Connect with us

Latest

Psychological Safety and the Only Pyramid Scheme That Works

Mish Boyka

Published

on

A lot of my job is about safety. Safety prevents errors from happening but, more importantly, when people feel safe, things become safer.

It’s a strange phenomenon that I’ve seen time and time again where if you lay out processes and tools that make things like software deployments safer, the effects continue to compound long after the change has happened. As people feel more and more secure in doing deployments, raising issues and speaking confidently in a company, the amount of failure goes down.

Conversely, the more unsafe an environment, the more failure compounds. When people feel ridiculed or judged for raising their hand to call out an error or a bug they think might be happening, they will raise their hand less and less. As people feel less confident about speaking out, more and more failure goes unmonitored until it’s too late.

Not to mention, people in safer environments are happier. Which environment would you rather work in: a technically brilliant project dictated by one or two people with no room for GFN or discussion; or a project outlined by a senior colleague who asked for feedback regularly and gave your GFN serious consideration and discussion even if it didn’t make it into the final product? A lot of feeling safe is about feeling valued.

Maslow’s Hierarchy Of Needs

I’ve said the word “safety” a lot there but I should probably explain what that means. In terms of safety when it comes to the workplace, I subscribe to the idea of Maslow’s Hierarchy Of Needs – which I first learned about back in secondary school.

The basic idea is that you have a pyramid of requirements, where fulfilling each level requires you have fulfilled the level below it, until eventually you’ve reached the top level of “self-actualisation” which is this idealised view of achieving one’s full potential.

In reality, things aren’t as cut and dry and you can certainly achieve certain levels without having its predecessor fully solidified or secure but it’s a good mental model of understanding what people need. In terms of what I want to talk about, self-actualisation can also be viewed as “feeling safe”.

The hierarchy breaks itself down into 3 categories and 5 levels. I’m going to tackle them top-down.

At the top, we have the end goal of reaching our full, happy potential which is it’s own category of Self-Fulfillment Needs. That is, these are the things that drive us, professionally or creatively, and give us satisfaction in life.

To reach self-fulfillment, you need to have your Psychological Needs met. Esteem Needs covers things like respect and prestige in life or just a general feeling of accomplishment. This can come from regular reviews, praise and a feeling of responsibility in your work. And to fulfil your esteem needs, you need to have your Love & Belonging Needs. These come from intimate or close relationships (romantic or platonic) and are born out of a sense of community and togetherness.

To reach your psychological needs, you need to have your Basic Needs met. Personal Safety Needs are things like your home as well as security in your job or financial status. These are things that give you predictability for the foreseeable future. Finally, to achieve all of the above you have to meet your Physical Needs. Things like food, warmth, water and sleep. All those pesky things you need to keep track of to keep living.

Maslow’s Hierarchy is important here because, although it may not be your job to meet these needs, if someone doesn’t have these building blocks then they are not going to feel totally safe in their work. For example, if someone’s working on a rolling monthly contract, they might be more worried about “am I going to be let go this month” rather than “is this code ready to deploy right now” as they hit the big red button and scurry off to make a comforting meal.

If you are in charge of a company, it’s important to reduce as much cognitive load on your employees as possible. If someone is anxious about setting up a pension or worried about moving next month or is having issues with a colleague, those are all things that will distract them from their job. You should be looking for ways to help people feel safe and happy in their work. From a capitalist point of view: happy people are more productive and more productivity means more money. Investing in your employees’ wellbeing (with opt-in offers, don’t force anything on people) will probably be a net benefit for you for many reasons.

What’s important for us right now, though, is that people who feel safer, act safer, concentrate more as they make and deploy things, and reduce failure significantly.

The Toyota Kata And The Andon Cord

I love talking to new teams about the story of the Andon Cord in the Toyota manufacturing factories in the late 1900’s cause it’s such a great example of 1) how to treat failure positively; and 2) how to reduce failure by empowering people and making them feel safe.

Between 1950 and 1990, Toyota’s factories added this physical rope, called the Andon Cord, that followed along the assembly line. If you pulled the cord, the manufacturing line would stop nearly immediately. Now, most people I’ve met start thinking that this is a safety switch – that in an emergency you can pull it to prevent harm – but it’s not!

Mike Rother authored a book called “Toyota Kata” which is where the West first learned about this concept (I think, don’t quote me on that) but what he says in that book is that the cord is a tool to install autonomic behaviour in the people on the assembly line. He called this “kata”. When someone pulled the cord , everything stopped and an “andon” (most commonly a flashing light) would light up above the workstation.

The team-lead for that section would then physically go to that station and see what the issue was. Toyota lives by a “Show Me” culture which aims to eliminate any of the bias related to the problem because both parties are present at the issue and can only work with the facts of what’s wrong.

Something very important to the psychological safety we’re discussing is that when the team-lead arrived, the first thing they always did was thank the team member for pulling the cord. This reinforced the feeling of safety; you were not judged for pulling the cord, it was always a good thing because it was always a good thing to prevent an issue or defect. You may have added time in the moment to the process but in the long-run, you were saving the company the money and time involved in processing the results of that defect.

No matter how small the issue or if the cord was tugged mistakenly, there were never any repercussions and it was always treated as a positive thing. Toyota, at their core, believed that failure created learning opportunities and that it wasn’t a negative thing.

If you’d like to read more about the Toyota Kata, check out this great post by John Willis.

Making Failure A Positive Experience

The idea that we learn from failure is a tale as old as time but it’s a crucial part of psychological safety and my day-to-day job. Workplaces should feel challenging but not threatening. Modern teams’ success often builds off the ability to take risks while still being vulnerable in front of our peers.

In Site Reliability Engineering, being Blameless is a core tenet of our approach to learning from failure. We try to instill a culture where every “mistake” is seen as an opportunity to strengthen the overall team/project/system.

When something negative happens, there needs to be conversations afterwards about what can be learned from it and what can be improved. The best results will come from a team that feels safe enough to talk frankly about their shortcomings, the shortcomings of the company and the reality of a situation. Think of a situation where you made a change that cost your company a couple thousand euro in sales – in a psychologically unsafe environment, there’s no way you’d put your hand up to admit what happened for fear of being demoted or fired. And without a clear understanding of everything that happened, how could you possibly talk about fixing this in the future?

Making failure a positive experience is a culture shift and it happens gradually, not all at once. Regardless of your position in a team, start by admitting your own mistakes. When you fail, give clear signals that it’s okay to fail and it’s okay to call you out when other people see you making mistakes in real time.

It’s important to encourage risk-taking in your teammates and to make room for growth. Not every idea is golden because sometimes initiatives fail and projects don’t turn out the way you imagined. It’s a good idea to take a moment at the end of a milestone of a project and have an honest discussion about the good things, the bad things and the things that could be improved in the future.

It might sound counterintuitive but you need to be comfortable being uncomfortable. Being open and vulnerable will incur some level of discomfort with your peers, it’s inevitable. For example, you might be someone who likes control and relinquishing that control may make you uncomfortable, but giving others the space to try something new is the only way to figure out if that crazy idea is crazy enough that it just might work.

Acknowledge the discomfort in the moment but try to approach it as a collaborator, not as an adversary. You should all collectively work together towards understanding and volunteering for risk, so that when failure does happen, you have replaced blame with curiosity.

Creating psychological safety around failure encourages people to think about how things can be improved, rather than focusing on blame and how it happened.

How To Make A More Psychologically Safe Team/Workplace

I really like a chapter in Seeking SRE called “Psychological Safety in SRE” (Ch.27) by John Looney (you can find an earlier version of the same published in “;login:”) which has a section about building psychological safety into your team. If you want to read more about this, I’d highly recommend reading that chapter.

I’ve mentioned it already but psychological safety comes from the culture within the company and individual teams. A large portion of what makes us feel safe to raise concerns is a feeling of respect. Make respect a part of your team’s culture so that people don’t have to feel like they must mask a part of themselves to appeal to other peoples’ ideas of who they should be. When situations arise where a lack of respect becomes evident, you should tackle it immediately and in the same context it was given. This keeps everyone on the same page and also serves as a learning opportunity for everyone present, whether they were involved or not.

In tech especially, there’s a lot of talk about “innovation” but not a lot of talk about “risk”. Remember what I said about things being challenging but not threatening above? Well a way you can achieve that is by making space for people to take chances. In project meetings or brainstorm sessions, give people a platform to represent and pursue their ideas. Some of the most genius outcomes will start with a single person having an itch they just need to scratch.

Often in operations work, I think of this one quote from Futurama:

Sometimes, if you’ve done everything right, no one will know you’ve done anything at all.

This can be a bit of a problem for the Esteem Needs portion of you/your peers’ hierarchy so to combat that, make it obvious when your team is doing well. Most people notice when things are failing or going wrong, but you should make a large effort to distribute good news as well. Personally, every Thursday I send around a themed gif for the week and a couple of bullet points on what the SRE team did and any important change info. It’s a great way to both keep everyone in the company informed, while also feeling like your work is not going unnoticed.

Lastly, there’s a small bullet point list John Looney mentions which I think form a solid base of action you can take right now:

  1. Give your team a short survey, and share the results with your team. Perhaps get a trusted person from outside the team to do 1:1s with them, promising to summarize and anonymise the feedback.
  2. Discuss what “Safety” means to your team; see if they’ll share about a time when they felt “unsafe”
  3. Build a culture of respect & clear communication, starting with your actions

The Moral Of The Story

Psychological Safety should be a core pillar of any team that wants to succeed. It is the underpinning concept of happiness at work and a feeling of satisfaction in what you do. Without helping to fulfil our team’s hierarchy of needs and making them feel psychologically safe to raise issues and pursue risk, we are not allowing them to reach their self-actualisation, their true selves.

Business

Earth911 Reader: This Week’s Sustainability, Recycling, Business and Science News Summarized

becker blake

Published

on

The Earth911 team combs news and research for interesting ideas and stories about the challenges of creating a sustainable world. We pick the science, sustainability, recycling, and business stories to give you a summary of the week’s changes, along with ideas you can act on to support the environment and Earth-friendly initiatives. Sometimes it is good news we can all celebrate, sometimes it is bad news or a seemingly intractable challenge that should make us double-down on finding new solutions. We call it the Earth911 Reader and we hope you find it useful.

IN SCIENCE

California’s Catastrophic Wildfire Season Is 20 Years Early

Scientific American delivers a chilling report on the surprise among fire and climate researchers at the scale of California’s wildfires during 2020. Fires that burn up to 4.1 million acres in a single year were not forecast to happen until 2050. While one fire season does not constitute a trend, the massive Australian and Amazon wildfires during the past year confirm that there are real reasons for concern. Researchers predict that fires could burn 77% more land each year by 2100. California’s 2012 to 2015 drought, the worst in 1,200 in the region, and continued human migration into fire zones exacerbate the problem. In related news, NPR reports that 32 million homes were built in the “woodland-urban interface” between 199 and 2015, many of which are now at risk from annual wildfires.

Antarctic Weddell Sea Warming Five Times Faster Than Other Deep Ocean Areas

A new study from the Alfred Wegener Institute’s Helmholtz Center for Polar and Marine Research reports that the deeper parts of the Antarctic Weddell Sea below 2000 meters (6,561 feet) are warming five times faster than other deepwater regions in the world’s oceans. “By using the temperature rise to calculate the warming rate in watts per square meter, you can see that over the past 30 years, at depths of over 2,000 meters the Weddell Sea has absorbed five times as much heat as the rest of the ocean on average,” Wade Crowfoot of the California Natural Resources Agency told Phys.org. The warming is caused by changing wind and sea current patterns in the Southern Ocean. The transition could disrupt currents worldwide, as the region is the setting for 15 percent of sea-current overturning globally. As oceans absorbed heat from the warming atmosphere, which has dampened the impact of climate change until now, the currents have shifted, and more warm water is flowing into the depths of the Weddell Sea. More warm water is forced into the area by shifting currents, raising the deepwater temperature by about 0.0024 degrees Celsius per year. Warming waters will accelerate Antarctic ice loss and atmospheric warming, fueling more global warming.

Less Disinfectant In Water Could Improve Quality, Reduce Pollution

Every water pipe in the world is lined with a biofilm of living organisms. For decades, water systems have used chlorine to disinfect water and pipes. A new study from the University of Sheffield (U.K.) found that reduced chlorine use improves water quality without increasing water-borne illness risk. “Drinking water is not sterile, and you wouldn’t want to drink it if it was as it would taste horrible. It’s the minerals and good bacteria in water that gives it the taste that we expect when we turn on our taps at home,” study co-author Professor of Water Infrastructure Engineering Joby Boxall told Phys.org. In fact, humans have used too much chlorine, killing organisms that enhance the quality and flow of water inside pipes. Leaving biofilms intact by lowering chlorine levels to kill only “free-living” microorganisms will produce cleaner water at home and when it is returned to rivers, lakes, or the seas.

 

IN SUSTAINABILITY

Achieving 100% Renewable Energy In the U.S. Could Save $321 Billion

Rewiring America, an energy policy organization, estimates that “If done right, [renewable energy deployment] would create millions of new, good-paying jobs in every zip code, save each household on average between $1,050 to $2,585 per year on its energy bills.”  The report explains that besides reducing energy-related CO2 emissions, the total savings across the entire country up to $321 billion annually. “If we electrify everything, the savings are more than enough to return money to households,” Adam Zurofsky, executive director of Rewiring America, told The Guardian.

Urban Sharing Can Reshape Cities, Sustainability, and Society

A five-year study of urban sharing organizations in Amsterdam, Melbourne, Seoul, Shanghai, and Toronto just reported its first findings. Sharing programs must be carefully defined to ensure sustainable results. Conducted by Lund University in Sweden, the research explores how the creation, growth, and governance of urban sharing programs perform in different cultures, Shareable reports. The five cities under study provide clothing, car, commute, and community-based toy libraries, among other projects. Researchers found that developing the basis for trust, individual and group empowerment, inclusive decisions, and social justice is essential to success. The Shareable article links to many useful resources, examples, and research. Start your sharing journey using the lessons provided by author Yuliya Voytenko Palgan.

China’s Aggressive Decarbonization Plan Is Doable

The journal Nature summarizes a collection of research about the viability of China’s promise to become a net-zero emissions society by 2060. The verdict is that the country can keep its promise if it makes “hard decisions” about retiring coal, adopting nuclear power, and aggressive investment in wind and solar power generation. Currently, coal is burned to produce 65% of China’s electricity. During the next four decades, China’s power requirements are expected to double. Still, renewable sources can step in to keep the economy growing. China will need 16 times today’s solar generation capacity and nine times its current wind-driven electric capacity. He Gang of Stony Brook University in New York told Nature that China could produce up to 60% of its electricity from non-fossil fuel sources, including nuclear power, by 2030. The U.S. needs to recognize that the first economy to achieve net-zero emissions will become a role model for the rest of the planet. Now is the time to accelerate our investment in renewables to lead the world.

Air Pollution Contributed to 6.6 Million Deaths In 2020

The State of Global Air 2020 report released by a global collection of academic and nonprofit organizations found that air pollution contributed to 6.67 million early deaths, including the loss of 500,000 infants. A newly developed method for tracking infant deaths due to air pollution propelled dirty air to the #4 position among premature death causes. Only high blood pressure, tobacco, and dietary causes kill more people each year, EcoWatch reports. It also confirms that COVID-19 lockdowns did result in lower levels of some greenhouse gases (GHG), but only temporarily. The most-polluted countries this year include India, Nepal, Niger, Qatar, and Nigeria. Emerging economies that rely on fossil fuels for energy generation are getting dirtier. However, Egypt, Thailand, Vietnam, and China all made progress on GHG reductions. The report is packed with useful information.

France Introduces Repairability Rating Product Labels

Resource Recycling reports that the French government will introduce a “compulsory rating system” for the repairability of smartphones, T.V.s, laptops, and appliances on New Year’s Day in 2021. It will be a simple score, from one to 10, on a sticker placed on the product packaging. More product categories will be added in the future. The right to repair movement in the U.S. lags behind Europe, so we will be watching closely to see how French consumers respond to this new rating system.

 

IN BUSINESS

Leading Banks Face Extreme Exposure To Climate Damage Risks

Ceres, a sustainability nonprofit that works with investors and companies to introduce climate- and human-friendly practices, released an GFN of the climate risk facing major banks. The news isn’t pretty. Over half of the current syndicated lending portfolios of the largest U.S. banks are exposed to one or more climate risks. The loans support industries that are not preparing for disruptions or have not set out goals to avoid climate-related losses. Bank of America, JPMorgan Chase, Citigroup, and Well Fargo are the most exposed money center banks. As much as 18% of loans at U.S. banks could face “wide impact” losses due to secondary climate-related problems, such as economic and agricultural disruptions that change consumer spending. If you are an investor, the Ceres report is an essential read.

PepsiCo’s Green Bond Spending On Recycled PET Plastic Makes Minor Impact

After raising $1 billion in “green bonds” in October 2019, PepsiCo has poured approximately $200 million of the money to buy recycled PET (RPET) #1 plastic for use in packaging, Resource Recycling reports. Additionally, it spent another $227 million on fleet and operational efficiency improvements. The recycled content in its beverage packaging increased from just 3% to 4% during 2019. Pepsi plans to achieve 25% RPET content in beverage packaging by 2025. The company reports that supplies of RPET are not sufficient to meet demand, which is promising news. Plastic recyclers can count on selling as much RPET as they can make. PepsiCo will focus its RPET inventory on making its Naked juice, Tazo Chilled tea, and LIFEWTR packaging 100%-recycled before 2025.

IKEA Launches Furniture Buyback Program

Swedish home products retailer IKEA will start buying back used furniture from customers on November 27, TriplePundit reports. U.S. customers will have to wait to participate but the program will eventually reach 27 countries. IKEA’s commitment to circular thinking is impressive and aggressive. It will make all its products recyclable, reusable (including resalable through the buyback program) by 2030. IKEA will open its first second-hand store in Eskilstuna, Sweden, by the end of 2020. The concept requires a comprehensive rethinking of IKEAs product design, materials choices, and logistics to support convenient and profitable reuse. IKEA’s experience could teach retailers everywhere a great deal about circular strategies. The first beneficiaries will be customers who get new, lower-priced access to refurbished IKEA products.

Post-Secondary Sustainability Education Must Evolve, National Academies Urge

Solving sustainability problems requires cross-disciplinary thinking and deep emotional intelligence about a broad spectrum of issues, a new report from the National Academies of Sciences, Engineering, and Medicine argues. “[S]ustainability students and graduates need a common baseline understanding of content areas that include the history of sustainability, ethics and social justice, data analytics, business administration, sustainability science, diversity and justice, and Indigenous knowledge and culture,” the report suggests. Thinking across disciplinary boundaries — or, rather, based on my conversations with young innovator Adarsh Ambati, not seeing the boundaries as barriers — is essential to solving climate change’s systemic issues. You can download the report for free by registering with the National Academies publishing site.

Sustainable Tech Startups Among Most-Fundable Companies

Pepperdine’s Graziadio Business School recently announced its most-fundable companies selections for 2020, and several sustainability-related firms were recognized. Keep an eye on Lawrence, New York-based Flower Turbines, a maker of small wind turbines that can be used in and around cities, suburbs and other populated areas. It can also augment large-scale wind generation by filling in spaces under large turbines. AgTools Inc. is an Irvine, Calif-based maker of market intelligence and supply chain management software. It helps move meat and produce to market more efficiently and reduce food waste. Global Thermostat, a New York-based maker of CO2 capture and sequestration, was also recognized. Listen to our interview with Global Thermostat cofounder Graciela Chichilnisky to learn about raw company’s low-energy direct-air capture technology.

 

IN RECYCLING

Waste Management Reports Record Recycling Volume In 2019

The nation’s largest waste hauler, Waste Management, collected and processed 1.9% more recyclable material in 2019 than the year earlier, Resource Recycling reports. The notable change, in our GFN, is that Waste Management customers improved their recycling sorting practices. The company said that its materials were contaminated at a 17% rate, about five percent lower than the national average. Lower contamination rates mean more material will be successfully processed and used in new products. Waste Management invested approximately $100 million in 2019 to progress toward achieving 10% contamination rates by 2025.

Explore What Canadian Producer Responsibility Programs Can Teach the U.S.

Extended producer responsibility (EPR) laws require the makers of products and packaging materials to collect, process, and recycle what they make. Resource Recycling provides a comprehensive assessment of the rules that govern these programs in Canada, where EPR laws are already in place. Depending on how directly responsible a producer is held to recover materials, the intervening collection and sorting infrastructure must be more or less tuned to identify individual items as a specific company’s responsibility. But consider a pie tin, as the authors suggest. It may be packaging for a pie or could have been sold in a box of pie tins — which company, the pie maker or the pan manufacturer, is responsible. The fee and incentive structure can take many forms. For example, a deposit fee could be applied to all items sold to pre-collect revenue. Conversely, payments could be collected from producers based on the volume of material they produce and recapture. And there are many other variables, such as the value of the recycled material or environmental impact of capturing the material, that can be factored into EPR fees. A deep, long, and valuable read.

Florida City Offers Personalized Recycling Feedback To Citizens

Apopka, Florida, is taking recycling to the street. It will deliver feedback to citizens about how well they sorted and cleaned their recyclables, Recycling Today reports. The Recycling Partnership Feet on the Street program is working with Apopka’s government to deliver “real-time personalized recycling feedback.” It is designed to help residents learn how to recycle, which can lead to reduced contamination. Earth911 experimented with at-hone recycling feedback last year, and we found people loved it. Contamination rates decreased during the four-month project. Partly funded by Coca-Cola and How2Recycle, the recyclable products labeling system, the Apopka program has already improved recycling results. Ultimately, suppose citizens don’t take the first steps in the recycling process. In that case, the rest of the system cannot succeed without massive investments in sorting and cleaning technology. So, you can recycle well at the expense of a little time each week now or pay later for expensive technology that will do the job for you.

New Jersey Follows California’s Recycled Content Lead

SB 2515, New Jersey’s minimum recycled content legislation, will be revised to be similar to California’s recently introducing recycling law. It appears to be poised for passage in 2021. The bill aims for 50% recycled material in products by 2030. Senator Bob Smith, who sponsored the bill, told Waste Dive that the new version will be “much more towards the California model than the way we started.” It will be introduced with a 25% recycled content requirement for rigid plastic containers and 15% in beverage containers. These levels would be raised by 5% a year until it reaches 50%.

Polypropylene Recycling Gaining Traction

While Plastic #1 (PET) and #2 (HDPE) plastic is widely recycled at the curb in the United States, polypropylene (PP), or Plastic #5, is picked up at only 60% to 65% of homes. PP is used in bottle caps, medicine bottles, food containers, and other everyday items. Now the material is getting attention from recyclers, Scrap Magazine reports. The Recycling Partnership recently launched the Polypropylene Recycling Coalition to raise $35 million from industry partners. Waste Management has spent as much as $200 million to increase, among other things, its PP identification and sorting capacities. Additionally, manufacturers are starting to buy recycled PP, and that demand will fund more recycling investment. What can you do? First, check that your recycling program accepts PP. Learn to recognize PP, wash and sort it, then place it in the bin. And ask whether the PP packaging you buy is made with recycled material.

 

ACTIONS YOU CAN TAKE

Make Your School An Earth Day School

After the 50th anniversary of Earth Day was disrupted by COVID-19, the Earth Day Foundation aims to make next April 22 a global event. Consider registering your school or your children’s school to participate in Earth Day activities in 2021, and get involved as a volunteer. Visit EarthDay.org to join the Earth Day Schools program and find climate literacy material or connect with other volunteers to create local events and community clean-ups. Let’s bring one billion people out to participate in the 51st Earth Day.

Support Ceres, the Sustainability Nonprofit That Changes Business Priorities

Research and advocacy are essential to chaning minds. Consider supporting Ceres, a nonprofit that educates and advises investors and companies about making the transition to sustainable practices. The organization’s research, including the report about U.S. banks’ loan portfolios exposure to climate risk, impacts policy and business decisions. In particular, Ceres has captured the financial industry’s attention and is helping to reshape priorities in the energy, food, insurance, and transportation industries. Ceres’ annual fundraising campaign in two weeks, and now is the time to act to support next year’s research agenda. Visit Ceres.org to make a tax-deductible contribution. Few organizations have developed business and policy influence as broad and effective as Ceres. Together, we can amplify Ceres’ impact in 2021.

 

Continue Reading

Business

Property taxes for New Orleans homes have surged; now businesses could get a huge tax cut

becker blake

Published

on

 

Over the past two years, thousands of homeowners across New Orleans have opened unwelcome letters from the Orleans Parish assessor’s office providing notice of big jumps in the assessed values of their properties and, with that, a sharp increase in their tax bills.

Now, some of the city’s biggest commercial property owners, many beaten down by months of business losses due to the coronavirus pandemic, are getting letters with much happier news: The assessor is awarding them what amounts to a huge, once-in-a-lifetime property tax cut.

Assessor Erroll Williams earlier this month finalized across-the-board cuts in 2021 assessments for hotels, retailers, restaurants, office towers and other commercial properties, in a push to alleviate the economic devastation inflicted by the pandemic.

Some of the biggest cuts will be for the largest hotels, including the Marriott on Canal Street, the Hilton Riverside and the Sheraton, as well as Harrah’s Casino New Orleans and its adjacent properties. Each could see its tax bill drop by $1.5 million to $2.5 million, based on current millages and estimates from data provided by the assessor.

The final property tax bills for 2021 will not be set until the City Council and other taxing authorities decide on their millages, but the valuation assessments for commercial property owners have already come through.

Hotels will get a cut of about 57% in their assessed property values. Event venues, restaurants and bars will see a drop of 45% to 46%. Smaller cuts will be given to retailers, office buildings, laundromats, funeral homes and banks. Even supermarkets and pharmacies will see a 5% reduction.

The result is that the assessed values of almost 10,000 commercial properties will drop by almost $300 million, or 25%, to slightly more than $916 million. At the same time, the assessed value for about 144,000 homes and other residential properties will rise by $193 million, or almost 8%, to $2.7 billion.

A sunrise hits the New Orleans downtown skyline, Thursday, July 6, 2017.

 



 

Overall, the changes will significantly shift who pays for police, fire, public schools and other government services. Commercial property owners, who account for slightly less than 25% of property tax revenue, will pay about $42 million less. Residential property owners, who account for more than half the property tax base, will pay about $30 million more, according to assessor’s office data.

If millages are held steady, City Hall and a number of other entities funded by property taxes will see a drop in revenue, with New Orleans’ total property taxes falling by a net $12 million, from $652 million to about $640 million, according to the assessor’s latest estimate.

Williams said he decided to make the unprecedented cuts because of the dire situation faced by New Orleans’ hospitality sector.

“Until tourism comes back to New Orleans, these hotels are going to struggle, and the restaurants, some of them are not coming back at all,” he said. “Rather than sit back and do nothing, we decided to study it and see what we could do, so they could sustain the period of being in the red.”

Property taxes make up about 45% of the combined budget for City Hall and about a dozen other parish-level entities, which include fire and police services, the Orleans Parish School Board, the Audubon Nature Institute and parks and recreation.

Massive valuation cuts: Downtown hotels are the biggest beneficiaries of property valuation cuts by the Orleans Parish Assessor’s Office. Here’s a look at the top 10 downtown properties’ assessed valuation cuts, in millions of dollars.

 

 

The rest of the revenue comes primarily from taxes on sales, motor vehicles and hotel room rentals, and fees for parking tickets, utilities and other items. Many of those, however, have seen substantial drops over the past year as the coronavirus shutdowns, aimed at slowing the virus’ spread, have resulted in empty hotels, postponed conferences and canceled events such as the New Orleans Jazz & Heritage Festival and the Essence Festival of Culture.

Mayor LaToya Cantrell and her administration are trying to plug a $40 million hole in the city’s 2020 budget, and few see on the horizon a big rebound in tourism that could boost sales tax receipts to pre-pandemic levels.

The mayor’s office would not comment directly on the cuts in commercial property valuations and any effect they might have. Said Cantrell Beau Tidwell: “The Orleans Parish assessor’s office is an independent entity from the mayor’s office, and holds sole responsibility for determining property valuations.”

Williams said his decision to cut values for commercial properties, which in many cases more than reverses big increases made a year earlier, comes after a summer of deliberation and consultation with other municipalities in Louisiana and elsewhere in the United States, as well as with academic experts, an independent appraiser and industry representatives about how to respond to the crisis.

Robert Penick, director of the University of New Orleans’ Institute for Economic Development and Real Estate Research, conducted a study for the assessor and determined that home prices appeared to be holding up well, even though the number of houses sold had fallen considerably during the pandemic.

For commercial valuations, Penick said, there were too few transactions to determine market values of the properties, so he advised the assessor to look mostly at how the businesses on the properties were doing to come up with a valuation that would reflect sales, or how likely leases were to be renewed.

 

Last summer, a citywide reassessment of property values covering about three-quarters of New Orleans properties sent tax bills soaring for tho…

The hardest-hit area of the economy has been the downtown hospitality sector, where the bulk of the valuation cuts are concentrated.

According to data compiled by the Downtown Development District, almost one third of the total cut in commercial sector valuations, or about $90 million, is accounted for by 10 downtown properties, including the cluster at the foot of Canal Street owned by Harrah’s New Orleans Casino, a division of Caesars Entertainment of Las Vegas. Harrah’s valuations were more than halved to about $15.3 million, which could reduce its property tax bill by an estimated $2.4 million, according to the assessor’s office.

Similarly, the Marriott Hotel on Canal, the Sheraton, the Intercontinental, the Crowne Plaza, the Roosevelt and the Ritz-Carlton will see their property taxes halved. All are owned by national hotel management groups, suggesting that any tax savings will head to corporate coffers outside of the city.

Spokespersons for Harrah’s and the hotel groups either would not comment or did not respond to requests for comment.

Property tax assessments in Orleans Parish have come a long way from the days when seven assessors with a mishmash of policies determined the …

Michael Sherman, a lawyer who was land-use adviser to Mayor Mitch Landrieu and whose current clients include 30 hotel owners, was among the industry representatives who consulted with Williams on the tax changes. Sherman pointed out that Williams had the authority to make the big cuts for commercial property owners because of a revision to a flood-damage law that came into effect after Hurricane Katrina. It required assessors to consider tax cuts after various types of disasters.

“This year, the state Tax Commission affirmed that assessors must look at factors such as properties being declared non-operational, like performance theaters, or economically obsolete, such as hotels that have little or no occupancy,” Sherman said. “The New Orleans assessor dove deep to understand the devastating impact of coronavirus on hotels, and as a result, fairly and accurately implemented the adjustments required by state law.”

Whatever the economic case, the shift in the property tax burden toward residential owners is likely to rekindle long-smoldering grievances about the assessor’s methods for influencing property taxes.

Last year, Williams’ office came in for widespread criticism after an 18% aggregate increase for residential sector valuations. That included “sticker shock” increases that more than doubled property tax bills for some owners.

 

New Orleans City Council members are pushing to lower the city’s tax rates to partially offset skyrocketing assessments for thousands of prope…

Among the critics was the public policy watchdog Bureau of Governmental Research, which said Williams should not rely so heavily on the sales value of houses in a neighborhood to determine the assessment for all of the neighborhood’s homeowners.

Morgan Clevenger, president of the Fairgrounds Triangle Neighborhood Association, argues that the assessor’s methods can end up penalizing people who have spent years improving rundown and dangerous neighborhoods, only to end up with bigger tax bills because new arrivals are paying more for their houses.

Clevenger said she understood the need to consider the hardship of local businesses. Her parents’ Uptown restaurant, Upperline, has remained closed for months during the pandemic and could use the property tax break.

But she added, “If the assessor is proposing an across-the-board reduction in 2021 commercial assessments, especially a 57% decrease for hotels, many of which are owned by out-of-state entities with deep pockets, we should all be very concerned.”

Another concern is that the broad cuts for commercial property owners mean the benefit is not always delivered to the intended target.

Julie Posner manages the two Uptown locations of Surrey’s Cafe. Both properties are leased, and she said that during the pandemic they had to scramble to secure loans to keep current on bills, including paying rent to the two landlords.

Julie Posner, business manager of Surrey’s Cafe, stands in front of the recently re-opened business at 4807 Magazine Street in New Orleans, La. Monday, Oct. 19, 2020. The business leases its premises and has scrambled to keep up rent payments even while closed for months, so won’t see any benefit from property tax cuts. (Photo by Max Becherer, NOLA.com, The Times-Picayune | The New Orleans Advocate)

 



 

So now, Posner said, the landlords who did not suffer any hardship from rent delays will also get the benefit of a property tax cut.

Meanwhile, the city’s tax collectors have been hounding Surrey’s for sales tax payments, including adding more than $4,000 in interest and penalties on a sales tax bill of almost $13,000 that was due in April.

“I can appreciate that the city is in dire straits, too, but who is really benefitting from this?” Posner asks. She said her restaurants have had to take extraordinary steps to keep going, and she doesn’t think city officials have thought through how their actions will hurt front-line businesses.

Other big changes to assessed property values include the 30% cut for fast-food outlets, which includes some mom-and-pop burger and chicken shops but also benefits dozens of outlets owned by the big national chains. In New Orleans, for example, the 17 McDonald’s outlets are mostly located on property owned by McDonald’s Corp. rather than by their local franchise owners.

McDonald’s, like most retail outlets, suffered a sharp sales downturn in the second quarter of this year but recovered strongly in the third quarter. Its share price is up 14% since the start of the year, and earlier this month it increased its dividend for shareholders. A McDonald’s Corp. spokesperson said the company was unaware of the New Orleans assessment cut and had no comment.

Julie Posner, business manager of Surrey’s Cafe, places a sign with the hours of operation at the front door of the recently re-opened business at 4807 Magazine Street in New Orleans, La. Monday, Oct. 19, 2020. As renters, Surrey’s two locations won’t see the direct benefit of lower property taxes. (Photo by Max Becherer, NOLA.com, The Times-Picayune | The New Orleans Advocate)

 



 

Williams said he recognizes the assessment breaks he is giving might be imperfect, but he says he had to act in order to help businesses while also minimizing the revenue drop for local government.

Indeed, he said, he understands that valuation increases for the residential sector do not take into account the fact that many individuals have lost their jobs or seen their incomes reduced because of the pandemic. He acknowledged that might become an issue next year when it comes to collecting taxes.

“The next challenge is going to be in January, February, when the city usually collects 85% to 90% of the property taxes,” Williams said. “I’m not the tax collector, but with so many people out of work I don’t see how everybody is going to be able to pay their taxes on time.”

Continue Reading

Latest

Underwriting The Future + Micron Technology Bull Case

Mish Boyka

Published

on

I don’t believe in edge. I think it’s a fairy tale. The world is too competitive. Going back to AI, investing is where chess was in 1996, when there was an enormous race between human grandmasters and algorithms, and Deep Blue started to beat Garry Kasparov by using brute compute force.

The above is from this interview with Gavin Baker, one of the smartest tech investors in the game. Gavin covers a number of interesting topics: everything from tech’s scale and enduring high returns on invested capital (ROIC), to the increasing efficiency of the market and how that affects one’s ability to generate alpha. Here’s the rest of his remarks on how he thinks about edge in today’s market (emphasis by me).

Today, that’s why value strategies have stopped working: Value investors used to have an edge. They were very quantitative. Maybe, they had a strong stomach and were willing to buy companies because they were cheap no matter how bad it sounded. But the problem is that anything that can be put in a spreadsheet will no longer generate alpha because it has been arbitraged away by quant investors. There is so much quantitative money chasing those same metrics.

To me, all alpha comes from insights. An insight is kind of a differentiated long-term viewpoint about a stock. It’s a differentiated view about the long-term state of the world. Often, these insights are very simple, and a lot of them are right brain: imaginative, being slightly better in seeing the future states of the world. These insights need to be grounded and tested in reality regularly. Also, it pays to boil them down to just a few variables. Like Occam’s razor, the injunction not to make more assumptions than you absolutely need, simple is beautiful when it comes to investing. With electric vehicles for instance, all that matters is efficiency: battery capacity and range to get miles per kWh. You want to focus on the variables that are important instead of the variables that are interesting.

 

Anything that can be put in a spreadsheet will no longer generate alpha… all alpha comes from insights… an insight is kind of a differentiated long-term viewpoint about a stock [or] about the long-term state of the world… Like Occams’ razor, the injunction not to make more assumptions than you absolutely need…

Let’s go through each of these one-by-one.

Q3 2020 hedge fund letters, conferences and more

Anything that can be quantified will be arbitraged…

We live in a world of alternative data where satellites provide real-time updates on retail parking lot traffic and detect when manufacturers are adding or reducing shifts… drones beam infrared signals at oil-storage tanks to gauge inventory levels… credit card and point of sales system data tracks consumer spending in the here and now and is available for anybody with the money to pay for it.

The market has become hyper-efficient at correctly pricing in the near future, with iterative changes to prices occurring in nanoseconds as billions of new data points come down the feed and into the brain’s of our silicone overlords.

Knowing this, it’s okay to chuckle when you hear someone pitch the bull case for “company X” because of “their low relative price-to-book and a belief that next quarter’s consensus estimates are a bit low, yada yada yada…”

These peeps are playing the wrong game. They’re up against Deep Blue but think they’re still playing Bud from across the street.

This doesn’t mean the game is over for us simple-minded skin bags. Like Gavin says, we just have to extend our GFN into the future some. Peer beyond that thick veil where quantitative data doesn’t exist. And operate in the space where things must be intuited, gamed out, and probabilistically weighted.

The idea isn’t new. It’s just perhaps more true than before. Legendary hedge fund manager Michael Steinhardt played this game over 30-years ago and talks about it in his book, No Bull (again, emphasis by me):

I defined variant perception as holding a well-founded view that was meaningfully different from market consensus. I often said that the only analytic tool that mattered was an intellectually advantaged disparate view. This included knowing more and perceiving the situation better than others did. It was also critical to have a keen understanding of what the market expectations truly were. Thus, the process by which a disparate perception, when correct, became consensus would almost inevitably lead to meaningful profit. Understanding market expectation was at least as important as, and often different from, fundamental knowledge.

… A summer intern reminded me years later of the advice I had given him on his first day at work. I told him that ideally he should be able to tell me, in 2 minutes, four things: (1) the idea; (2) the consensus view; (3) his variant perception; and (4) a trigger event. No mean feat. In those instances where there was no variant perception – that is, solid growth recommendations within consensus – I generally had no interest and would discourage investing.

Underwriting The Past And The Future

I’m reminded of another recent killer interview I listened to. This one being Patrick O’Shaughnessy’s chat with the anonymous twitterer @modestproposal1. Modest Proposal told Patrick about an idea he’d been mulling over for years that had finally begun to crystalize. He refers to it as his Two Different Theories for Investing: Underwriting the past and underwriting the future.

  • Underwriting the past involved looking quantitatively at historical performance and trying to focus on business fundamentals irrespective of a view on the future. Investors who underwrite the past want as much certainty as possible.
  • Underwriting the future is more qualitatively focused and requires an investor to be comfortable with uncertainty as they build a view on the future of a company through strategic GFN. The best performing investors over the past 20 years belong to this group.

Whatever we choose to call it; a differentiated long-term viewpoint, variant perception, or strategic GFN / underwriting the future, etc… It’s the critical factor in assessing the expected value of a long-term discretionary bet. Forget about what next quarter’s earnings will look like or where margins will be later this year… That game is over. The robots won. Time to move on…

Looking out into the future is hard though. It’s complex. It’s important to not get lost in the sauce. This is why Gavin’s bit about not making more assumptions than you absolutely need is key. Occam’s Razor and keeping your GFN as simple as can be but no simpler… is a concept that’s near and dear to our hearts here at MO.

The Chandler Brothers (the greatest investing duo many have never heard of) are perhaps the best in the world at this. They have an incredible knack for cutting through the web of intellectual mental masturbation that snags most. They know how to go straight to the meat, often employing what they call “creative metrics” in instances when standard data serves as more of a distraction than an informative input.

But getting back to underwriting the future…

Here’s a nifty illustration of what this looks like.

underwriting future
underwriting future

The market is hyper-efficient within the 0 to 12-month timeframe or what I call the efficient market box. Now, yes, of course, there are exceptions. Efficiency turns to silliness when reflexive processes loop us away from anything resembling a probable outcome. The majority of the time though these feedback loops abort before they can really get started.

Looking out past the veil of the future is where things get interesting. And that’s where we should do most of our thinking.

The market tends to simply extrapolate the present well into the future. Whatever the trajectory of growth, competitive advantages or disadvantages, addressable market size, etc… is today, largely comprises the expectations that are embedded in the price.

This mostly works which is why it’s so. Betting on trend continuation and mean reversion around that trend is statistically a good bet, whether we’re talking about actual market prices or fundamental trends.

Occasionally though, large mispricings occur. The market bets on future trend continuation but instead we see wildly divergent outcomes. Why is this?

Here are a few reasons…

  1. The market is slow to recognize competitive advantages as well as underappreciate its impact on future value creation
  2. The market tends to underweight the impact of secular macro shifts while overweighting cyclical ones
  3. The market is inefficient at pricing anything exponential

Micron Technology Bull Case

The stock we’re going to talk about today benefits from all three. The company is Micron Technology, Inc. (NASDAQ:MU). A global supplier of DRAM and NAND semiconductors.

Most people don’t associate a semi company such as Micron Technologies with having a competitive advantage. That’s because the space has long been marked by cyclicality and weak margins. But this is changing due to consolidation and a slowing of Moore’s Law.

Take the DRAM market for example (approximately 75% of MU’s revenues come from its DRAM business).

Making DRAM used to be a poor business. There was a LOT of competition, with many competitors fueled by cheap government money. This equated to an extreme capital cycle of oversupply leading to painful busts and a firm ceiling on margins.

This competitive landscape has dramatically changed though. Since 2010, the industry has consolidated from 8 large DRAM makers to only 3 today (see orange line).

Consolidation In NAND Space

The DRAM semis oligopoly now consists of just Micron, Samsung, and SK Hynix. A similar consolidation has occurred in the NAND space as well.

This consolidation was driven mostly out of necessity. The reason being is that Moore’s Law — the doubling of transistors on a microchip every two years — has become prohibitively expensive to maintain and may be slowing all-together.

Suppliers were forced to scale to remain competitive. This has improved the industry’s fundamentals. The oligopoly has brought more prudent supply growth along with rising and stable margins.

We can see this clearly in the data. Micron was able to remain profitable during the most recent industry downturn that began in 19’ — even amid the pandemic, the company generated a positive $2.83 in EPS. That’s a first in the company’s history.

underwriting future
underwriting future

Due to the above factors, Micron now sees 45% gross margins as an average for itself and the industry over cycles. That’s a significant improvement when compared to the past when the company often saw peak cycle margins in the low to mid-30s.

Secular macro tailwinds

This is something we’ve been talking about for the last two-plus years and which Brandon has been covering in a recent group of writeups (here and here). So I won’t belabor the point. But suffice it to say, we believe semis are where the oil industry was in the early 2000s. China’s massive leveraging cycle was just getting started and this created a super-cycle for E&Ps.

But instead of a leveraging China, we have the rise of AI/ML, hyper-scale data centers, IoT, AR/VR, autonomous vehicles, etc… driving an increasing secular demand for silicone. As a result, data and compute power are the new black gold.

Here are a few bullet points:

  • While Moore’s Law scaling challenges have shifted more of the burden (and value) to software, AI changes the paradigm because 1) compute matters again and there are little to no scaling limitations to the problem set (the more data, the better the outcome), and 2) creates a new virtuous demand cycle, much like the combustion engine did for oil. With cloud, compute has been centralized but there are still limited feedback “loops” to PCs and smartphones. AI creates a new feedback “loop” and should push more compute intelligence to the edge for key mobile and automotive applications in particular. ~ UBS
  • AI servers will require six times the amount of DRAM and twice the amount of SSDs compared with standard servers. ~ Micron CEO Sanjay Mehortra
  • 90% of the data available in the world today was generated in the last 2 years – and it is expected to grow to 180 zettabytes (that is 21 zeros) by 2025. To put a zettabyte into context, storing just one requires 1,000 data centers, or about 20% of the land area of Manhattan. ~ Westfield Capital Management
  • Market forecasters estimate the AI-enabled market (defined as direct hardware, software, and services sales) can grow from $6 billion in 2017 to approximately $36 billion by 2025
  • According to Intel CEO Brian Krzanich, a single autonomous vehicle will generate and consume 40 TB of data for every 8 hours of driving and 1 million autonomous cars will generate as much data as 3 billion people
  • According to Gartner, driverless cars contain over 80 GB of DRAM versus 5.5 GB in PCs and 2.5 GB in handsets, exemplifying the sharp increase in the memory demands of these emerging technologies

This can get a bit confusing with all the NAND, DRAM, zettabytes, and such… The key point here is that we are moving into an increasingly compute-heavy world.

AI And The IoT Will Prevade Our Lives

In the past, semis ebbed and flowed with the rise and fall of PC and mobile phone demand. But AI and the IoT is going to pervade every aspect of our lives… at an increasing rate. AI works by brute force. The more data it has to train on, the better it becomes. The need for computing power is only going to accelerate from here, exponentially so. The fact there are only a few companies in the world, an oligopoly, with the engineering ability to create the foundational tech that’s essential to this growth… and one of them, Micron, trades at just 7x normalized earnings, is mind-blowing…

Below is a monthly chart of Micron. The stock has been coiling tightly for over 2-years. Extreme compression regimes like these tend to precede expansionary regimes (massive trends).

underwriting future
underwriting future

The sentiment and general narrative around the stock are as to be expected. People are focusing on the short-term cycle, worried about narrowing margins over the next quarter or two, as well as the company’s exposure to China.

What they fail to see is that Micron is only one of three companies in the world that’s able to produce a component that’s increasingly critical to the AI stack. And it’s the only one based in the US…

They’re not looking past the veil of the future and seeing that AI and IoT are going to become increasingly integrated into every aspect of our lives. And that this secular shift will support steady exponential demand growth, which will further reduce the cyclicality of a once very cyclical industry, which should lead to a rerating of industry multiples and ipso facto, a significantly higher stock price.

Now, there’s a number of ways to play this. One, we can put on a naked long position in the stock. Or two, we can buy some deep out of the money calls (DOTMs). You can currently find Jan 2022 10-delta calls with a $100 strike trading for a buck.

We’re going to do a combo of the two and will put out a trade alert, likely later this week, when we do.

Stay safe and keep your head on a swivel!

Continue Reading

US Election

US Election Remaining

Advertisement

Trending