A Supreme Court Mess

Just before going to bed Saturday night, I looked at my phone (which I normally avoid at night) and saw the headline that hit me like a truck: Justice Ruth Bader Ginsburg passed away at 87 years old. I immediately regretted looking at my phone. Really, what good can come out of looking at the news before bed. I instantly knew a political bomb was dropped in an already over-the-top gonzo super-charged election. The “October surprised” came early is a mild way of putting it.

Trump and Mitch McConnell didn’t waste time saying that they were going to fill the seat before the election, of course causing a massive controversy. The Democrats still haven’t digest what the Republicans did in 2012 with then-President Obama.

Some President never gets a pick. Just having one pick is a major decision. Trump is getting three picks in his first term assuming this one goes through. His first two picks were re-nominating conservatives judges to maintain the statue quo. But now he gets to flip a seat from liberal to conservative. Trump and McConnell gets to complete a judicial coup and install a 6-to-3 conservative majority. I don’t recall anything like that from happening and the Dems are freaking out.

The Democrats really have no power to stop them. So they make threats that if they take control of Congress that they will make sure that they get their day (severe retaliatory actions like expanding court, adding states (D.C. + Puerto Rico). For the Dems to take action they will need at least 52 seats plus the White House.

I don’t want to rehash everything that happened. If you read the news you know what happened in 2012 when McConnell and the Republicans stalled Obama to let the voters decide with ten months to go before the vote. It’s hard not to see the hypocrisy. But this is politics. Hypocrisy is an enduring norm with a long pedigree. Wouldn’t you have expected otherwise? You think the Democrats wouldn’t have not the done same in a similar situation? Try to imagine the reaction of Chuck Schumer, Nancy Pelosi if a conservative Supreme Court justice had died weeks before the re-election bid of a Democratic president while that party also controlled the Senate.

At first I was a “shocked” that the Republicans will go ahead with that. It’s hard to have faith in your politician, the government, the institutions when they pull that kind of tricks. But now that I digested the news, maybe the Republicans are shooting themselves in the foot with rushing the process.

At the moment of typing this post Trump is leaning towards Judge Amy Coney Barrett as a potential replacement. But it could change soon because they often send ” trial balloons” in the media to measure the reaction. Nominating Amy Barrett signals two things 1) Trump is going after the female vote 2) Trump is going after that “undecided/frustrated” middle-right centrist voter.

However that strategy might not pay off. Install Barrett and centrist GOP voters have one less reason to hold their nose to vote Trump. This could make the difference in the Presidential election. The Republican establishment probably already know that but staging the legal coup is very important to them. It’s worth the price to pay.

The simple answer here has always been that the GOP would confirm someone, because it’s worth an awful lot to them, and also that they’ll pay a price for doing so, because it’s worth paying a price for something that’s worth a lot to you. Maybe to the Republicans is worth sacrificing a few seats if you can reverse abortion and have a long-term hold on the judicial branch. If you’re McConnell you just want to get somebody confirmed as soon as you can, and then deal with the consequences (electorally and otherwise) later.

By paying a price, the polling suggests this is an unpopular move, perhaps verging on very unpopular depending on which poll you look at. So, it’s likely to make it harder (though far from impossible) for the GOP to hold the Senate. Is that the decision that will push the Senate to flip blue? And get slaughtered in the 2022 mid-term. But the playbook plays out, the Dems will be able to draw some decent House maps in redistricting, they can add D.C.+ Puerto Rico to help mitigate their Senate disadvantage, and the GOP seems to have trouble winning the presidency; it’s not a bad medium-run position.

Delisting China Stocks?

I’m been trying to make sense of the U.S.-China escalating tension. I believe we are in a cold war. It’s been brewing in the dark for years, each player placing their pieces, trying to get optimal positioning once it breaks out. The cold war is being fought on many front. There’s a trade war, a tech war, an economic war, a covid war, a political system war, and there’s the Hong Kong issue (and Taiwan). Washington is considering a range of sanctions against Chinese officials and firms as punishment for Beijing’s crackdown on Hong Kong. The world is being forced to choose between the U.S. or China, just like the world had to choose between the Soviet Union or America. The list of issues is long. Often, for an successful oversea company trying to growth, going to the NYSE or Nasdaq would make sense. 

I’m trying to assess the U.S. threat to delist Chinese stocks. Are they dumb crazy? Is it just politics? Or does it make sense?

  • Over the years, American investors have been pumping billions of dollars into Chinese firms listed in the U.S., from giants like Alibaba (BABA) and Baidu (BIDU). Investors have been able to profit from the explosion of e-commerce in China, even though the likes of Facebook and Amazon.com Inc. are largely shut out of China.
  • Recent admissions of accounting fraud at Luckin Coffee have prompted heightened scrutiny of U.S.-listed Chinese companies.
  • There’s a threat to evict some 170 Chinese companies listed in the U.S.
  • The move is more than just political. China, uniquely among major world economies, bars the U.S. Public Company Accounting Oversight Board (PCAOB), from monitoring corporate audits, considering that a national-security risk. Chinese audits are done on a completely different basis.
  • The Senate passed a bill giving all Chinese companies three years to let the PCAOB in, or be kicked out of U.S. markets. It will likely clear the House.
  • Rumblings about China companies not playing by the same rules have been around for years. The bill will force Chinese companies to abide by the same accounting rules as U.S. companies listed on the NYSE and Nasdaq.
  • The bill will also require public companies in the U.S. to disclose whether they are owned or controlled by a foreign government, including China’s communist government.
  • China declares states secrets in not allowing full transparency of corporate books, especially those with heavy state involvement.
  • Why close the books? Probably what they find won’t be pretty. Opening corporate records could reveal embarrassing links between the nation’s leaders and valuable share packets. Stuff that they don’t want to come out.
  • The question now is whether we will see Chinese companies give in to the new rules or relocate outside the U.S.
  • Two of China’s most valuable U.S.-listed companies, NetEase (NTES) and JD.com (JD) are pushing ahead with multibillion-dollar share sales in Hong Kong.
  • Chinese stock can thrive without a primary U.S. listing, look at Tencent. If you have a good company, you will likely find capital.
  • Despite the issues with Chinese companies, attracting capital is one of the U.S.’s major force. It’s very important that they keep that advantage. I bet London and Singapore is looking for take advantage of the dispute.
  • The U.S. instead should have policies to attract listings and capital. One idea is hiring high quality annually-inspected US audit firms.
  • Companies with good oversights and financial control would probably trade at a premium. Investors prefer companies that have oversight.
  • It’s important for any company to play by the rule. I don’t think the idea of crippling Chinese capitalism by denying it a listing will work. It’s probably good domestic political firework, but it won’t amount to much. It will probably hurt the country by pushing companies to look elsewhere.
  • Despite the issues, the U.S. and China should work out their problems. It’s what’s best for everyone’s interest. They need each other. They depend on each other.
  • China should play by the same rules as everyone. The U.S. should go back to the principles of what made them great.
  • Get each country’s top three negotiators and send them on an island to work it out behind doors.

Thanks for reading and have a good weekend,

Brian

Response to Justin Trudeau comments “I want to be clear: people who make $50,000 a yr should not pay higher taxes than people who make $250,000 a yr”

I didn’t write this letter but it’s really good so I wanted to share it. Peter MacIntosh a partner at White Kennedy LLP wrote it. I don’t know him nor that I have any links to him. The letter express the feelings a lot of people have out there.


To the Liberal Members of Parliament,

I recently read a Globe and Mail article reporting on the Liberal caucus meetings held in Kelowna. In the article the Prime Minister of Canada, and the leader of your party, was quoted as follows; “I want to be clear: people who make $50,000 a year should not pay higher taxes than people who make $250,000 a year Mr. Trudeau told his MP’s”.  I have never been a politically active person but feel compelled to respond to this comment.

First of all, I am a tax partner at the largest independent accounting firm in the southern interior of British Columbia. For the last 25 years we have assisted small business owners and primarily owners of private corporations. As a result, I can speak from first hand knowledge and experience. We have thousands of clients and I can state that the situation the Prime Minister has described does not exist. It does not exist because under no scenario is this possible. If your leader is describing the proposed tax changes to you in this way then I strongly suggest your are being misled and lied to.

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One of the Best Trump Political Cartoon

The New Yorker probably has the best political cartoon of Trump I’ve seen in a while. The only reason Trump hasn’t bashed the New Yorker it’s because the articles are too long for him to read.

tom-toro-daily-cartoon-for-wed-feb-22
“It lets you hold the President’s attention for a few extra seconds before he wants to change channels.”

Trump is reputed for watching a lot of TV and a very short attention span. Just think of the people he has attacked on Tweeter seconds after they said something he didn’t like on TV.

Refreshing Climate Talk from Exxxon’s New CEO

The first blog post by ExxonMobil’s new CEO and Chairman Darren Woods is refreshing. Mr. Woods advocates a nationwide carbon tax to discourage use of polluting fuels. Exxon also endorsed the Paris Agreement. Actually, former CEO and now Secretary of State Rex Tillerson wasn’t a climate denier unlike his predecessors. Rex Tillerson said that climate change is real, but downplayed humanity’s responsibility for raising the global thermostat. Tillerson was also favor of a carbon tax. The fact that Mr. Woods is repeating these commitments  is encouraging. He doesn’t want to start his term labelled a climate denier. 

Exxon and other energy companies are facing huge challenges. The Company needs to meet growing demand for energy while managing the risk of climate change. The neutral carbon tax would promote greater energy efficiency and the use of today’s lower-carbon options, avoid further burdening the economy, and also provide incentives for markets to develop additional low-carbon energy solutions for the future. Woods’ view continues the corporate policy implemented during Tillerson’s reign at Exxon.

I occasionally visit the East Coast, the Gaspé peninsula on the Atlantic ocean, where I’m from.  That region is a front row seat to climate change. Scientists’ warnings that the rise of the sea would eventually imperil the coastline is no longer theoretical. In Gaspé they are seeing increasing severity of extreme weather, floods and heavy rain in the summer. Because the Gulf doesn’t freeze as often it used too in the winter,  tidal floods increasingly inundate the roads that are too deep to drive through. Certain roads are disappearing beneath the sea several times a year. These things didn’t happen when I was a kid. Now its a few times a year.

It is a good sign that we are starting to move away from discussions about whether climate change is real, and talking about solutions. Let’s see if these nice words can translate into action.

 

Uber’s Pitch to Investors

Update: After publication I received a Tweet  suggesting an excellent article on Uber: Can Uber Ever Deliver? Part One – Understanding Uber’s Bleak Operating Economics posted Yves Smith. Hubert Horan did a thorough 6 part series on the company. The article includes financials from Uber.

A lot of people are asking how can I invest in Uber. They say things like “Uber is the next big thing, I can’t miss out on its IPO”…Every year we have a company that makes people dream. People want the next Microsoft. The fantasy of easy money makes people dream and they kind of lose their mind when it comes to rational investing.

Uber is what we call a “disruptor” business. Companies like Uber, Netflix, Spotify, Airbnb and Amazon among others are “disrupting” the world we know with the aim of making it better. Along the way it creates winners (usually the consumers) and losers (taxi drivers, cable companies, hotels etc…) Uber is simply an taxi app on your phone that let’s book a ride. Uber didn’t reinvent the wheel here. They simply made an under-served service, cabing, much better.

Uber is a company that I admire. I like taking it and I believe they are not going anywhere no matter how many angry cabs drivers block the streets. Technology is not something bad or good, just like steel is not bad or good. It’s just that our laws are not up to date for these new an upcoming companies. Companies like Uber take on the establishment and left the old guard gritting their teeth. Fast growing companies like Uber constantly need money. Uber is still a private company and we don’t have access to financials. Various media have reported that Uber is burning over $500 million a quarter. It could be an exaggeration but it’s reasonable to think they are burning through a lot of cash since they are constantly looking for money. Uber is not profitable and probably won’t be for a long time. A company like Uber is still allowed to exist because the capital market let it exist. If the tide turned, like it did with the dotcom boom in 2000, it could become a bust.

Companies that you admire and love doesn’t necessarily make it a great investment. I like Twitter, it doesn’t mean it’s a great investment. You still need to focus on the fundamentals. You still need to ask how you are going to make a return on that investment. Especially if the company is burning through cash. Interesting fun companies doesn’t necessary = I will be rich. A company like Uber can’t pay a dividend or buyback shares. So you are entirely hoping that the next valuation round will be higher (and you are diluting your ownership too). It’s the greater fool theory. Now I’m not saying Uber is a bad investment. We barely know anything about its finances. It might turn out to a great investment. I don’t know.

I suggest you read the article, Banks Passed Up Uber Share Sale on Lack of Data from Bloomberg. Credits to François Denault,  an excellent value investor in Montreal for the find.

The articles says that at least two investment banks passed on selling shares of Uber to their high-net worth clients — shares eventually sold by other banks in January — because the ride-share company wasn’t willing to provide financial details about its business. The 290-page Uber prospectus Morgan Stanley sent to prospective investors before the January stock sale didn’t include Uber’s net income or annual revenue. The New York-based bank addressed the lack of data in its prospectus, and love that part, by saying “the development of insights and big ideas is valuable to the investment process, whereas obsession over incremental ‘information’ flow is not.” I just love how you can spin so much b.s. and still get the money you need. Good for them. But there’s a lot of suckers out there. We live in a weird era. Reminds me of Trump with his “alternative facts” and “we disagree about the facts”.

Who is buying shares of a company without having any clues about the financials? A lot of folks apparently.  It’s a dream for Uber and a potential disastor for investors. Reminds me of the dot-com mania. Now that we have the Dow at 20,000 points, there’s seems to be a mini euphoria going on.

Rationing Table at the Cuban Store

Below are pictures of what happened when you don’t focus on freedom, innovation, the search for wealth and prosperity. Socialism has never worked. The USSR, Cuba, China, and now Venezuela (among others) were failed states. Venezuela is in a full economic crisis. A country rich in natural resources is now a disaster. Good luck finding toilet paper.

rationing-form
Rationing table at a Cuban store. Source: mises.org

Source: mises.org
Not much to buy. Source: mises.org

What Ever Happened After This Round of Golf?

presidents

Here’s an interesting picture taken in 2008. In hindsight, there’s a lot going on here.

Rudy Giuliani, the former mayor of NY, is smiling and doesn’t look crazy. What happened to him? He tried to become President in 2008. Donald Trump was a democrat, pro-war, pro-choice and a Clinton supporter. Now he’s President-elect as a republican. Michael Bloomberg was the mayor of NY and hanging out with Donald Trump. He was considering an independent run to stop Donald Trump. Bill Clinton wasn’t a vegan. And then you have Joe Torre and Billy Crystal photo bombing. I wonder if that pic will ever be taken again.

 

 

Référendum de Percé

Below is a message I posted in French on my Facebook account. It’s my take on the referendum in my hometown. In short, the town just had its “Donald Trump” moment.

Premièrement je voudrais remercier André Boudreau, Doris Bourget et les autres conseiller qui ont servi la ville de Percé. Ce consacré au service de la population est extrêmement difficile. Ça demande beaucoup de courage et d’engagement. Et encore plus au niveau locale parce ce que tu vis avec gens qui sont impacté par tes décisions à tous les jours.
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