We had a wonderful meeting of minds at La Madeleine’s. We had 4 attendees: (from left Jeff
Harrington, VJ Arjan, Tommy Schultz, and Ry Zamora who also joined us later on.
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A quick note about the hiatus: For 3 months in a
row, Mother Nature decided not to be kind to our Scarlet Kings meetings. It seemed that every time we had scheduled
our meeting there was either ice, or snow, or hail, or all three. For whatever reason, the Weather Gods had
decided to punish us, but thankfully after numerous lucky Rain Dances to
appease the Weather Gods, we were able to regain their favor and the weather
was back to normal on this past Sunday the 6th. : )
Oculus Rift and the Next Wave of Virtual Reality
Facebook
made headlines recently by buying Oculus Rift for $2 billion. (It also bought Whats-App for $19 billion,
which Jeff mentioned it probably did for its subscriber base as opposed to the
actual instant messaging platform.)
Followers
of our blog would know that the Scarlet Kings have been discussing the Oculus
Rift for several months now as a potential industry game-changer (no pun
intended). We all discussed how Facebook
could potentially utilize Oculus Rift and also the virtual reality wave to
come.
For
those who have not been adequately introduced to the Oculus Rift, it may be a
good idea to see some videos on YouTube.
To call the virtual world, virtual, would actually be a misnomer. The
world within the Oculus Rift is so real that those who stay in the virtual
world long enough not only grow accustomed to it but also have some trouble
distinguishing between that world and the real world.
Although
we had some trouble coming up with exactly how Facebook would intend to use
this technology, we figured that the worse-case scenario would be that it would
lease this technology for royalty income.
Tommy
mentioned some of the uses of virtual reality and why it is going to be so
huge. For one, it allows people to
experience a setting anonymously. A
particularly specific instance would be, for instance, a college student who is
writing a paper on the Middle East and wants to experience virtually a Hajj
(holy pilgrimage) in Mecca, Saudi Arabia while not assuming the cost or the safety
risks of going to Saudi Arabia itself.
Jeff
mentioned that one of the drawbacks of virtual reality is that it only
satisfies one of our senses, sight. It
leaves something from the user to be wanted if it cannot touch or smell.
However,
even this may not be long in coming.
Recently, life scientists at the University of Louisville have been able
to help paralyzed patients walk again through spinal shock treatment. The stimulation from the electric shock
allows the person to reconnect nerves that allow for movement. The question then arises, it is possible to
use electric shocks to simulate sensory perceptions as well? Could an electric shock to a certain part of
the brain simulate the sensation of touching or smelling in a virtual world? Well
that seems to be the implication these scientists may have come to. A video is attached below so you can see this
miracle for yourself:
Also,
with the development of artificial intelligence, it is entirely possible to
deal with objects in a virtual reality as if they were humans. This can be seen today in the use of AI
characters in video games. In these
games, the characters are using artificial intelligence software to interact
with the gamer. Tommy mentioned that
several of these have passed the Turing test, which is a measure of a machine’s
ability to exhibit intelligent equivalent to that of a human. One such example
would be the HK-47 droid in the game Star
Wars: Knight of the Old Republic (video of the HK-47 droid is attached
below).
http://www.youtube.com/watch?v=ooak56OSUWM
Incredibly,
continued Tommy, this is just the tip of the iceberg. Soon there could be virtual classes on how to
shoot a bow and arrow, or virtual classrooms, or even virtual workplaces. The ramifications and scope that this technology
could extend to are almost limitless. It
could very well be reminiscent of the virtual world portrayed in the movie The Matrix.
Tommy
went on that over the next few years there would emerge 2 types of people. One type would buy into this virtual world
wholeheartedly and would decide to function in this world and another type that
doesn’t and chooses to remain in the real world.
Eventually
there could be machines that would be intelligent enough to deal with every
single aspect of our lives. Recently
Amazon’s CEO, Jeffrey Bezos, stated in his earnings call last week that Amazon
is developing technology for drones that would deliver its packages to its
clients in 30 minutes or less. These
drones are in the final stages of testing and should be able to deliver
packages very soon (assuming that the legal hurdles have been overcome).
This
poses the potential question, years and perhaps decades from now – Do people,
therefore, become obsolete?
Russia and the Ukraine
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| Putin with Ukrainian counterpart Yanukovich |
Of
course, we had to discuss the topic of what is currently happening in the
Baltic region.
In
short, here is what is happening: The Russian army is moving into the Crimean
part of the Ukraine; the international community has responded by denouncing
the Russian government’s actions and also by imparting economic sanctions.
There
are a few points that we discussed:
-
80%
if the Russian federal budget comes from oil and gas exports to Europe. A long-term European sanction on Russian oil
and gas would cripple the Russian economy.
-
One
of the great interests Russia has especially in Crimea is a naval base,
Sevastopol, which is protected by a treaty and also happens to be the only
Russian navy base that is liquid all year round and doesn’t freeze over.
-
The
Crimean region of Ukraine is composed of mostly ethnic Russians, hence the over
90% approval to annex itself to Russia.
-
Russia,
which has been anti-NATO for decades, will do anything in its power without
inciting too much animosity to prevent Ukraine from joining NATO as it serves
as a geopolitical buffer between the NATO-states and Russia.
-
Russia
is playing a weak hand. Due to the
incredible inefficiencies that still exist in the Russian economy, the cost of
oil production in Russia is around $100 a barrel. The potential to inject huge financial
resources to back their political ambitions are lacking thereof.
Here
is what may happen. Jeff mentioned that
the country of Ukraine, outside of Crimea, is hotly divided as well. The eastern part of Ukraine is pro-Russia and
the western part is pro-Europe. Ukraine
may, therefore, be permanently divided.
This would particularly be the case should there be a decision made to
join NATO. Certainly that would
antagonize Russia even more and would lead to further military embarkations.
Who is Tony the Tiger looking at?
It
is certainly fascinating observing the psychological ploys of marketers. Jeff mentioned the amazing Cornell study in
which researchers found that of the 57 boxes of cereals in the cereal aisles,
51 of them had their cereal mascots looking downward, aimed squarely in the light
of sight of children 48” and under.
These
researchers found that “trust level goes up about 18% if you make eye contact
with anything. This is even simply a
picture on a box, but also increases your likelihood to want to purchase the
cereal.”
Here
is a link to a video describing this study in more detail:
Mt. Hoax
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In
February, Mt. Gox, one of the largest exchanges for Bitcoin was shutdown by
federal authorities and had to declare bankruptcy. It is estimated that nearly $500 million
worth of bitcoins was wiped out.
Jeff
mentioned that although Bitcoin allows its owner to circumvent the banking
system and is a way for its owners to remain anonymous, Bitcoin is still a very
flawed form of currency. He mentioned
that large drug emporiums and cartels, like the Silk Road marketplace, have
used Bitcoins to cover their tracks and conduct business without the oversight
of the law.
Mt. Gox was initially founded in Japan as a card trading exchange – “Gox” literally
standing for "Magic The Gathering Online Exchange".
Jeff
believes, however, that should financial corporations ever begin to create
derivative contracts for Bitcoin, it could become a legitimate currency. Governments would do everything they can to
prevent Bitcoin from succeeding though, as the ability to print money is one of
the most profitable things a government can do.
Monkey Economics, Freud and the Animal Subconscious
“Two things are infinite: the universe and human stupidity; and I’m not sure about the universe.” – Albert Einstein
“We are the middle children of history, with no purpose or place. We have no great war, or great depression. The great war is a spiritual war. The great depression is our lives. We were raised by television to believe that we'd be millionaires and movie gods and rock stars -- but we won't. And we're learning that fact. And we're very, very pissed-off.” – Tyler Dearden in Fight Club
We
entered into a philosophical discussion regarding essentially why people behave
the way they do, particularly why do human beings as intelligent as they are,
repeat their mistakes over and over again?
Human
stupidity is so fascinating for some that there are even organizations, like
the Darwin Awards (www.darwinawards.com), that collect tales of such instances and keep records them
on the internet.
Tommy
brought up a TED talk on monkey economics.
It is an absolutely fascinating video, and it is reproduced here for
your viewing:
The
gist of the talk is this. Researchers at
Yale University designed a simple financial market for monkeys to see whether
monkeys would behave similarly to humans in certain circumstances. One of the circumstances tested was the
monkey’s behavior involving loss aversion.
For instance, let’s take 2 scenarios:
-
Scenario
1: You have $2000, and have a 50% chance of losing $1000
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Scenario
2: You have $2000, and have a 100% chance of losing $500
Most
people would pick option 1 because even though the probabilities are exactly
50% for each scenario, people would rather risk losing $1000 to have a chance
of losing nothing at all.
Long
story short, it turns out that monkeys, like humans, also suffered from loss
aversion just like humans do. It may be,
therefore, that the reason behind humans repeating financial mistakes over and
over again may have something to do with our biology and an ingraining of our
predication for having a certain behavioral bias over several, several millennia.
VJ
mentioned that Freud was a huge proponent of the subconscious mind and that
deep within every “refined” human being is still the potential to behave like a
pure animal. He mentioned that this is
especially the case when a person’s survival is at risk – if there is a risk of
losing food, shelter, etc., then so-called “intelligent” humans can become
instinctively compelled to do very unintelligent things. It also happens to turn out that when having
too much of a survival commodity can end up making us do unintelligent things
as well. For instance, when we have too much money, there is an instinctive
desire to have more, also known as greed.
Some
of the most human irrational behavior can be found in a crowd. In a crowd or due to social pressures, people
can do the most incredible things. There is
a common saying among investors regarding “following the herd” or “following the public”. It is certainly interesting to note that the
public has been usually on the wrong side of the market, time after time
throughout history.
Which way from hither Mr. Dow Jones?
“Numbers
don’t lie, people lie about numbers.” – Kevin Day
No
meeting of the Scarlet Kings would be complete without asking where the market
may be headed from here.
Although
some economic reports like producers index and consumer sentiment seem to be
improving, the market seems unable to break into new highs – this is especially
the case for several large cap staple companies like Apple, Coca-Cola, Wal-Mart,
McDonalds, etc. Ry mentioned, however,
that the economic data is only going to be as good as how truthfully it has
been disclosed.
Going
back to the previous topic about “following the herd”, we may even start seeing
the beginning of analysts looking at reports with rose-tinted glasses. Untruths or exaggerations of the truth have the
habit or tendency of popping up towards the end of bull markets – so we will
have to see whether people will start lying about the numbers or not.
On
the heels of the meeting, the latest payroll report was also less than
flattering. It seems that there may be
some stalling regarding corporate hiring due to the cost cutting and
restructuring measures that several corporations have been engaging in to
deliver higher profitability. Revenues,
however, are not growing and are being revised downwards over the next year or
so.
The
consensus was that even though on the surface the market looks okay today,
there are reasons to be concerned and cautious.
The current bull market is the 3rd longest bull market in U.S.
history.
That being said, there are
indications that housing could lead to another leg of the continued recovery
before this run ends. Jeff explained his case for a shallow correction in the midst of a rotation out of momentum stocks. He went on that the momentum crowd includes tech, which is a mild bubble across the sector while some if the concentrated momentum stocks are out in fantasy land. Every correction so far has been a launching pass for future runs. His attention has been on the P/E ratios, which indicate the overall market is about fairly priced (not cheap, not overpriced).
Earnings are important because they make up the 'E' in 'P/E' and the bar for this quarter has been set too low, in his opinion. Many leading economic indicators are also moderate to strong. Also, last month's employment retort saw the economy return to its employment peak set before the crash of approximately 116.3. In other words, we have recovered all of the jobs lost during the recession. He does not see the economy stalling, so any correction, to him, will be shallow.
Still,
anything can go wrong. Oftentimes, it is
not just the overvaluation of equities but an external event that can serve as
a catalyst or excuse for a selloff in the market. At the moment, it seems that investors are in
the market as there is no other safer place to put their money.
Although
we do not know when the correction could take place, we foresee anywhere between on the low-end,10%, to high-end, 40% correction to take place when it comes. The key for all of us is to avoid the “Deer-in-the-headlights”
syndrome and to proactively prepare should that time come, so we can adequately
protect our assets.
“From
the CenturyLink Center in Omaha, Nebraska, USA - Ladies and Gentlemen…..Leeeeeeeeet’s
get ready to rumble!!!” – Ring announcer Michael Buffer (if he ever attended a Berkshire
Hathaway meeting)
Ry
and VJ will be attending the Berkshire Hathaway Annual Shareholder’s Meeting in
Omaha, Nebraska so, unfortunately, there will be no meeting next month. On the bright side however, there should be lots of pictures, videos, and notes that will be uploaded for you all so you can
experience the “Buffett Shrines” for yourself : ).
The
next meeting, therefore, will be on Sunday, June 1st, 2014.
For
those who have not attended a meeting, but would like to attend, please email
your wish to VJ Arjan at scarletkings@gmail.com
Also it seems that there are many domestic and
international readers who are following our blog posts not only in the United
States but all over the world including Europe, Latin America, and Asia. If you
wish to be added to our email list, please email at scarletkings@gmail.com
