21st April 2019

Published on: 21st April, 2019

This week’s reads focus on fulfilment from work, lessons from the Sweden’ social welfare, valuing cannabis companies, women in hedge fund industry and their pay differential generally and Netanyahuism in Israel and globally.

1. Long read: The Moral Peril of Meritocracy
Author: David Brooks
Source: New York Times (https://www.nytimes.com/2019/04/06/opinion/sunday/moral-revolution-david-brooks.html)

This remarkable article from the NYT raises a toast to those who first fail in the great capitalist race to become rich & famous but then lift themselves up to imbue their own lives and that of others with more meaning. These are people whose lives have been lived on what the author calls “two mountains”.
“People on the first mountain spend a lot of time on reputation management. They ask: What do people think of me? Where do I rank? They’re trying to win the victories the ego enjoys.
These hustling years are also powerfully shaped by our individualistic and meritocratic culture. People operate under this assumption: I can make myself happy. If I achieve excellence, lose more weight, follow this self-improvement technique, fulfillment will follow.”
Sounds familiar? But then comes the interesting twist in the article: “But in the lives of the people I’m talking about — the ones I really admire — something happened that interrupted the linear existence they had imagined for themselves. Something happened that exposed the problem with living according to individualistic, meritocratic values. Some of them achieved success and found it unsatisfying. They figured there must be more to life, some higher purpose. Others failed. They lost their job or endured some scandal. Suddenly they were falling, not climbing, and their whole identity was in peril. Yet another group of people got hit sideways by something that wasn’t part of the original plan. They had a cancer scare or suffered the loss of a child. These tragedies made the first-mountain victories seem, well, not so important.”
This crisis separates the women from the girls so to speak. “Some people are broken by this kind of pain and grief. They seem to get smaller and more afraid, and never recover. They get angry, resentful and tribal.
But other people are broken open. The theologian Paul Tillich wrote that suffering upends the normal patterns of life and reminds you that you are not who you thought you were. The basement of your soul is much deeper than you knew. Some people look into the hidden depths of themselves and they realize that success won’t fill those spaces. Only a spiritual life and unconditional love from family and friends will do. They realize how lucky they are. They are down in the valley, but their health is O.K.; they’re not financially destroyed; they’re about to be dragged on an adventure that will leave them transformed.
They realize that while our educational system generally prepares us for climbing this or that mountain, your life is actually defined by how you make use of your moment of greatest adversity.”
So how do our heroes and heroines find redemption?
“First, there has to be a period of solitude, in the wilderness, where self-reflection can occur…The self-centered voice of the ego has to be quieted before a person is capable of freely giving and receiving love.
Then there is contact with the heart and soul — through prayer, meditation, writing, whatever it is that puts you in contact with your deepest desires….In the wilderness the desire for esteem is stripped away and bigger desires are made visible: the desires of the heart (to live in loving connection with others) and the desires of the soul (the yearning to serve some transcendent ideal and to be sanctified by that service).
When people are broken open in this way, they are more sensitive to the pains and joys of the world. They realize: Oh, that first mountain wasn’t my mountain. I am ready for a larger journey.”

2. Long read: How to Think About Taxing and Spending Like a Swede
Author: Monica Prasad
Source: NY Times (https://www.nytimes.com/2019/03/07/opinion/europe-taxes-sweden.html)

Monica Prasad, a professor of sociology at Northwestern, discusses tax structures of various countries and its impact on reducing poverty and inequality. Sweden as a country has low poverty & inequality compared to other European countries and America. Whilst the average Swede falls under the high tax bracket (42.9%) compared to the average American (31.7%), on the spending side, Sweden does not target much of its spending specifically to the poor. Tax revenue is spent on universal programs, like health care, which benefit most those who live longest; free college tuition takes from those who do not go to college and gives to those who do. Many aspects of welfare state spending in Sweden — as in other European countries — are linked to income, so that the more you earn, the more you receive in benefits. This is enormously effective, because it gives an incentive to Swedes to work hard and earn more. Poverty and inequality do get reduced, though not by redistribution from rich to poor, but rather by redistribution within classes — from the healthy to the unhealthy, from the young to the old and from the lucky to the unlucky.
Monica says that Governments have to adopt policies that reduces poverty & inequality yet are business friendly.
“In the recent rush of proposals to tax the rich, Democrats have forgotten — or never really cared to learn — an important lesson: The countries that have been most successful at reducing poverty and inequality have not done it by taxing the wealthy and giving to the poor. Take Sweden, a country often cited by progressives for its extensive social programs. Sweden has very low poverty and inequality, and economic mobility is significantly higher than it is in the United States; a poor Swede is much more likely to become middle class than a poor American is.
We can learn from Sweden, but the lesson is not what many people think. Rich Swedes do get taxed at high rates, but so does everyone else: The average American worker’s total tax burden is 31.7 percent of earnings, compared with 42.9 percent for the average Swede. The Swedes actually tax corporations less: 19.8 percent, compared with 34.2 percent in the United States in 2017, the last year for which we have comparative data — and yes, that’s after all the loopholes and deductions have been accounted for. The American rate will be lower after the 2017 tax bill, but it’s still unlikely to be as low as Sweden’s. Estate tax? In the United States the average effective rate is 16.5 percent. In Sweden, it’s zero. Swedish national sales taxes, which fall disproportionately on the middle classes, are much higher than sales taxes in the United States. In France, another country held up as an exemplar by progressives, the economist Thomas Piketty and his collaborators found the overall tax structure was actually a bit regressive, meaning the wealthiest pay slightly lower rates of tax than the less wealthy. Throughout Europe, since World War II, the rule has been high taxes on labor and low taxes on capital.
On the spending side, Sweden does not target much of its spending specifically to the poor. Tax revenue is spent on universal programs, like health care, which benefit most those who live longest; free college tuition takes from those who do not go to college and gives to those who do. Many aspects of welfare state spending in Sweden — as in other European countries — are linked to income, so that the more you earn, the more you receive in benefits. This is enormously effective, because it gives an incentive to Swedes to work hard and earn more. Poverty and inequality do get reduced, though not by redistribution from rich to poor, but rather by redistribution within classes — as the American sociologist Arthur Stinchcombe once put it, from the healthy to the unhealthy, from the young to the old and from the lucky to the unlucky. These patterns go back to the early 20th century, when many European countries were trying to figure out how to compete with the rising American economic behemoth and decided that they had to nurture their capitalists to do so……………The real lesson to take away from Europe is that progressive social programs are most popular, most effective and most durable when they are carried out in ways that do not damage business prosperity. European social reformers didn’t just reduce poverty and inequality. They created a new reality. When conservatives come into power in European countries, they find they cannot take away the progressive policies. European reformers managed this by embedding progressive policies in business-oriented arrangements. Low taxes on capital are just one example. We don’t need to enact exactly the same policies now — given how much wealthy Americans have benefited over the last several decades, progressive taxation still has a role to play in the United States — but we do need to learn the larger lesson that the secret of the European welfare states is that they are surprisingly business-friendly…………
To move from vision to reality, the Green New Deal coalition must include business groups, manufacturers, farmers and unions, and reformers need to genuinely listen to and respond to their concerns. They need to focus on solving problems such as the decline in productivity and work force participation, by using the revenue from a carbon tax to create jobs in energy efficiency and renewable energy, and by using higher taxes on capital gains to fund infrastructure, education, and research and development. Green reformers also need to explain the enormous business opportunity that this historic shift to a zero carbon economy presents. Get businesses to make investments in renewable energy and energy efficiency, and you make your policies not only more feasible, but also irreversible.
None of this would create a European-style welfare state. But if done right, it would create something even more extraordinary: a new model of capitalism that European progressives themselves would, someday, try to imitate.”

3. Long read: How to Value a Pot Stock
Author: Tara Lachapelle and Sarah Halzack
Source: Bloomberg (https://www.bnnbloomberg.ca/how-to-value-a-pot-stock-1.1246593)

After enough research to show marijuana or cannabis or good old pot is now less harmful than tobacco and alcohol, leading to legalisation in America, there is plenty of new business models emerging to capitalise on this trend. More intriguing now is how these businesses are valued given the absolute greenfield nature of this business. This article throws on light on how some of the big tobacco and booze companies are pre-empting a potential disruption to their core businesses lest the pot business takes off in way that no one had envisaged barely a year gao.
“Canopy’s CEO has said he wants it to become the Google of pot – but he’ll need to add a few more digits to its sales figures.
….Cannabis growers have hardly any revenue and their product is still illegal in their most desirable market, the U.S. That’s not stopping investors and corporate giants from spending billions of dollars to take stakes in these companies. They obviously see growth potential. And yet the question remains, how do you even value a pot business?
…Altria Group Inc., the U.S. tobacco leader and maker of Marlboro cigarettes, announced in December that it was buying 45 percent of Cronos Group Inc., one of Canada’s growing number of cannabis producers and among the industry’s high-flying stocks. The $1.8 billion transaction left us wondering: How did Altria determine that price? After all, in the period before the deal, Cronos generated sales of less than $4 million – no, that’s not a typo – and certainly no profits. Recreational pot had only just become legal in Canada two months earlier. Altria, a $105 billion market-cap company that rarely does splashy deals, placed immense value on a barely existent business in a nascent market.
The dynamics were the same when Constellation Brands Inc., a beer and liquor conglomerate, spent $3.8 billion to increase its stake in Canopy Growth Corp. earlier in 2018. Canopy’s CEO has said he wants it to become the Google of pot – but he’ll need to add a few more digits to its sales figures.
It’s a tricky thing to gauge the worth of assets that will potentially be highly valuable down the road – but are difficult to quantify just yet. Looking at other industries where this has been the case is helpful. Even if their businesses aren’t perfect comparisons, the method of valuing them can be instructive.
Take the natural-resources space, where the focus is often on non-financial metrics. They include production capacity and tangible assets, such as proved oil reserves – which is to say, how much fuel a producer can likely pump from their land. It can be argued that this is similar to how individual investors already have been gauging cannabis companies, dazzled by how many kilograms can be produced and how many acres of greenhouse they have.
But the downside to this approach for cannabis is that it puts too much emphasis on supply-chain processes that may become commoditized, and a rudimentary focus on capacity doesn’t capture how the early movers in this market can differentiate themselves. The industry’s novelty also distracts from what can be a challenging business from an operational standpoint. For example, Aphria Inc.’s share price increased more than elevenfold over the last five years, but in its latest quarter the business was hamstrung by supply shortages and packaging issues.
A better comparison for cannabis may be the biotechnology space. Deals for drug developers involve big, risky bets on future potential blockbusters. These products may not generate revenue yet, but they aim to address very specific markets and are expected to have an economic moat that wards off competition. For pharmaceuticals, that moat comes from patent exclusivity that prevents copycat versions of a therapy. In some ways, this is what the more advanced cannabis companies are looking to accomplish. They won’t have patents in the same way, but they do aim to create intellectual property and specialized brands that appeal to certain types of customers. And they want to be first to form those customer relationships.
Remember, this market will be far more expansive than simply selling a box of joints. There’s an opportunity to create all sorts of consumer products, and the marketing can vary widely – from wellness drinks and beauty items infused with cannabidiol, or CBD (the part of cannabis that doesn’t deliver a high), to “sin” products like marijuana-infused edibles, or something more akin to having a glass of wine.

Look at it this way: Altria doesn’t own tobacco farms. It owns high-margin brands that source from tobacco growers. So when it’s studying the future of marijuana, it’s not looking solely at production. It’s looking for unique brands that can be scaled up by a team with the necessary know-how. In the case of Cronos, CEO Mike Gorenstein said on the last earnings call that the company is trying to differentiate itself with pre-rolled joints, adding that innovation around branding and efficiency will be “a bigger differentiator than just cultivation.”
Knowing the important role that brand-building will play in the next phase of the cannabis industry’s growth story, it’s useful to study these companies’ senior management teams and look for branding and retail pedigree. It’s a good sign that Cronos’s head of marketing has had stints at PepsiCo Inc. and Mondelez International Inc., and that Tilray Inc. has a one-time Starbucks Corp. executive running its retail strategy.

…..Wherever it’s sold, if the cannabis business is to grow as big as the industry’s bulls hope, it is going to have to successfully court non-users and infrequent users. That’s where newer innovations, such as edibles and beauty items, may be more important than smokeable products.
The companies that become the breakout stars in the legal cannabis era will be the ones that have a vision for how to create demand for such goods, whether through curiosity-inducing product, a great in-store experience or alluring marketing. These capabilities – not merely spreading more seeds in soil – should be a critical part of valuing the pot pioneers”

4. Short read: Elite men and inequality in the hedge fund industry
Author: Megan Tobias Neely
Source: Wipsociology (http://www.wipsociology.org/2018/09/15/elite-men-and-inequality-in-the-hedge-fund-industry/)

Megan Tobias Neely, a Postdoctoral Fellow at the Clayman Institute for Gender Research at Stanford University, tries to find the reason as to why firms run by white men manage 97 percent of hedge fund assets—a $3.55 trillion industry. Based on her work, Megan believes the answer lies in a system of patronage organizing the industry. There is a very strong mentorship environment in the hedge fund industry. One generation teaches the next generation who teaches the next generation as there’s a strong sense of loyalty, there’s a strong sense of kinship and family. Megan also says that patrimonialism has widespread impacts that extend beyond Wall Street and into Washington – Ben Bernanke/Alan Greenspan after completing their Federal Reserve stint consulted hedge funds.
Megan says patrimonialism warrants closer examination as elite networks—whether in finance, technology, or government—impact public policy and generate systemic inequality on a broad scale. We need to better understand what can be done to change this system of inequality, and what is at stake if we don’t.
“I’m sorry, but so and so’s brother needed to get hired. Shit happens,” Karen recounted, with resignation, a time her boss denied her a promotion. Karen is a white woman who works at a hedge fund, a private financial firm. She continued, “When there’s big money, greed, power, people protect their own. And sometimes it’s the guy in the parish, the guy in the corner [office], the guy in the whatever.”
Karen’s account provides insight into why firms run by white men manage 97 percent of hedge fund assets—a $3.55 trillion industry. Moreover, she sheds light on why these elite men have amassed riches. Indeed, I find that gender and racial inequality provide a key to explaining why hedge funds drive the divide between the rich and the rest. Since 1980, U.S. income inequality has skyrocketed, in part due to mushrooming pay in financial services. Hedge fund managers are well represented among the “1 percent” with average pay of $2.4 million. Even entry-level positions earn on average $372,000. ($390,000 is the threshold for the top 1 percent of families.)
Yet, the “winners” of widening inequality—at hedge funds and among top earners overall—are mostly white men. Why is this lucrative industry a bastion of white-male power and privilege? From 2013 until 2017, I interviewed and observed people who worked at hedge funds. I find the answers lie in a system of patronage organizing the industry. In a recent article, I show how patronage allows a select group of men to groom and transfer capital to one another.
Patronage on wall street
In the 1900s, Max Weber defined a patrimonial system of authority as based on trust, loyalty, and tradition. He observed as a new capitalist elite replaced patriarchal monarchies during the Industrial Revolution. Weber predicted that bureaucracy would replace patrimonialism as the organizing fabric of capitalism.
Julia Adams later specified how a patrimonial leader rules “paternally” as a symbolic father. This patriarchal system legitimizes the monopoly of power and resources among men. Does patronage exist on Wall Street today? I find that patronage entrenches inequality at hedge funds. Men identify, groom, and seed future generations of financial elites—usually other men. Gender, race, and class status shape whom they deem to be trustworthy and loyal………..
Jay recognized family-like mentorship as the way to gain the know-how of the industry.
“As you get older, wiser, more experienced, you seek somebody who reminds you of you, who has that same ambition, that same passion, that same drive.” Jay said, “And you teach them all that you know.” I realized the younger men I observed with Jay were his mentees. When I asked, he said, “Yes!”
“How did you build these relationships?” I asked.
“As you start climbing the totem pole, if you will, you start looking for people like yourself.” Jay said, “It’s this organic process whereby you see people that have the same mentality, the same passion. It’s very tough to explain from a data perspective; quantitatively, how do you quantify that? You just see it. You kind of feel it. It’s organic.”
This patrimonial system of white male privilege is not only self-sustaining. It speeds up over time, as the beneficiaries concentrate their power and resources by investing in protégés.
A revolving door
Patrimonialism has widespread impacts that extend beyond Wall Street and into Washington. First, hedge funds have collapsed markets and currencies. George Soros “broke the Bank of England” by short-selling the British pound. The Hollywood hit “The Big Short” exposed how hedge funds profited from the greatest stock market crash in recent history. Second, a “revolving door” exists between Wall Street and Washington. Former male politicians with ties to Goldman Sachs alone, include Treasury Secretary Henry Paulson, Head of the Securities and Exchange Commission Arthur Levitt, House Majority Leader Dick Gephardt, and White House Chief Strategist Stephen Bannon……………….
Patrimonialism warrants closer examination. Elite networks—whether in finance, technology, or government—impact public policy and generate systemic inequality on a broad scale. We need to better understand what can be done to change this system of inequality, and what is at stake if we don’t.”

5. Short read: Netanyauism is Winning in Israel – and Globally
Author: Max Fisher & Amanda Taub
Source: New York Times (https://static.nytimes.com/email-content/INT_12137.html?nlid=25282463)

20 years ago for many non-Israelis, Israel looked like a strange country – a country created from the ravages of World War II by and for Jewish people, a country that seemed to be fighting the Palestinians almost perpetually. 20 years on Israel looks like everywhere else. The rest of the world seems to have become like Israel – every country seems to be perpetually in a state of civil war. “Israel, far from being an anachronism, turned out to be a harbinger. Rather than Israel coming to more closely resemble other democracies, other democracies are looking increasingly Israeli.”
As a result, the Israeli leader Benjamin Netanyahu seems to have become a poster boy for other leaders in countries as disparate as Brazil, Hungary and India. Everybody, it would appear, wants a page out of the Netanyahu playbook. “Mr. Netanyahu rose to power in the 1990s by championing skepticism and fear of efforts to make peace with the Palestinians, a common sentiment among Orthodox and secular nationalist Jewish Israelis. When he defeated Shimon Peres in elections in 1996, Mr. Peres commented, “The Jews had beaten the Israelis.”
For 20 years in and out of power after that, Mr. Netanyahu played what many American diplomats suspected was a double game. Abroad or when speaking in English, he would emphasize Israel’s democratic system, its hope for peace with the Palestinians and its respect for international rules and norms. At home and speaking to his base, typically in Hebrew, he would promise stern treatment of Palestinians, promise to expand the settlements choking off the West Bank and warn darkly about Arab Israeli voters.”
And so, against all odds, Israel has laid the template for the kind of right wing politics that many other countries seem destined to follow: “…Netanyahuism is succeeding beyond Israel. Voters around the world are flocking to strong-fisted rulers who promise to protect “us” — usually defined, at least implicitly, along racial, ethnic and religious lines — by controlling or expelling the minorities or cultural outsiders unlucky enough to be categorized as “them.”
More and more often, defying the international order, with its idealistic restrictions on everything from the use of force to a state’s obligations to refugees, is seen as a plus. In this new nationalist order, there is one country that, paradoxically, wields little power in the traditional sense but commands great cultural sway…There is more going on here than evangelical pro-Israel attitudes or strategic interests in the Middle East. Israel’s old-style ethnonationalism and its hard-line treatment of Palestinians, once an international liability, have become an asset.”

6. Short read: Having Kids Is Terrible for Women’s Earning Power
Author: Janet Paskin
Source: Bloomberg (https://www.bloomberg.com/news/articles/2019-04-10/the-pay-check-what-having-kids-does-to-women-s-pay)

This article quantifies what many of us have seen happening in our lives (or in the lives of our better halves). “At the beginning of their careers, men’s and women’s income are practically equivalent. By the time everyone’s in their mid-40s, women on average make as little as 55 percent of what men do.
Claudia Goldin, an economics professor at Harvard University and an expert on the gender pay gap…her research finds that women often pull back from their careers because their unpaid work—raising and caring for a child—becomes more demanding. In a 15-year study of MBA students at the University of Chicago, Goldin and her colleagues found that the pay gap started to widen a year or two after a woman had her first child. “These women are extraordinarily driven and dedicated to what they’re doing,” she said. “They’re trying as hard as they can, but at some point, the demands of home are really getting to them.”… According to research from the Bureau of Labor Statistics, women spend more time on more days of the week caring for their children than men do. They also spend more time on domestic duties such as cleaning and laundry.”
Unfortunately, for women their reduction in working hours post-motherhood has a non-linear impact on their earnings: “Those additional responsibilities often lead women to limit the time they spend at their paying jobs…Women’s attempts to deal with these dueling demands are often mistaken for a lack of dedication or ambition in their careers. That perception also contributes to the gender pay gap, Goldin says.“The difference in hours is not that large,” she said. “But the penalties are very, very large.”

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Note: the above material is neither investment research, nor financial advice. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services and as an Investment Advisor.
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