Ontario Covid Update – Jan 12

January 12th, 2021 by Potato

Ontario provided its updated figures and modelling for covid today. The slides are available here if you want to look at the data without squinting at the video.

It’s not all that unexpected — I was sketching vaguely similar curves and worried about what an even more contagious version might do. But hearing it made real was just crushing. Covid’s on track to challenge heart disease and cancer for the top cause of death in Ontario this year (and will make the top 10 easy). And the strain on the hospital system is delaying treatments (esp. surgeries) which will make those other conditions worse.

But the big, not entirely surprising bad news is the hospital system and ICU beds: we’re just about out of empty ones, and the curve is still rapidly going up and to the right. Surgeries are being cancelled (again), and we’re not far off from very painful decisions about what happens if there’s a car accident.

One thing that’s crushing is that we were so close to getting to zero in the summer, and just opened back up a few weeks too early, without the testing and tracing capabilities ready. Still, the cases were low, everyone had stocked up on masks, and I genuinely thought we could get back to normal-ish with masks, handwashing, and social distancing*. I signed up for curling, expecting we would get a season, esp. with the modified rules of play (everyone wears masks, and things like using one sweeper to maintain 2 m between players at all times) — I had my mask rotation all planned out, and even got contact lenses so my glasses wouldn’t fog up. Schools reopened, and we kind of talked about how important that was for parents to be able to go back to work.

Then the cases started rising in the fall, and we did nothing about it until we’re now finding the hospital capacity getting crushed again. More people are going to lose their dads and other loved ones to cancer because surgeries had to get postponed, again.

I’m depressed and angry and just crushed at the whole thing.

I’m also a touch confused. They showed some data about how many people were moving around — people going to work has stayed steady since the summer, even as Toronto, Peel, and York went into lockdown (code red or grey or whatever). How there was a big spike in people visiting other residences at Christmas (to the surprise of no one). But I haven’t heard much on contact tracing and explaining what’s behind all the transmission. Are masks and handwashing and social distancing working, but some people aren’t compliant, and it’s that movement that’s the problem? Is it schools or workplaces or superspreader weddings? A little bit of everything adding up?

For most of those questions there isn’t much I can do on a personal level. I’ve tried to cut out contact with the outside world as much as possible, stretching out the time between grocery trips to two weeks or so, and our social circle is a completely closed bubble of 5 people. Wayfare has been making homemade masks since the beginning, and she did a lot of research on the best patterns and designs. They’re 3 layers, with two layers of regular (cotton?) fabric sandwiched around a layer of non-woven interface material. They have metal strips to conform to the nose (important to minimize glasses fogging and get the air moving through the material for filtering and not around the material), and straps to tie tightly around the head, which keeps it pretty well sealed all the way around the face. Though she made a few models with noses or cone shapes or whatever, I wear the basic pleated rectangle ones, so there’s no tiny holes from stitching a seam right in front of your nose. I’m sure they’re a step up from disposable surgical masks, even after a few washes. And I’m very good about wearing it whenever I’m indoors (or with another person outside — though I don’t wear one on solo walks).

However, are cloth masks enough, especially with the new B117 variant? Should we all (but especially should I) be wearing a N95-equivalent to go grocery shopping?

* – Circling back around to add: I thought the masks, distancing, etc. precautions would be good enough to get r < 1 so life could return to more-or-less normal. It doesn’t look like those were sufficient in practice (whether it’s non-compliance or whatever is a bit of a moot point as we will have non-compliance, esp. as covid fatigue sets in). We are a long, long way from Covid-zero (and we were really close in the summer!), but that may be the only strategy that lets us avoid the hammer and the dance through the fall based on the current vaccine roll-out projections.

On Lags and Exponential Growth

January 7th, 2021 by Potato

Ontario hit 89 daily Covid deaths today. We could lockdown tonight, go full Wuhan and weld peoples’ doors shut, and it wouldn’t stop us from hitting 100/day by next week — those people already have the virus, it’s just taking time for them to get sick and die. [Though I’d be happy for the universe’s constant need to prove me wrong to kick in here and save a bunch of lives as this turns out to have been the peak]

Lags make it hard to manage things, especially when that management also involves really hard decisions. It’s hard to call for a lockdown when cases are barely into triple digits. But that’s when it has to happen when you only have a few hundred spare ICU beds in the province. Ah well, back to home schooling for at least a few weeks now, though I still don’t actually know what the plan is. Is it Covid-zero?

And of course this is also why we wanted to start curbing the growth in greenhouse gas emissions in the 90s… or now, I suppose.

Does Fraud Create Alpha?

January 4th, 2021 by Potato

[Editor’s note: I’ve been sitting on this draft for a few months. Other than compiling some ideas from others and ranting a bit, the post as it is isn’t all that original. I thought the really clever bit would be to add some actual research and back-testing on fads and frauds to semi-seriously answer the question, but that turned out to be too much work and I now realize I’m never going to do that much research and stats even if there’s a chance that it’s more than just a lark. Anyway, I figured you may as well get to read it instead of killing it off. This one certainly isn’t investment advice, and I’m not alleging any companies or people are frauds here — I’m linking to the allegations and cases where I can, innocent until proven guilty, etc. etc.]

Elon Musk tweeted out in the middle of the trading day: “Am considering taking Tesla private at $420. Funding secured.”

Funding was not secured, not remotely. It was one of the most egregious and blatant cases in living memory and the SEC filed fraud charges. It revealed significant problems with corporate controls given that his Twitter account was identified as a channel for official company communications, and looked like a slam-dunk open-and shut case for the SEC.

Yet he settled for a slap on the wrist: no D&O ban, no forced divestiture of his holdings, just a requirement to add two new independent directors, and a $20M penalty (the company also paid $20M). Less than two years later, he got an incredible pay package tied to the stock price, orders of magnitude larger than the fine, despite the company still not producing an annual profit [at the time — it has eeked one out between drafting and posting this] and even clawing back bonuses for its workers. Oh, and despite coming very close to driving the company into the ground along the way (though there was no going concern language in its reporting at the time).

Securities regulators are broken. They are not working to protect investors or provide for rational, functioning markets. It was only at the last minute that the SEC stopped a bankrupt company from issuing more stock that it knew to be worthless. It’s the golden age of fraud.

And it’s not just a SEC problem. Germany’s BaFin failed spectacularly in regulating Wirecard, even prosecuting people working to expose issues at the company, instead of taking their leads and investigating the company (i.e., their jobs). And here in Canada, we have a patchwork mess of regulators. Not just the provincial securities regulators, where even when they get someone, the penalties can be the cost of doing business, but even within a province we can have different regulatory bodies letting problems slide. Bad actors can use the courts as a weapon, and even if you win a SLAPP suit, it can be costly and disruptive to your life, while bad actors buy themselves months or years more time to keep fleecing investors as critics and defenders of everyday investors are forced into silence.

Bad actors have free reign in the capital markets. None has put it quite so boldly as Musk’s “I do not respect the SEC,” (or the 2020 remix) but the days of fearing the wrath of the regulators appear to be a quaint figment of history. And regulatory capture is such a joke they don’t even try to hide it any more.

Indeed, I have heard it said1 that frauds are some of the best investments out there. After all, they don’t have earnings misses when the numbers are fake anyway.

Or as some have so eloquently put it: Fraud creates alpha2.

As an investor, you almost have3 to assign some portion of your portfolio to frauds and fads to keep up. And given that there is no downside any longer, as a CEO or Director of a company, you have a fiduciary duty to commit fraud2.

That’s a fine angry rant against the state of the markets as they sit today. If we had elections for OSC or SEC head, I might be just ticked off enough to throw my hat in the ring (or go campaigning for someone with a more protectionist bent). But that’s not how it works. There’s nothing to do but rant and carry on. Yet I keep coming back to that lovely, infuriating phrase:

Fraud creates alpha.

It’s a thing that we say — shaking our heads and laugh-crying — to encapsulate the absurdity of our times. But… is it true? Does fraud create alpha? Like in a systematic way? Should we be checking if it might be a 6th factor in the Fama-French schema to round out size, value, profitability, and investment?

Let’s make it F&F — fads and frauds, because that’s another area where there has been some outsized stock performance lately. Indeed, it’s almost like that litmus test of the Nigerian scams, where the emails are purposefully full of spelling mistakes to try to weed out those who may not be sufficiently gullible. The business models in some cases have no hope of working, or at least will never reasonably justify the stock price4. But that’s likely the point — as long as no fundamental analysts are buying it anyway, then the sky’s the limit. 3X revenue may be crazy-sauce in a low-margin business, but once you’re already there, 7X is really no crazier! And with a touch of what some may interpret to be stock manipulation, why not see if we can shoot for 20X while we’re at it?

Many modern “success stories” are incinerators of capital, serially selling stock to fill the hole created by losses and growth for growth’s sake, though as a side effect they have created a world where our lifestyles are subsidized by dumb capital. Oh, and skirting (or at the very least, bending) the law is a key element of disruption for many of these start-ups — from how they pay and treat their workforce as independent contractors, to flaunting municipal taxi, zoning, or other laws, if not securities laws themselves.

We who can recite the Litany of Saint Graham (“In the short run the market is a voting machine, but in the long run it is a weighing machine”) believe that fads and frauds will one day crash. Some people even make their living shorting them. But far too often, they go up first. They go up a lot.

And therein is the question: do fads & frauds create alpha? Now if you hold until they crash — assuming they do eventually crash and burn — then you’d think not, it would be trivial. To cite the Disciple of Graham, a string of impressive numbers multiplied by a single zero is still a zero. But if you take an approach where you rebalance away as they go parabolic, there might be something there. In an equal-weight portfolio of shit, you may not care much when your German payment processor is finally de-listed if your California vapourware company has sextupled in value. It’s skewness of returns in over-drive.

So let’s build an index and backtest. For example, if you buy in as soon as a report or article or forum post first suggests something fishy, and then rebalance away after each doubling (to other F&Fs or a core market portfolio if you run out of ideas), would that generate alpha?

This is the point where I thought actually doing a bunch of research and math would make the post more fun (and maybe even prove or disprove the point instead of just ranting), but it’s also a lot of work and it’s been many months since I first drafted this and I don’t think I’m ever going to get the research/math part done. So I will leave the idea there — maybe someone else with some time on their hands can go back a few decades and see if you can construct an index of fads & frauds and some rules (equal weighting? trend-something?), and see if it provides improved risk-adjusted returns.

1. Likely Carson Block on a podcast — apologies to whoever said it as I didn’t keep the source, but I think it was a podcast and not an article if that helps.
2. I think this can be attributed to TC. There’s probably more in here that can be attributed to the Chartcast.
3. No you don’t especially if you’re a smart passive investor, this is a whiny post and not actual investment advice.
4. I have heard it said (Chanos?) that one of the worst things for a fad company to do is to make a profit because it’s stock will crash when it suddenly goes from being valued based on some dream about TAM to being valued on a price/cash flow or price/earnings basis.

On Rent Control

April 6th, 2017 by Potato

An important principle in our society when it comes to rentals is striking a balance between a landlord’s ability to make money and a tenant’s security of tenancy. A tenant will call whatever place they are renting home, and deserves to have some reasonable modicum of security that they will get to continue to call that place home.

They should not be kicked out because they got a non-destructive pet, because of their skin colour or religion, or that of their significant other (or the very fact that they may have started dating since the place was first rented). A tenant shouldn’t get kicked out because it would just be more convenient for the landlord to flip the place if it was vacant, or because the tenant didn’t welcome the landlord’s sexual advances – we as a society have said that the laws are going to protect against that.

And none of them mean a damn thing without rent control, because all the landlord has to do is jack the rent to a level no one can afford, and the tenant gets forced out (“economic eviction”). They don’t even have to show that that’s actually the new market rent or find a new tenant at the new price. They could jack the rent from $1000/mo to $100,000/mo, evict the tenant they don’t like (for any reason whatsoever), then rent it to the next tenant they do like at the original $1000/mo and nobody in power blinks an eye.

So in Ontario it’s a big deal that we don’t have rent control on properties built after October 1991. All those new condos built in the boom, many of which are serving as rental stock, are uncontrolled and there are essentially no protections for tenants. This is especially important in the midst of a housing bubble, as people feel there’s no option but to buy (no matter the price) if they don’t have the security to raise kids as tenants. We’ve been seeing that in the news recently in Toronto, with the Premiere picking it up this week when the rent doubled on a few people for an economic eviction.

Now, I think the existing pre-1991 rent control is a very good compromise between security and economics: the landlord can charge whatever the market will bear when the tenant leaves, and they get to put through increases in line with inflation (set by the government) while the tenant stays there. So the tenant gets protection, but not the unit. And to a large extent, the government rate is actually about what rent inflation is. I spent a decade in London, Ontario, and watching the rental market* there, market rent inflation if anything lagged the allowed increases. I know the approximate rent a few people were paying in downtown Toronto near UofT, and running those through the increases to today gets to within 5% of the current asking rent in those areas. Other than the last few years, rent inflation has been really low. And when costs legitimately spike (like when our apartment replaced the boiler or property taxes increased), the landlord can apply for an above-guideline increase, which goes before a third-party arbiter.

But, it doesn’t have to be that exact system: we could add enough rent control to prevent economic eviction, but allow double the rent increases for places built after 1991, or have regional inflation rates, or permit any increase to market rent, with the burden of proof on the landlord to apply to a board or ombudsman that that’s actually the new market rent and not a ploy for economic eviction.

Some people on Twitter and elsewhere have railed against rent control for buildings after 1991 – including Ben Rabidoux, who I usually agree with – as it would dis-incentivize building rentals. But I simply do not see it here.

First, there was hardly any building of rentals after the exemption was put in, and we’ve had almost three decades for that to do something. So evidence suggests it was not effective as an incentive, and taking it away isn’t going to change that.

Second, deciding whether to build a rental building depends on a number of factors: how much it costs to build and operate versus how much you can bring in in rent. The current market conditions and base case projections on inflation and financing costs are massively more important to that decision than rent control rules. Having free reign to increase rents only helps you in the scenario where rent inflation increases rapidly and where tenants do not turn over very often and where the government doesn’t recognize the inflation in the guideline increases. For more normal scenarios, the lack of rent control is a nice option (mostly to skirt eviction rules) but otherwise doesn’t really affect the economics of your building — doesn’t sound like the make-or-break incentive to me. Indeed, for most cities over most of the last few decades, the provincial guidelines (and occasional above-guideline requests and vacancy de-controls) have been plenty to keep your units at market levels. So yes, putting in rent control will be a dis-incentive, but a relatively minor one compared to the other costs of building and operating, and is nowhere near something that should out-weigh the social need for some measure of rent control (without which all other tenant protections are toothless).

And the fact is, cap rates are garbage right now. Rent control or not, we’re going to get hardly any serious purpose-built rentals in the GTA simply because people are willing to pay far more for a condo for consumption than a rational investor would for a rental (driving up land and construction costs). There are many other incentives to condo building (including that you get to crowd-source your funding and punt the risk to individual saps), and disincentives to purpose-built rentals (including the property tax regime). Despite the fact that at the moment there is no rent control on the books for future rental units, I’m amazed that there are any being planned in this environment, and I’m sure that there is a story about back-room dealing with the city to have made that happen anyway.

So I say bring on rent control for buildings after 1991: as it is for others, or a weaker compromise form if necessary, but something to provide more security of tenancy than the current economic eviction free-for-all.

* – note, there are no good data sources on market rents that I know of. Everyone complains about CMHC’s because it only tracks large apartment buildings, which tend to be older. Many rentals don’t show up on MLS so the realtors don’t have a good picture, either.

Public Transit Tax Credit Axed

March 23rd, 2017 by Potato

In yesterday’s federal budget, one of the changes was eliminating the public transit tax credit, which looks like will be effective July 1.

For many people in Toronto living the car-free life, a metropass is a no-brainer, tax credit or no. If they live downtown they’re on and off streetcars and buses pretty much any time they leave the house shoebox.

For commuters, it’s not so clear-cut: metropasses are expensive. By signing up ‎with a discount through your payroll (if your employer offers it), they’re $129/mo, and $134 if you sign up for the yearly discount plan on your own (and over $146 a la carte).

With the tax credit, these are effectively 20% cheaper, so best case, a metropass only costs ‎$103.20, or $1238.40/year, and maybe as much as $1401/yr. With tokens (or a presto fare) now $3, you’d have to take at least 413 trips to make it worthwhile to choose a pass instead, maybe as many as 467 in the year if you pay full price each month. How many days will you commute to work? There are two trips each day you go to work and 365 days in a year, but with weekends, vacations, holidays, and likely a few sick/work-from-home days, you’ll likely have about 450-460 one-way trips for work.

‎So with the tax credit, a metropass is financially worthwhile — though not by very much, considering you do have to commit to it to get a discount, and not lose your cards/receipts to claim the tax credit. But it is more convenient than tokens, and opens up the option to take the TTC for non-work-related trips.

Without the tax credit, even the cheapest metropass option needs nearly 500 trips to break even. That’s not totally out of the realm of possibility — just a few extra non-commuting trips per month to do it. But I know in my case I probably only use the TTC 10 or 12 times a year outside of work purposes, plus another dozen or two trips on it for convenience when downtown (e.g., to take the bus or streetcar all of three stops to grab lunch at work) — walking-distance trips that I would not bother with transit if it weren’t free anyway (and often don’t if there isn’t a streetcar or bus in view).

So without a tax credit, unless the TTC changes its pricing scheme in response (which I doubt will happen), I’ll be unsubscribing from the automatic metropass purchases.

Aside from deciding how to respond to it in my own life, I’m not sure what to think of the move: it does make more sense to simplify things and just directly fund transit, especially given how many people have had to dig up receipts to prove their claim. However, in practice I highly doubt that the TTC will adjust metropass pricing (or soon presto monthly pricing) to compensate‎ for the loss of the tax credit, even if they get more direct funding, which means more people like me will make the decision to abandon the stable funding of metropass subscription programs and move to paying by the trip. That, in turn means taking transit becomes a visible, painful cost. And as for simplifying the tax system, there are a other tax credits out there that could have been targeted over (or with) this one.