” because the developer was not holding for the long term.

“Once they’ve sold it and got out of the thing, there is no thought about what happens over the next 30, 40, 50, 60 years,” Professor Randolph said.

“In this business it is in, and out, and off.”

The second layer of the problem is the way responsibility is diffused over architects, builders, subcontractors, engineers and certifiers.

“All along the way, there are a whole range of decisions being made by people who have no interest in the whole of the project but are crucial to what might happen,” Professor Randolph said.

“I’m old enough to remember working on building sites when I was a lad. And there’d be a clerk of works who oversaw the whole thing from start to finish, who kind of patrolled and policed the site … They don’t have those things any more. The best they have is a project manager who comes down every so often in a nice suit with a laptop and a spreadsheet.”

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ARE WE TALKING BUILDING COLLAPSES?

No. Australia is not likely to have the same problems as China where high rise buildings literally topple over.

Our standards may be imperfect but they are far higher than that. Structural problems don’t mean a building coming down in a pile of dust. Structural failures can make a building uninhabitable well before it gets to that, thanks to leaks, gaps, or being unable to open doors and windows.

In some cases they can be fixed without demolition. But it always takes significant expense...

THE MALAYSIA SCANDAL IS STARTING TO LOOK DIRE FOR GOLDMAN SACHS: ROLLING STONE

oldman Sachs, which has survived and thrived despite countless scandals over the years, Gmay have finally stepped in a pile of trouble too deep to escape. There’s even a Donald Trump angle to this latest great financial mess, but the outlines of that subplot – in a case that has countless – remains vague. The bank itself is in the most immediate danger.

The company’s stock rallied Thursday to close at 165, stopping a five-day slide in which the firm lost almost 12 percent of its market value. The company is down 35 percent for the year, most of that coming in the past three months as Goldman has been battered by headlines about the infamous 1MDB scandal.

Just before Christmas, Malaysian authorities filed criminal charges against Goldman, seeking a stunning $7.5 billion in reparations for the bank’s role in the scandal. Singapore authorities also announced they were expanding their own 1MDB probe to include Goldman.

In the 1MDB scheme, actors tied to former Malaysian Prime Minister Najib Razak allegedly siphoned mountains of cash out of a state investment fund. The misrouted money went to lavish parties with celebrity guests like Alicia Keys, a $35 million jet, works by Monet and Van Gogh, property in New York, Los Angeles and London, and (ironically) the funding of the movie The Wolf of Wall Street.

The cash for this mother of all bacchanals originally came from bonds issued by Goldman, which earned a whopping $600 million from the Malaysians. The bank charged prices for its bond issuance that analysts believe were suspiciously high – like a massage price that suggests you’re probably getting more than a massage.

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Najib lost re-election in May, ending a 61-year reign for his party. National anger over 1MDB was a major reason for his downfall. The prime minister was allegedly central to the scam, which involved luring investors to national development projects that mostly never took place.

His election loss was a turning point. Until that time, international authorities had been unable to obtain cooperation from the Malaysian government, which under Najib insisted no crime had been committed.

Najib was one of the first world leaders to congratulate Donald Trump on his win in 2016. At least at one time, the two men were pals. They golfed together once at the Trump National Golf Club in Bedminster, New Jersey. Najib even claimed he had an autographed photo on his desk from Trump reading, “To my favorite Prime Minister. Great win!” Trump hosted Najib at the White House last year, thanking the soon- to-be-ousted leader for “all the investment you’ve made in the United States.” Najib appeared to stay at one of Trump’s hotels on that trip.

On November 30th of this year, the Justice Department filed a civil forfeiture suit targeting more than $73 million funneled into the country by 1MDB players. There is email evidence the money may have been intended to help influence the Trump administration to drop the case.

But Najib’s electoral loss changed the picture. With his ouster, the new Malaysian government was suddenly eager to help outside investigators.

“It completely reversed the situation,” says John Pang, a former policy adviser to the prime minister’s office in Malaysia. “Before, you essentially had the victim saying there was no crime. Now, you had the Justice Department meeting with a 1MDB task force in Kuala Lumpur.”

The change resulted in a string of new indictments, suits and prosecutions surfacing in the second half of 2018. At year’s end, Goldman is known to be under investigation in the U.S., Singapore and Malaysia, while 1MDB probes are ongoing in at least 10 countries. Goldman has seen two ex-employees criminally charged in the U.S. since the summer, one of whom pleaded guilty.

What really set Wall Street afire was a pair of fall revelations. On November 8th, the Wall Street Journal reported longtime Goldman CEO Lloyd Blankfein – who stepped down on October 1st to “pursue other interests” – met on more than one occasion with one of the most infamous figures in the 1MDB scandal, Low Taek Jho, better known as “Jho Low.”

In that same week, Bloomberg reported Blankfein was an “unidentified high-ranking executive” in court filings associated with the case.

This was devastating news. The key question about 1MDB had always been whether the thefts were the actions of a few “rogue” bankers in a foreign outpost, or if the scam snaked higher.

Things that make you go

The mere mention of Blankfein’s name in conjunction with a 1MDB court filing sent Goldman’s share price into freefall.

The closing price of Goldman stock on November 8th was $231.65. By November 12th, after investors had a weekend to digest the WSJ and Bloomberg articles, it had fallen to $206.05, reaching a low of $151.70 before bouncing back up a bit this week.

Goldman has been forceful in addressing the charges that Blankfein met with Low. Reached for comment this week, the bank said it has identified three meetings at which Low might have been present, but has only been able to confirm Low’s presence at one.

“Mr. Blankfein had an introductory, high-level meeting in December 2012 with the CEO of Aabar, which was an existing client of the firm,” says company spokesman Michael DuVally. “At Aabar’s request, Mr. Low accompanied the CEO to that meeting.”

Duvally insists, however, that the firm has no evidence of any contact more extensive than that.

“Mr. Blankfein does not recall any one-on-one meeting with Mr. Low, nor have we seen any record to suggest such a meeting occurred.”

In December, outside analysts predicted the bank might need to set aside $1 billion or more for penalties. The company is having ongoing conversations with the Justice Department, but has not discussed numbers yet.

In addition to the Malaysian action seeking $7.5 billion, the company is facing two more class-action lawsuits filed by investors, and a significant amount of negative press.

For all that, the scandal is still not well understood. 1MDB was a twist on third-world kleptocracy, one that exposed a new flaw in the global financial system.

Dictators have always plundered national riches. But they could only steal assets that existed. For instance, in former Zaire, now the Democratic Republic of Congo, Mobutu Sese Seko shifted profits of mineral sales to private accounts. In the Philippines, Ferdinand and Imelda Marcos swiped proceeds of sales of sugar, tobacco, bananas, coconuts and everything else they could get their hands on. Saddam Hussein stole oil revenues.

Malaysia is rich in copper, timber and oil. But Najib and his cohorts didn’t have to steal any of those resources.

“He didn’t steal diamonds or bananas. He stole debt,” says Pang. “This is something completely new. And he couldn’t have done it without a bank the size of Goldman.”...

Things that make you go

EMPTY HOMES AND PROTESTS; CHINA’S PROPERTY MARKET STRAINS THE WORLD: NY TIMES

or Hu Peiliang, Jurong was a city of cranes, concrete and opportunity. He was so sure it was Fon the cusp of a boom that last year he moved his family there. On an overcast day last month, Mr. Hu, a 31-year-old real estate agent, pointed to one new building after another as evidence. New city blocks have been built, crosswalks and streetlights erected overnight. One development straddling several blocks called Yudong International will include 120 buildings when completed.

But who will buy all those apartments? Mr. Hu paused before answering. “I was wondering that myself,” he said. Since July, he has sold only a handful.

Unwanted apartments are weighing on China’s economy — and, by extension, dragging down growth around the world. Property sales are dropping. Apartments are going unsold. Developers who bet big on continued good times are now staggering under billions of dollars of debt.

“The prospects of the property market are grim,” said Xiang Songzuo, a senior economist at Renmin University, said during a lecture at Renmin Business School this month.

“The property market is the biggest gray rhino,” he said, referring to a term the government has used to describe visibly big problems in the Chinese economy that are disregarded until they start gaining momentum.

China is grappling with an economic slowdown brought on by efforts to curb debt and worsened by the trade fight with the United States. But any solution will have to contend with the country’s property problems. More than one in five apartments in Chinese cities — roughly 65 million — sit unoccupied, estimates Gan Li, a professor at Southwestern University of Finance and Economics in Chengdu.

“We are already in a difficult economic situation,” Mr. Gan said. “The decline will only get worse.”

Things that make you go

In places like Jurong, homeowners are paying the price. Some property developers have slashed prices on new apartments to gin up business or cut corners to save money. That undercuts the property values of earlier buyers, who increasingly are taking to the streets to protest.

In October, dozens of apartment buyers in Jurong gathered outside the sales office of Center Park, a 22-building residential complex pitched by Country Garden, the developer, as China’s version of Central Park in Manhattan. Security guards barricaded the entrance to prevent protesters from storming the building to demand their money back.

“I am very angry,” said Jia Rui, 24, who bought a Center Park apartment a year ago. He watched last year as property prices rose for months before deciding to buy the apartment, which will be bigger than the one he currently lives in with his wife and parents. When he learned that similar apartments were later being sold at nearly half the price, Mr. Jia said, he felt helpless.

“It is not possible to get a refund,” Mr. Jia said. Then again, he added, Jurong will have a subway line connecting it to Nanjing, a major city, by 2023. “Maybe the price will go back up by then,” he said.

China’s property market has long been a wild ride, driven by speculation from property developers and home buyers alike and made worse by government efforts to tame prices if they get too high and juice sales if they get too low. The current slowdown stems in large part from a three-year building spree driven by a surge in prices in many cities. Officials struggled to contain a white-hot property market with measures that included open consideration of a national property tax.

“You never know when the music will stop in China, so you try to do as much as possible before the music stops,” said Nicole Wong, a property analyst at CLSA, a stock brokerage. “Which it did.”

Housing is key to China’s well-being. It accounts for roughly one-fifth to one-third of China’s economic growth, depending on whether ancillary industries like construction and furniture-making are included. Property is the largest source of wealth for households, a given in a country with strict rules against moving money overseas and a volatile stock market. In major cities, it sometimes accounts for as much as 85 percent of a family’s assets, according to researchers at Southwestern University.

That store of wealth is looking increasingly shaky. Sales in terms of gross floor area on the market have dropped sharply since September. The share of apartments in new developments that are being sold has plunged since the summer. The number of failed land auctions has doubled this year, indicating that property developers are unwilling or unable to buy land for new developments.

Now people are angry, and Chinese officials and property developers are doing something about it. Officials tried various measures to take steam out of the market last year and are now reversing some of them.

Things that make you go

In recent months, they have loosened mortgage requirements, eased restrictions on when homeowners can resell their properties and made it easier for university students to continue living in the cities where they are studying after they graduate, potentially increasing housing demand. In some cities, property developers have cut deals with home buyers to give them back the difference between the current price and the one they originally paid...

NEW YEAR, OLD PROBLEMS FOR ITALY’S BANKING SECTOR: FT

talian finance is ending 2018 with a cliffhanger. The collapse of a capital raising at midsized Ibank Carige could lead it to be put into resolution next year. It also risks wider repercussions, adding to investor jitters about Italy and fanning populist anger over banks and big business.

The Malacalza family, steel billionaires with a 27.7 per cent stake in Carige, abstained from voting for an emergency €400m capital increase at a shareholder vote on Saturday. The family had already twice changed the management team and lost hundreds of millions of euros in earlier attempts to shore up the bank after a fraud scandal left a hole in its balance sheet.

But the decision was still unexpected. The capital call was the third leg of a deal agreed with supervisors to keep the bank alive. A new bond and new business plan had already been agreed. The European Central Bank had given Carige until the end of the year to close a capital shortfall or find an acquirer. Time is running out.

Of course, Italy’s banking system has been here before. Two years ago almost to the day, Italy ended the year on tenterhooks after a JPMorgan rescue of Monte dei Paschi di Siena, then Italy’s third-largest bank by assets, collapsed after a €5bn capital raising failed to secure an anchor investor.

Five months later, and the Italian state had fashioned a €8.8bn rescue for Monte dei Paschi. Within weeks, two Veneto banks on the ropes were wound down under Italian insolvency laws.

Carige could suffer the fate of the Veneto banks, unless some white knight — the government or a buyer — rides to the rescue in the coming weeks. Even Carige chairman Pietro Modiano struggled to put a brave face on the fiasco. According to Italian press reports, he was overheard saying to another board member on Saturday: “There isn’t time, they’ll kill us all”.

The first test will come from the market when the Milan stock exchange reopens on Thursday. The risk remains, of course, that depositors move faster than the market when bank branches reopen the same day. Retail investors have already begged the government for a state rescue. Another possibility is that Italy’s banking system, which owns €320m of Carige debt through the interbank deposit guarantee fund, could convert that into equity, in effect taking ownership.

Things that make you go

Carige, Italy’s 10th largest bank by assets, is no Monte dei Paschi, or even the Veneto banks, in terms of size. It had €16.3bn of deposits at the end of September and its market value is just €89m. Arguably, overbanked Italy should seize the chance to close an ailing bank. Yet the timing of the debacle threatens to have a bigger impact on investor confidence than Carige’s size might suggest.

Investors have been rattled about Italy after inconclusive March 4 elections ultimately gave rise to an anti-establishment, anti-EU populist coalition government. Italian banks have been in the front line of those concerns.

As big owners of Italian sovereign debt, widening spreads on Italian bonds have had an immediate impact on their balance sheets. In a clear sign of the sector’s discomfort, Italy’s largest bank UniCredit priced a new $3bn bond in November at about 4.2 percentage points over the euro swap rate. Business leaders have reported that bank credit was already being squeezed as the lenders sought to cling to capital by making fewer loans. A failure of Carige would fan those market concerns. But the bigger impact may be a social and political one.

Italy’s Five Star-League government rose to power on anti-bank, anti-establishment rhetoric that won votes among people who had lost money as a result of the crises at Monte dei Paschi and the Veneto banks. One of the pledges of the governing coalition has been to put aside €1.5bn to compensate those who lost money either as a depositor or investor in the banks. That promise has gained them support in the Veneto and Siena, ground zero of Italy’s bank crises.

Another bank crisis, or a bank run, at Carige could fan that support for populists going into crucial European parliamentary elections in May. Anger in Carige’s home town of Genoa is already high after 43 people died when a bridge in the city collapsed in August, which populist politicians blamed on negligent big business.

Senior leading Eurosceptic government members have already said that a strong showing in the European vote would presage a bigger clash with EU authorities and boost anti-EU sentiment — a move that would only ratchet up the pressure on Italian banks’ balance sheets...

Jan 02, 2019

Temporary administrators have been appointed to troubled Italian lender Banca Carige after a majority of its board members resigned on Wednesday.

The European Central Bank announced the decision to appoint three temporary administrators and a surveillance committee to replace Banca Carige’s board of directors and “take charge” of the lender, after executives quit and the mid-sized lender missed a deadline to shore up its financial health.

Things that make you go

Last month the lender failed to raise an emergency €400m after the Malacalza family, the billionaire shareholders that hold nearly a third of Carige, abstained from a shareholder vote on the turnround plan.

The capital call had been an effort to keep the bank afloat after a fraud scandal hit its balance sheet, and the ECB gave it until the end of 2018 to either close a capital hole or find an acquirer.

On Wednesday, the ECB said a majority of Carige’s board members — including its chief executive — had resigned. It was necessary to take action to “stabilise its governance and pursue effective solutions for ensuring sustainable stability and compliance,” the central bank said.

The move removes Banca Carige’s independent management and control bodies. The administrators will report back to the ECB “continuously” and take action to ensure it “restores compliance with capital requirements.”

Fabio Innocenzi, Pietro Modiano and Raffaele Lener have been appointed as temporary administrators while Gianluca Brancadoro, Andrea Guaccero and Alessandro Zanotti have appointed as members of the surveillance committee.

INTERVIEWS WITH PAUL TUDOR JONES, LOUIS BACON, BRUCE KOVNER: THE ZIKOMO LETTER

What’s so special about macro hedge fund managers?

(PTJ): I love trading macro. If trading is like chess, then macro is like three-dimensional chess. It is just hard to find a great macro trader. When trading macro, you never have a complete information set or information edge the way analysts can have when trading individual securities. It’s a hell of a lot easier to get an information edge on one stock than it is on the S&P 500. When it comes to trading macro, you cannot rely solely on fundamentals; you have to be a tape reader, which is something of a lost art form. The inability to read a tape and spot trends is also why so many in the relative-value space who rely solely on fundamentals have been annihilated in the past decade. Markets have consistently experienced “100- year events” every five years. While I spend a significant amount of my time on analytics and collecting fundamental information, at the end of the day, I am a slave to the tape and proud of it.

Is it possible to teach someone to be a tape reader – what some might call a trend follower or technical analyst?

Things that make you go

(PTJ): Certain people have a greater proclivity for it because they don’t have the need to feel intellectually superior to the crowd. It’s a personality thing. But a lot of it is environmental. Many of the successful macro guys today, they’re all kind of in my age range. They came from that period of crazy volatility of the late ’70s and early ’80s, when the amount of fundamental information available on assets was so limited and the volatility so extreme that one had to be a technician. It’s very hard to find a pure fundamentalist who’s also a very successful macro trader because it is so hard to have a hit rate north of 50 percent. The exceptions are in trading the very front end of interest rate curves or in specializing in just a few commodities or assets.

What’s your take on the next generation of managers?

(PTJ): I see the younger generation hampered by the need to understand and rationalize why something should go up or down. Usually, by the time that becomes self-evident, the move is already over. When I got into the business, there was so little information on fundamentals, and what little information one could get was largely imperfect. We learned just to go with the chart. Why work when Mr. Market can do it for you? These days, there are many more deep intellectuals in the business, and that, coupled with the explosion of information on the Internet, creates the illusion that there is an explanation for everything and that the primary task is simply to find that explanation. As a result, technical analysis is at the bottom of the study list for many of the younger generation, particularly since the skill often requires them to close their eyes and trust the price action. The pain of gain is just too overwhelming for all of us to bear!

You’re not necessarily a fan of hiring people straight out of business school.

(PTJ): Today there are young men and women graduating from college who have a tremendous work ethic, but they get lost trying to understand the logic behind a whole variety of market moves. While I’m a staunch advocate of higher education, there is no training – classroom or otherwise – that can prepare for trading the last third of a move, whether it’s the end of a bull market or the end of a bear market. There’s typically no logic to it; irrationality reigns supreme, and no class can teach what to do during that brief, volatile reign. The only way to learn how to trade during that last, exquisite third of a move is to do it, or, more precisely, live it – a sort of baptism by fire. One has to experience both the elation and fear as markets move five and six standard deviations from conventional definitions of value.

How will macro investing fare over the next five years?

(PTJ): The macro space will be great. I think we’re going into one of those slow or zero-growth periods in the U.S., which will give us a lot of volatility.

Will hedge funds do as well as they have done in the past?

Things that make you go

(PTJ): Average returns will drop. The amount of money that was made by hedge funds in the past two decades was so outsize relative to anything in civilization in the past couple of centuries that it naturally attracted the best intellectual capital in the world. As a result, the inefficiencies that existed in the ’70s and ’80s and even the ’90s are not as readily seen. But in this business there will also always be that upper tier – that top 10 or 20 percent of managers who will outperform everyone else.

What experience had the biggest impact on your career?

(PTJ): Trading commodity markets back in the late ’70s – when they were still extraordinarily volatile – allowed me to experience repeated bull and bear markets across a variety of different instruments. Remember, in agricultural markets the cycle can be just 12 months. I lost my stakes a couple of times, which taught me risk control and risk management. Losing those stakes in my early 20s gave me a healthy dose of fear and respect for Mr. Market and hardwired me for some great money management tools. Oh, incidentally and by necessity, I became a pretty good fundraiser, which has helped me in the not-for-profit world.

Who’s had the biggest influence on your career?

(PTJ): My first boss and mentor, Eli Tullis, of New Orleans. He was the largest cotton speculator in the world when I went to work for him, and he was a magnificent trader. In my early 20s, I got to watch his financial ups and downs and how he dealt with them. His fortitude and temperament in the face of great adversity were great examples of how to remain cool under fire. I’ll never forget the day the New Orleans Junior League board came to visit him during lunch. He was getting absolutely massacred in the cotton market that day, but he charmed those little old ladies like he was a movie star. It put everything in perspective for me.

What was your single best trade or investment?

(PTJ): Probably buying March put options on the Japanese stock market in early February of 1990. The volatility was an absurd 5 percent, owing to the newness of the options market, with which many Japanese had little experience. Much like the U.S. stock market just before the 1929 crash, the Japanese stock market in early 1990 was following the same price pattern with remarkably similar fundamentals and valuations that provided enormous profit opportunities in a truncated period of time. I actually felt sorry for the people who were on the other side of that trade when I was buying those puts.

Your biggest missed chance?

(PTJ): I missed the subprime opportunity of 2007, and it rankles me every time I hear the term. We have studiously avoided mortgages at Tudor specifically because it is a big-carry game that does not adequately compensate for the inherent tail risk. That unfamiliarity, though, came with a huge opportunity cost.

Things that make you go

IF MACRON FAILS, EUROPE FAILS: DER SPIEGEL

amed German political sociologist Max Weber once argued that the two great drivers of Frevolutionary power were charisma and rationality. Charisma depends on enthusiasm, rationality on intellectualization. According to this blueprint, Emmanuel Macron would seemingly be the ideal revolutionary. He combines charisma and intellect like few others and believes in the need to change France, Europe and the world. The book about his campaign is called simply: “Révolution.” Macron sees himself as a know-it-all in the best sense of the term, but precisely that is also his greatest weakness. Nowhere did Weber write that charisma and intellect magnify each other when combined. A glance at the trajectory of Macron’s popularity in France might lead to the assumption that the two qualities cancel each other out. Can a charismatic leader be a know-it-all? Can a know-it-all have charisma?

Many French people now see Macron’s election to the presidency as something of an accident. Emmanuel Macron had no party, little experience, and lots of luck. His political opponents destroyed each other. Indeed, polls show that far less than half of Macron’s voters in spring 2017 voted for him out of conviction. The rest of his voters, though, indicated that the other candidates, Marine Le Pen first and foremost, were simply unelectable.

Luck is not a factor in Max Weber’s discussion of charismatic rulers. Macron, who suddenly became head of state at the age of 39, first needed to develop his authority. And he did so with a clear strategy, setting out doing so with single-minded determination, seeking to develop charisma through images and symbols, and to carry out his revolution through shrewd argumentation. He put himself at the epicenter of French politics. As a candidate, he was alone. And he remained so as president. But this over-personalization had its price. Macron’s system relied on the complete centralization of power in the hands of the president and of a few intellectually gifted advisors, who sometimes send out text messages at 3 a.m., as Macron does himself. Macron’s IQ-absolutism was successful in his first year. The furthest-reaching job-market reforms in recent French history, which he instituted in fall of 2017, didn’t even lead to a general strike, as had been feared.

Macron loosened the rules for firing employees and broke up the rigid wage-negotiation system. He simultaneously lowered the budget deficit below the 3-percent mark for the first time since 2007. He even modernized the sacrosanct French secondary-school diploma, known as the baccalauréat. Emmanuel Macron has already reformed his country more profoundly than all the presidents before him -- at least since Mitterrand, who implemented an important wave of modernization starting in 1983.

Things that make you go

Macron is proud of his reforms. Rightly so. He believes these reforms will bring growth back to France. Rightly so. He also believes that new growth in France will repair the social imbalances in the country. Rightly so. But Macron is forgetting about the span of time required between reform, growth and social justice.

Many French don’t want to wait. They want results. Immediately. The yellow vests don’t have a face, but they have charisma. And they are united in anger. They want a revolution and they want more net income. They don’t care what this might mean economically for their highly indebted country. They loathe the self-proclaimed revolutionary at the top, his aloof reliance on symbols, his know-it-all revolutionary rationality. Although the Élysée’s arguments are technocratically coherent, the gilets jaunes confront them with brutal simplicity: If you abolish the wealth tax but raise the price of diesel by six cents per liter, you are an enemy of the people.

One-and-a-half minutes into his address to the nation last Monday, Macron took a deep breath and addressed those whom he had forgotten: the single mothers, the job-seekers, the excluded. The mea culpa was followed by the checkbook, with Macron pledging to raise the minimum wage, introduce a tax exemption for overtime pay and lower social-welfare contributions for pensioners. It was a classic Macron moment -- empathy paired with technocracy, symbolism paired with facts, charisma paired with rationality. Can this approach work? Definitely. But only if Macron can win back his authority.

The hatred of the yellow vests will not disappear immediately. On the other hand, though, the movement has no leverage to derail the Macron system. The government has confronted the violence of the demonstrators with severity, but no political movement has yet emerged. Even if such a movement were born, it would have no influence. Macron is relatively secure in the Élysée until May 2022 and he enjoys absolute majority in parliament. He has no coalition partners to keep happy and no reason to fear a no- confidence vote...

IN 2019, THE ‘TECHLASH’ WILL GO FROM STRENGTH TO STRENGTH: POLITICO

When it came to tech, 2018 was a cracker. Facebook fumbled its way from scandal to scandal. Google was slapped with another record antitrust fine over its Android mobile software. And officials in Brussels, Washington and elsewhere struggled to get their heads around how tech went from a legislative sideshow to the center of policymaking worldwide.

For those hoping the new year will bring respite from this ‘techlash,’ I have bad news: We’ve only just begun.

Things that make you go

No matter where you look — from early-stage European Union investigations into Amazon and Facebook to potential federal privacy legislation in the United States — the era of laissez-faire policymaking on tech has come to an end.

In its place, politicians are taking their battle with Silicon Valley’s biggest names to the next level, while doing all that they can to support domestic digital programs and local startups as the digital economy becomes central to the wider economy.

As 2019 approaches, the list of upcoming regulatory stand-offs feels never-ending.

Facebook (which outmuscled Google this year to become the tech giant everyone loves to hate) faces a slew of regulatory investigations into its Cambridge Analytica scandal, privacy sanctions under Europe’s new data protection rules and its role in the spread of misinformation in elections around the globe.

Margrethe Vestager, Europe’s competition czar, is in a race against time before her tenure ends at the European Commission to complete a series of investigations into many of the world’s largest tech firms. The U.S. Congress — never known for its willingness to regulate tech — is slowing waking up to the fact that it may need to act.

And from France to the Philippines, lawmakers are fast-tracking new rules aimed at curbing the power of Big Tech. From laws to tackle “fake news” to demands that firms pay more tax into national coffers, policymakers are eagerly trying to rejigger the playing field, all while most of these countries’ voters continue to embrace the latest tech wizardry faster than you can say “Hey, Alexa.”

With so much on deck, it’s easy to miss the big picture. Here are four predictions for 2019 to help guide you through what awaits us next year.

Tech nationalism

Gone are the days when tech was supposed to save the world.

Now, national lawmakers want to know how some of the world’s biggest tech companies are going to help them at home — either through paying more out in taxes (France’s new digital levy on Facebook and Google comes into force on January 1) or by investing in local operations, which can offer both high-tech jobs and digital know-how for countries’ national tech industries.

It doesn’t stop there. Expect to see politicians putting increasingly tough restrictions on who can acquire domestic tech players as the battle for talent, intellectual property and investment ratchets up amid the growing importance of digital industries to countries’ future economic prosperity. That already has started to happen with Germany, the United Kingdom and the U.S. balking at Chinese players scooping up national champions.

It’s the start, not the end, of such strategies.

Things that make you go

Even as Western allies look to outdo each other on tech, the era of digital cooperation will likely be tested to its limits as governments move to impose national laws on the internet age.

Data as a toxic asset

It’s become a cliché to claim data is the ‘”oil of the 21st century.” But now that Europe’s revamped data protection rules are in full swing (and tens of thousands of complaints have been filed across Europe), this seemingly never-ending pot of digital information is starting to look a lot less appealing — even if it still underpins the online digital advertising industry, or the main cash cow that keeps the digital economy running.

Already, competition authorities are investigating whether the collection of large amounts of information by a few tech firms (Facebook, Google and, increasingly, Amazon dominate the online ad world) could represent unfair competition. The first blockbuster fines under Europe’s General Data Protection Regulation, or GDPR, will likely be doled out in the second half of 2019.

And with new data breaches and online hacks revealed daily, the vast treasure troves of data that companies now hold on us may soon leave them open to almost limitless regulatory risk.

Public awakening to tech’s ugly side

Last year, I predicted policymakers and consumers would diverge on how they viewed Big Tech, with officials taking a significantly more skeptical line than the tech-mad voters. That held true for most of 2018. But as we head into the New Year, serious cracks are starting to show in people’s faith in Silicon Valley — and those will expand even further amid increasing regulatory pressure on how these firms operate globally.

In the U.S., for instance, a recent Pew Research Center study found that while roughly three-quarters of people still believed tech companies and their products had more of a positive impact than a negative one on their own lives, almost one-third of the same individuals now thought these firms had a harmful effect on the wider society.

Sure, that’s not a tidal wave of users running to the door — at least, not yet. But with investors pushing Facebook’s stock price down more than 20 percent this year and people from Lyon to Los Angeles openly questioning the role these players have in their daily lives, the optimistic drumbeat that surrounded the tech industry for years is coming to an end.

Misinformation, on steroids

With both India and the EU heading to the polls in two of the world’s largest-ever elections next May, 2019 marks the biggest test to date for how social media companies and governments worldwide confront digital misinformation. It’s not going to be pretty...

Things that make you go

CHARTS THAT MAKE YOU GO HMMM...

Bloomberg World Stock Market Cap Index vs Fed Balance Sheet ($tln) Jan 2014 - Jan 2019 88000 5

85000

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4 55000 2014 2015 2016 2017 2018

Source: Bloomberg

reat chart inspired by @yotavcos on Twitter which demonstrates conclusively the effect the GFed’s reduction of its balance sheet has had is having on world equity market capitalization. A $350bln reduction by the Fed has wiped about $18 trillion from the Bloomberg World Stock Market Cap Index.

Cause and effect...

Things that make you go

any of Netflix’s most Mpopular shows are owned by companies that plan to compete with Netflix. Which means many of those shows may vanish from the streaming service in the next few years.

So if you like watching “The Office,” “Grey’s Anatomy” or “Gossip Girl” on Netflix, you should enjoy them while you can. More than half of the 50 most popular shows on Netflix are owned by companies planning to launch their own streaming services — Disney (and its to-be-acquired Fox), NBCUniversal and WarnerMedia — according to data from analytics firm Jumpshot. Jumpshot measures online views of Netflix TV shows and movies by tracking the web pages its panel of users visit. The top 50 Netflix shows account for 42 percent of all Netflix views, according to Jumpshot.

But just because a Netflix competitor has a popular show on Netflix doesn’t mean they’ll take it away from Netflix: They could also charge Netflix a lot of money for it. Last month, for instance, Netflix shelled out $100 million to WarnerMedia for exclusive rights through 2019 to “Friends,” a show that first aired a quarter of a century ago.

That deal makes more sense when you learn that “Friends” is the second-most-watched show on all of Netflix, with about 4 percent of total views this year, according to Jumpshot. The most-watched show is NBCU-owned “The Office” (U.S. version), which accounts for about 7 percent of all views...

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Things that make you go

s CFOs draw close to 2019, they harbour a cautious outlook amid global economic uncertainty Afor the New Year. Key priorities that feature top of mind include turning their attention to recruitment challenges, technological investment and limiting business risk

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Things that make you go

WORDS THAT MAKE YOU GO HMMM...

ake a trip down memory lane with this Tmarvelous video of Louis Rukeyser’s Wall Street Week from December 1990 which features a youthful Jim Grant as well as Ralph Acampora, Marty Zweig and Louis Holland...

tanley Druckenmiller discusses Sthe outlook for the U.S. economy, his investment strategy for stocks and bonds, President Donald Trump’s attempts to sway Federal Reserve policy and the prospects for a solution to the U.S.-China trade dispute in this long-form interview with Bloomberg’s Erik Schatzker. CLICK TO WATCH PART I CLICK TO WATCH PART II Finally, someone is getting the message that long-form content has an audience! Who knew ;) year ago, I visited my friend, Marc ACohodes, at his farm in Sonoma County, CA, to talk about the art of short-selling. CLICK TO WATCH

That conversation had a profound effect on me and, in it, Marc called out MiMedx as a gigantic fraud – an accusation which has since been proven spectacularly accurate.

As I prepare to go back to Sonoma in a couple of weeks to film the MiMedx story with Marc, it felt like a good time to offer you a reminder of our original conversation. Stay tuned... CLICK TO WATCH

Things that make you go

AND FINALLY... and finally

CLICK TO VIEW

his collection of winning photographs from T2018’s UK and international wildlife photography competitions is truly magical.

What better way to begin the year than by enjoying nature in all its glory...

About The Author

uch to his chagrin, Grant Williams Mhas reached 30 years in finance. Over that period, he has held senior positions at a number of investment banks and brokers including Robert Fleming, UBS, Banc of America and Credit Suisse in locations as diverse as London, Tokyo, New York, Hong Kong, Sydney and Sin- gapore. From humble beginnings in 2009, Things That Make You Go Hmmm... has grown to become one of the most popular and widely-read financial publications in the world. Grant is a senior advisor to Vulpes In- vestment Management in Singapore, an advisor to Matterhorn Asset Manage- ment in Switzerland and also one of the founders of Real Vision Television—an online, on-demand TV channel featuring in-depth interviews with the brightest minds in finance. A regular speaker at investment con- ferences across the globe, Grant blends history and humour with keen financial insight to produce unique presentations which have been enthusiastically received by audiences wherever he has traveled.

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