Riches Among the Ruins

No Economy is too small, no political crisis is too dire, and no country is too bankrupt for a solo operator like me to find riches among the ruins.

-Robert Smith

Riches Among the Ruins: Adventures in the Dark Corners of the Global Economy is an incredibly entertaining bottom up look at frontier market crises over the last 3 decades from the perspective of a travelling distressed debt trader.  Each chapter is dedicated to Robert Smith’s experience in a particular country: El Salvador, Turkey, Russia, Nigeria, Iraq, etc, etc. Each country is unique, but Smith’s weaves several key lessons throughout his memoir.

Anyone who seeks  profits in inefficient markets could benefit from Smith’s experience.

Information vacuums are key for middleman and arbitrageurs

In the mid 1980s no one had any idea what an El Salvador bond was worth- which is to say, they had no idea what value others might attach to it. The ignorance, this information vacuum, was my bliss. The seller’s price was simply a measure of how desperately he wanted to dispose of a paper promise of the government of El Salvador, and the buyer’s measure of how eager he was to convert his local currency into a glimmer of hope and seeing dollars down the road. The spread, my profit, was the difference between the two. In a fledgling market, with no reporting mechanisms and precious little information floating around, the spread can be enormous, and there was no regulatory or legal restrictions on how much you could make on a transaction.

Though my sellers and buyers, usually the representative of foreign companies doing business in El Salvador, often knew each other , played golf together, or broke bread together at American Chamber of Commerce breakfasts, I knew it would take some time before they eventually started to compare notes. At the beginning I doubt any of them even mentioned they were trying to sell or buy El Salvador bonds because the market didn’t exist yet. But until the market matured it was a gold rush, and I developed a monopoly on that most precious of all commodities in any market: information. I found out who wanted to sell, who wanted to buy and their price, and I held that information very tight to the vest.

In some cases buyers and sellers were on different floors in the same office building, or different divisions of the same global corporation.  The biggest challenges for foreign companies doing business in the developing world was converting local currency revenues back into dollars.  One way to get money out was to buy dollar bonds at fixed exchange rate and over time collect principal and interest in dollars.

Creativity and information edge: Struggles over bondholder lists

In almost every country, Smith, goes through difficulty to get the list of people holding the bonds in which he was seeking to make a market. Arbitrageurs and brokers who had access to the list guarded it aggressively, because it gave them an edge in acquiring positions at a discount, or profiting as a middleman. This was a key bit of information, available from connections at the Central Bank or other places.

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History Repeats: The Serpent on the Rock

“History Repeats.  The first time as a tragedy, the second time as a farce.”

– Karl Marx(1)

There are amusing parallels between the rise and fall of the real estate private partnership market in the 1980s, the pre financial crisis tenant in common(TIC) syndication market, and  the post financial crisis non-traded REIT market driven by Nick Schorsch and his AR Global empire.

Each episode involved high fee investment products designed to fulfill investor desires for yield, tax efficiency and perceived stability, while creating disproportionate benefits for intermediaries.  Each episode ended badly.  And the cycle repeats, again and again.

First of all, the charts tell parallel stories:

Real Estate Limited Partnerships 1970-1991

Real Estate Limited Partnerships

Source: Obstacles and opportunities in the establishment of a secondary market for real estate limited partnerships  


TIC Equity raised 2001-2012:

Tenant In Common Equity

Source: Securities Litigation and Consulting Group

Non-traded REIT Equity Raise 2000-2016:

Source: Stanger Report, author’s calculations based on SEC filings.

Note that the 2015-2016 dropoff would be much sharper if you excluded Blackstone’s REIT, which entered the wirehouse channel in late 2016, and accounted for 50% of total annual NT REIT sales within a few months.  Sales to the independent broker dealer(IBD) channel, which Blackstone largely bypasses, were completely decimated, and the dropoff has accelerated in 2017. (2)

May Day

High fee products are sold, not bought. The commissions on illiquid real estate products have always been higher than other investments available to retail investors.

In Serpent on the Rock Eichenwald traces the original real estate partnership craze back to the May 1, 1975 abandonment of fixed commissions on sale of stocks and bonds. Yes it is viciously ironic that commissions were fixed before 1975. The financial services industry was apparently afraid of capitalist competition and all the wonderful creative destruction it brings. Once they lost large commissions on simple security trades, they went looking through more complex higher fee product.

After May Day:

No longer could brokerage firms subsidize their bloated through fat commissions on securities trades. Firms unable to adjust collapsed by the dozens. The industry had to either dramatically cut back expenses or find new products with higher commissions that could be pumped through the sales force. Suddenly tax shelters, which sold for higher commissions than stocks and bonds didn’t look so unappealing.

The impact of May Day has continued to drive down commissions decades later. This makes sense. After all, transactional costs should approach zero over the long run, because with computers the marginal cost of doing a trade in all but the most illiquid complex markets is effectively zero. Significant scale and technological investment is necessary to run a brokerage business focused on liquid markets.

Consequently, the current IBD ecosystem is highly dependent on non-traded REITs and other high fee direct private placement programs. This is complicated by the fact that IBDs payout a high proportion of commissions to the financial advisers(like 90% in many cases). Many financial advisers built their business on 1031 exchanges, non-traded REITs or other private placements. TICs typically charged 20-30% commissions. Commissions eat up a large portion of offering proceeds for non-traded REITs.  Additionally, non-traded REIT sponsors pay out a due diligence kickback to broker dealer home offices. Many smaller IBDs depend on these kickbacks for survival.

Of course, the commissions were much more egregious the first time around. Old timers fondly remember 20%+ loads on product. up front sales loads have now declined to high single digits and low double digits. Inland has driven down commissions on 1031 exchange product. Plus state securities regulators put out NASAA guidelines to limit loads on registered products. Nonetheless in an age where interactive Brokers charges $1 per side on a trade regardless of size, and few modern brokerages charge more than $7 per trade, even high single digit sales loads on non-traded retail product are absurd.

In Backstage Wall Street Josh Brown outlines his “Iron law of product compensation”:

The higher the commission or selling concession a broker is paid to sell a product, the worse that product will be for his or her clients.

This was the thread that connects the 1980s private partnership craze, with the pre financial crisis TIC explosion and the post financial crisis non-traded REIT market.

Yield Pig Exploitation and the Illusion of Safety

Just like private partnerships in the 1970s and 1980s, brokers sold TICs and Non-traded REITs to unsophisticated yield hungry retirees as safe, stable investments.
Here is one description of the private partnership market:

Many of the public offerings were promoted as a way for the small investor to participate in real estate, widely believed to be an inflation hedge, offering greater return and moderate risk as compared to stocks. The ability for an individual of modest net worth or income to invest in securitized real estate was viewed as a real benefit of public syndications.
The limited partners were sold their investments on the assumption that real estate was a safe, growing investment. Often these investors were unsophisticated in investment matters, and were more often swayed by aggressive brokerage salesmanship. The importance of liquidity became apparent to the investors only after substantial investment had already occurred. Liquidity was never promised for limited partnership securities and the partnership structure itself was designed to constrain liquidity.

Source: Obstacles and opportunities in the establishment of a secondary market for real estate limited partnerships  

In Serpent on the Rock Eichenwald meticulously tracked the juxtaposition between sales materials promising safety and the ultimate collapse in values.Non-traded REITs and TICs are also sold as safe investments that do not have the volatility of the stock market. Of course the stability is an illusion, and investors are still highly dependent on the real estate performance.


Due diligence

Eichenwald describes due diligence at Prudentialduring the peak of the private partnership craze:

The due diligence team was not just overwhelmed from the number new deals they had to approve- they also had to keep tabs on the old deals that had already been sold. Darr had negotiated for Bache to be paid a monitoring fee from some tax shelters it sold in exchange for reviewing their financial performance. Supposedly, this was designed to make sure that the general partners managing the deals did things right and took care of their investors. It was a key selling point for Bache brokers: In sales pitches, they painted a picture of top Bache financiers in green eyeshades peering over the shoulders of the General partners, watching everything that was done, The image of financial professionals crunching numbers late into the night to make sure investors were protected was a persuasive marketing tool.

But asset monitoring paid only a small fraction of the fees that Bache received from selling new deals. So the job of keeping an eye on the performance of old shelters quickly became viewed as simply a headache. It was an obligation that slowed down the whole process of churning out deals., without enough juice from fees to make up for the effort. The monitoring assignment became a hot potato, passed from executive to subordinates, and from then on down the line.

Many similar scenes in the book are shockingly familiar to anyone who has worked in the alternative investments space.

In subsequent years, third party due diligence firms serving broker dealers helped drive improvements in deal quality, but there are still many serious gaps. Since IBDs depend on the revenue from commissions and due diligence kickbacks, they are under pressure to find product to approve. This bias leads to cognitive dissonance. As non fiduciary middlemen, they often sell things that they wouldn’t invest in themselves, especially with a full sales load.

In the wake of the bankruptcy of TIC Sponsor DBSI, and the collapse of several tax driven energy deals, Reuters investigated due diligence in the independent broker dealer space. It highlighted a too cozy relationship between sponsors and third party due diligence firms.

Perhaps of even greater concern is the  disconnect between due diligence process and the needs of end investors.

Potentially alarming findings are often obscured in multiple pages of recondite language, with no definitive conclusions. “They’re these long-winded things that bury things that might be important inside boilerplate disclosures,” said Jennifer Johnson, a professor at Lewis & Clark Law School in Portland, Oregon, who has written extensively about the private-placement business.

Due diligence firms say their reports aren’t designed to be read or understood by investors. Rather, they are meant to help brokers decide whether to recommend private placements to their customers.


Same Same, But Different

Although the distorted incentives,exploitation of unsophisticated yield pigs,were almost identical in each of the three historical examples in this post, there are several key differences. Broker dealers primarily sold private partnerships in the 1980s as a way of reducing taxes. An investor can use a TIC structure as part of a 1031 exchange to  delay taxes when selling a property. REITS are a unique IRS creation but the reason for investing in a REIT is mainly income(Excluding situations where someone exchanges via an UPREIT transaction)
The private partnership market collapsed because the tax reform act of 1986 destroyed their entire structure, and basically collapsed the national real estate market. (see: this FDIC report )

The TIC market collapsed when the financial crisis hit the entire real estate market, exposing the problematic underwriting of the TIC Sponsors. However, regulatory issues weren’t the main driver of the collapse. Like the private partnership craze in the 1980s, the modern Non-traded REIT market also collapsed due to regulatory change although the . Finra 15-02, which increased the transparency on client statements, made it harder for advisors to get away with charging the massive sales loads. The fiduciary standard required broker-dealers to act in the best interest of clients, also led many broker-dealers to suspend or slow down the sales of high commission products.


The farce of AR Global’s collapse

Although private partnerships and TIC sponsors generally overpaid for properties they purchased, the collapse of their structures happened during a time of across the board real estate declines in the US

In contrast, investors in post financial crisis vintage non-traded REITs have suffered, in spite of a buoyant real estate market.    ARC Hospitality(Now Hospitality Investors Trust) offered shares at $25.00 a share from 2013-2015, and a client statement never would have shown a value below $22.00 until this summer. It  revalued at $13.20.  A PE fund recently offered  $5.53 for the shares.  Likewise ARC Healthcare Trust III sold shares $25.00, and recently marked its value down to $17.64, and is now subject to an affiliated transaction with no liquidity event in site.

Private partnerships and TICs were tragedies, AR Global was a farce.


To be continued….


(1) This is from The Eighteenth Brumaire of Louis Napolean.
The full translated quote is :Hegel remarks somewhere that all great world-historic facts and personages appear, so to speak, twice. He forgot to add: the first time as tragedy, the second time as farce.

(2) Wirehouses generally did not sell non-traded REITs until Blackstone entered the market in 2016 Anyone who carefully read The Serpent on the Rock will note how incredibly ironic it is that wirehouses have started to sell non-traded real estate securities again.  More on his in a future post.

9 Steps to 10x Thinking

Smartcuts: How Hackers, Innovators, and Icons Accelerate Success is a book about the power of lateral thinking- solving problems through an indirect or creative approach. “Smartcuts” means sustainable success achieved through smart work.  This is different than “shortcuts”, which are rapid, but short term gains. Ultimately the book outlines 9 key ideas, that lead up to the concept of “10x thinking”.

#1 Hacking the Ladder

Find sideways paths, like the warp pipes in Super Mario  that allows someone to beat the game in seconds, not hours.

#2 Train with Masters

Find mentors, and/or study the greats. Shoe designer Dwayne Edwards stole discarded shoes so he could study and draw the designs. This helped him develop the ability to notice tiny design details in shoes.

#3 Rapid Feedback

Rapid feedback accelerates learning. This has been critical to a lot of companies that have a website as their main product. In this book, the example of Upworthy illustrates the point. Turn work into rapid scientific experiments, and depersonalized feedback.

#4 Platforms

Tools and technology that people can buid off of. a platform “amplifies the effort and teaches skills in the process of using it.“ Key example: development of Ruby on Rails as a programming language.

Platforms are how Twitter could build Twitter in mere days while running a separate company. And Platforms are why Finland made all its teachers get a Master’s degrees and its students learn with hands-on tools that made learning better.

See also: Modern Monopolies: What It Takes to Dominate the 21st Century Economy

#5 Catching waves

The world’s best surfers arrive at the beach hours before a competition and stare at the ocean. This is a valuable metaphor for a lot of things in business and life.

“Intuition is the result of nonconscious pattern recognition,” ….. However, research shows, that we can also see patterns just as well by deliberately looking for them. Deliberate pattern spotting can compensate for experience. “but often people don’t even try it”

Budgeted Experimentation helps business avoid being disrupted, by helping them harness waves on which younger competitors might otherwise used to ride past them. Its helped companies like Google, 3M, Flickr, Conde Nast, and NPR remain innovative even as peer companies plateaued. In contrast, companies that are too focused on defending their current business practice and to fearful to experiment often get overtaken.

Key example of what to avoid: Kodak

#6 Superconnecting

Key example: Che Guevera taking control of the radio, using it as a way of promoting Castro’s revolution to a much wider audience than otherwise possible.

#7 Momentum

Build up potential energy, and amplify unexpected opportunities.

#8 Simplicity

The key feature of disruptively innovative products is cost savings(either time or money). But the key ingredient behind the scenes of every disruptive product is simplification.

Examples, email, USB Drives, Cars.(Henry Ford kept complexity under the hood).

Key example: Sherlock Holmes. He focused on what he needed to know, knowing how to figure out what he didn’t know, and forgetting about everything else.

#9 10x thinking

This quote from Astro Teller is key:

Its often easier to make something 10 times better than it is to make it 10 percent better…. In order to get really big improvements you usually have to start over in one or more ways. You have to break some of the basic assumptions and, of course, you can’t know ahead of time. Its by definition counter intuitive.

This means getting to first principles. 10x thinking forces you to come up with smartcuts.

10x thinking is probably now essential for survival in the modern economy.

Most innovation inside industries and companies today focuses on making faster horses, not automobiles.

This is why the innovator’s dilemma destroy’s so many companies.  What replaces them is something better.  Creative destruction is a beautiful thing.

Education of a Wandering Man: The Ultimate Autodidact

Louis L’amour was an autodidact’s autodidact. John Wayne called him the most interesting man in the world. L’amour spent the first couple decades of his adulthood wandering across the country, and around the world, doing odd jobs, and obsessively reading whatever he could find. Only much later did he become a famous novelist. Education of a Wandering Man is a quasi-autobiography, in which he describes the trajectory of his life, and the evolution of his thinking in terms of the places he traveled and the books he read.

L’amour spent years as a hobo, hopping trains from town to town, working various jobs. In each town he would visit the local library.

Its important to note, that unlike a bum, a hobo is ready and willing to work.

To properly understand the situation in America before the Depression, one must realize there was great demand for seasonal labor, and much of this was supplied by men called hoboes.
Over the years the terms applied to wanderers have been confused until all meaning has been lost. To begin with, a bum was a local man who did not want to work. A tramp was a wanderer of the same kind, but a hobo was a wandering worker and essential to the nation’s economy.

…Many hoboes would start working the harvest in Texas, and follow the ripening grain north through Oklahoma, Kansas, and Nebraska into the Dakotas. During harvest season ,when the demand for farm labor was great, the freight trains permitted the hoboes to ride, as the railroads were to ship the harvested grain, and it was in their interest to see that labor was provided.”


He also worked on merchant ships, and traveled throughout Asia and most of the world. He would find books for free or cheap wherever he went, reading 100+ books per year.  For example:

Byron’s Don Juan I read on an Arab dhow sailing north from Aden up the Red Sea to Port Tewfik on the Suez Canal. Boswell’s The Life of Samuel Johnson (Penguin Classics) I read while broke and on the beach in San Pedro. In Singapore, I came upon a copy of Annals and Antiquities of Rajasthan, Vol. 1 of 3: Or the Central and Western Rajput States of India (Classic Reprint) by James Tod.

Although he didn’t have real formal degrees, L’amour understood the value of books and knowledge:

Books are precious things, but more than that, they are the strong backbone of civilization. They are the thread upon which it all hangs, and they can save us when all else is lost.
…Knowledge is like money: To be of value it must circulate, and in circulating it can increase in quantity and hopefully, in value. “

He wrote 89 novels, and clearly a lot of ideas came from paying close attention when he travelled:

People are forever asking me where I get my ideas, but one has only to listen, to look, and to live with awareness. As I have said in several of my stories, all men look, but so few can see. It is all there, waiting for any passerby.”
… for a writer, everything is grist for the mill, and a writer cannot know too much. Sooner or later everything he does know will find its uses.

As with reading, L’amour never let the challenges of a transient lifestyle interfere with writing:

“I began my writing in ship’s fo’c’sles, bunkhouses, hotel rooms- wherever I could sit down with a pen and something to write on.”

L’amour also spent time boxing in various small towns, and coaching other fighters. I’ve seen reference online to a 51-8 professional record, although I wasn’t able to verify it.

In the later years of his life L’amour spent more time in his personal library. His deep knowledge of the world gave him perspective:

Surely, the citizens and the rulers of Babylon and Rome did not see themselves as a passing phase. Each in its time believed it was the end-all of the world’s progression. I have no such feeling. Each age is a day that is dying, each one a dream that is fading.

Goodhart’s law and the fall of Nick Schorsch: The infamous mousepad

The House of Cards that Nick Schorsch built was destined to collapse for a variety of reasons. But what started the demise was  then-CFO of ARCP Brian Block just making up some numbers in a spreadsheet. This led to ARCP revealing a $23 million accounting misstatement. After that it became nearly impossible for the non-traded programs to raise new capital, and a whole slew bad behavior and examples of egregious mismanagement soon came to light(I’ve highlighted examples of their questionable corporate governance before). ARCP changed its name to Vereit, but the whole American Realty Capital complex of affiliated entities that depended on new fundraising would never recover.

ARCP’s culture was obsessively focused on achieving financial projections, especially for adjusted funds from operations(AFFO), a preferred Wall Street metric for REITs . According to Investment News:

In fact, the company gave employees computer mouse pads with 2014 AFFO guidance on them. “AFFO per share greater than $1.16,” the computer mousepad declared. “First believe it, then achieve it.”

I was able to independently verify the existence of this infamous mousepad. Here is a (deliberately obscured) photo:

Nick Schorsch designed this mousepad that specified the AFFO targt for the company.

This mousepad is a manifestation of “Goodhart’s Law” in action. Named after economist Charles Goodhart, this states that

When a measure becomes a target, it ceases to be reliable.

Goodhart’s law is very similar to “Campbell’s Law” named after social scientist Donald Campbell. Campbell’s law states:

The more any quantitative social indicator is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor.

When people are incentivized to achieve one metric above all else, there behavior will result in the number ceasing to be have its orignal meaning. Goodhart’s law was originally used to describe how monetary policy targets led to distortion. Recent examples of this phenomenon on include reclassification of crimes to reduce crime statistics, and abuse of academic citations. In Capital Returns: Investing Through the Capital Cycle , Edward Chancellor highlighted the Goodhart’s law as the reason conducting investment analysis based exclusively on the single metric of earnings per share growth. The ARCP incident certainly wasn’t the first time that Goodhart’s law led people to fudge the accounting numbers.

Goodhart’s law inevitably leads to waste of resources. One example from the Soviet Union nail factories illustrates this in a big way:

The goal of central planners was to measure performance of the factories, so factory operators were given targets around the number of nails produced. To meet and exceed the targets, factory operators produced millions of tiny, useless nails. When targets were switched to the total weight of nails produced, operators instead produced several enormous, heavy and useless nails.

Beyond just reclassifying or forging numbers, and producing useless nails, incentives distorted by the emphasis of single metrics can have even scarier effects:

During British colonial rule of India, the government began to worry about the number of venomous cobras in Delhi, and so instituted a reward for every dead snake brought to officials. Indian citizens dutifully complied and began breeding venomous snakes to kill and bring to the British. By the time the experiment was over, the snake problem was worse than when it began. The Raj government had gotten exactly what it asked for.

To avoid the trap of Goodhart’s law or Campbell’s law managers (and investment analysts) need to take think deeply about what is measured, and take multiple factors into consideration, never relying too much on any individual metric. Failing to consider Goodhart’s law can be fatal for investments.

Non-Traded REITs and Thanksgiving Turkey

Non-traded REITs are like thanksgiving turkey:

“Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race ‘looking out for its best interests,’ as a politician would say. “On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.”
-Nassim Nicholas Taleb The Black Swan: Second Edition: The Impact of the Highly Improbable: With a new section: “On Robustness and Fragility” (Incerto)


AR Global Non-Traded REITs

That chart could easily be replaced with “4 years in the life of AR Global REIT investors. ARC Hospitality(Now Hospitality Investors Trust) was offered at $25.00 a share from 2013-2015, and would never have been marked below $22.00 on a client statement until this summer. It was recently revalued at $13.20 . Likewise ARC Healthcare Trust III was offered at $25.00, and recently marked down to $17.64. Both programs were sold as conservative stable investments that wouldn’t have the volatility one experiences in the stock market.

Of course, the revision of value wasn’t really unexpected, so the thanksgiving turkey/black swan analogy isn’t really right. . ARC Hospitality was egregiously over leveraged, all the ARC REITs, egregiously mismanaged by a kleptocratic external adviser. However, for customers who based their belief exclusively on the account statement, rather than actual analysis of the portfolio, the experience has been like that of the thanksgiving turkey. Investors in other non-traded REITs have had even worse experiences. Account statement stability is an illusion. Snapping out of that illusion can be painful.

In the case of ARC Hospitality, Brookfield Asset Management has mostly taken over, and will likely drive some recovery of value. Brookfield provided some rescue equity financing on dilutive returns- the alternative would have been a potential “going concern issue”. They have convertible preferred with a strike price about 11% above the current NAV. In the case ARC Healthcare Trust III, management is doing convoluted affiliated merger with another AR Global managed REIT. Strangely when an affiliate is buying it, they believe its worth less than the value they were selling it at before. More on these shenanigans later.

Grinding It Out

In Grinding It Out: The Making of McDonald’s Ray Kroc tells the story of how he built McDonalds into a behemoth. The key themes that run through it are his persistence and obsessive attention to detail. There are also some interesting strategic insights on how he views store operators differently than the typical franchise business, and how he selected real estate locations. If the book is too long, there is also a movie, and a country music song telling the same general story. The book is unique, however, since it provies a direct view into Ray Kroc’s thought process.

On Partnership:

One of the basic decisions I made in this period affected the ehart of my franchise system and how it would develop. That was that the corporation was not going to get involved in being a supplier for its operators. My belef was that I had to help the individual operator succeed in every way I could. His success would insure my success. But I couldn’t do that and, at the same time, treat him a a customer.

There is a basic conflict in trying to treat a man as a partner on the one hand while selling him something at a profit on the other. Once you get into the supply business, you become more concerned about what you are making on sales to your franchisee than with how his sales are doing. The temptation coud become very strong to dilute the quality of what you are selling him in order to increase your profit. This would have a negative effect on your franchiesees business, and ultimately, of course, on yours. Many franchise systems came along after us and tried to be suppliers, and they got into severe business and financial difficulty. Our method enabled us to build a sophisticated system of purchasing that allows the operator to get his suplies at rock-bottom prices. As it turned out, my instinct helped us avoid some antitrust problems some other franchise operators got into.

On selecting locations for new stores:

Back in the days when we first got a company airplane, we used to spot good locations for McDonald’s stores by flying over a community and looking for schools and church steeples. After we got a general picture from the air, we’d follow up wit h a site survery. Now we use a helicopter, and its ideal. Scarceley a month goes by that I don’t get reports from whatever districts happen to be using our five copters on some new locations that we would never have discovered otherwise. We have a computer in Oak Brook tat is designed to make real estate surveys. But those printouts are of no use to me. After we find a promising location, I drive around it in a car, go to the corner saloon and into the neighborhood supermarket. I mingle with the people and observe their comings and goings. That twlls me what I need to know about how a McDonald’s store would do there.


The Joy Of Footnotes

The Mezzanine by Nicholas Baker is a stream of consciousness novel that follows the protaganist’s thoughts during  lunch-hour activities, including the purchase of new shoelaces. Since the novel is basically just the running dialogue of the a person’s thoughts, it includes deep observations of a lot of everyday items. After reading the novel, I came away appreciating the design of everyday objects much more. The book manages to be simultaneously, deep, absurd, and hilarious.

I originally picked up The Mezzanine, after Matt Levine mentioned it during a Reddit AMA as a literary inspiration for his use of footnotes, supplementing his legal experience. The novel’s protaganist indeed praises the “luxuriant incidentalism of footnotes” in certain classic works. Those that appreciate footnotes:

“…know that the outer surface of truth is not smooth, welling and gathering from paragraph to shapely paragraph, but is encrusted with a rough protective bark of citations, quotation marks, italica, and foreign languages, a whole variorum crust of “ibid’s” and “compare’s” and “see’s” that are the shield for the pure flow of argument as it lives for a moment in on mind.”

Great scholarly works can use footnotes as “reassurances that the pursuit of truth doesn’t have clear outer boundaries: it doesn’t end with the book; restatement and self-disagreement and the enveloping sea of referenced authorities all continue.”

“Footnotes are the finer-suckered surfaces that allow tentacular paragraphs to hold fast to the wider reality of the library.

Additionally, the book indirectly considers a lot of Epistemological questions. The protagonist wonders what influences his thoughts:

“Will the time ever come when I am not so completely dependent on thoughts I first had in childhood to furnish my comparisons and analogies and sense of the parallel rhythms of microhistory? Will I reach a point where there will be a good chance, I mean a more than fifty-fifty chance, that any random idea popping back into the foreground of my consciousness will be an idea that first came to me when I was an adult, rather than one I had repeatedly as a child?”

Backgammon and Life Philosophy

Backgammon: the cruelest game provides a guide to some key principles of backgammon, and contains analysis of several games between top players. It also gets philosophical about the vicissitudes of randomness that make backgammon so challenging and intriguing:

From the start there is a complicated interplay of possibilities, probabilities, good fortune and bad, which influences every facet of the game. in backgammon, to seek position is to take certain calculated risks, and because all players are ruled by the dictates of the dice- or by chance, which Karl von Clausewitz, the ninetheenth-century military theorist, described as “an agency indifferent to the actor’s preference for the outcomes” – no player is ever in control of his particular destiny. One of the game’s chief tactics, then, is to shield oneself against the dice. The player with the strongest position can withstand the greater number of unfavorable rolls, or “bad luck,” than can the more weakly protected player, who, because he failed to protect himself, is more easily assaulted and overrun.

Nonetheless, no matter how cunningly you play, you are virtually always vulnerable. One unexpected horror roll can undermine the best positions, and derange the most sensible of plans; this is bot hthe charm and the frustration of the game. The best players know they must employ the craftiest of tactics, not because of the dice, but in spite of them. It is the enormously high luck factor in backgammon that causees it to be a game of skill. Without luck or accident, the game would not only be monotonous, but infinitely less skillfull.

In backgammon, to be skillful is to be self protective. At any given point in the ggame, the better players are aware of Murphy’s Law, which states that if anything can go wrong, it will.” Given the whimsical nature of the dice, all players have a chance in the game, but some players have more chances than others, because they have created in environment in which the more propirious is more likely to occur.

In backgammon, an understanding of the correct percentage moves in specific situations qualifies as “inside information” and will enable you to win in the long run. But not every time, alas, and often nt even in what you believe to be crucial games. This condition must be accepted philosophically, of course, and should not deter you from continuing a detailed study of the game.

Freedom Corridor vs. Belt and Road

India’s opposition to One Belt One Road makes sense given the whole Kashmir issue, and general geopolitical competition.  Indian think tanks have therefore been warning about risk to both China and target countries(ie this article makes some good points but is a bit cliched and hyperbolic)

Making things more interesting,  India and Japan this month launched their own similar(albeit geographically narrower)  initiative: The Asia Africa Growth Corridor(AAGC), aka the Freedom Corridor.   Right now its still in the  development bank and think tank press release phase,   but India and Japan have strong incentive to follow up with real money pretty quickly.  India and Africa have a deep history of mercantile and maritime connections.  India’s Exim bank has already funded $8 billion in credit in Africa, according to Modi’s speech during an African Development Bank meeting, which was held in India last week.  Port infrastructure in East Africa and the Indian Ocean are likely to be the first priorities, along with agriculture and electricity.  Incidentally,  India and Japan are also  building a LNG terminal in Sri Lanka, a country that is heavily in debt to China as a result of controversial infrastructure projects.

There is a Chinese aphorism,  “When the sandpiper and the clam grapple, it is the fisherman who profits” (鹬蚌相争渔翁得利).  If China and India really end up competing by spending money around East Africa, companies involved in building or benefiting from improved infrastructure could reap a decent reward.    Will the benefits accrue to any outside minority investors in publicly listed companies?  Too soon to tell, but it will be interesting to watch. The usual caveats about EM corruption and waste apply to AAGC as much as they do to OBOR, but the financial media is likely to oversimplify.  India and Japan’s now official strategy could impact select companies listed in India and Japan, in addition to companies in the less developed capital markets of East Africa and Sri Lanka.