Terra Incognita

Fall is around the corner and I hope everyone had a great summer. I’m taking this opportunity to re-connect and share with you a short missive.

If you are trying to make sense of this economic environment and you can’t, welcome to the club. I don’t have forty year plus of experience behind the belt and when I talk to people who do, they are clueless. The environment we are in is terra incognita. Sure we can go back in history to study the cause and effect of certain specific policy, but any attempts feel useless when applied to today’s climate. I don’t remember being tested on negative interest rate in university. We never lived in a time with so much global central bank intervention. Their collective action is distorting the “normal” course of action, if we assume there’s any meaning left to the word normal. We have over $16 trillion in negative interest rate bonds. I’m not a macroeconomics expert, but common sense dictates that when things are so out of whack, it’s not going to end well.

The dreaded over-used expression “this time is different” comes to mind. Basically we claim that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. There’s the sentiment that the important lessons from history to show us how much–or how little–we have learned don’t apply anymore. Throughout history, rich and poor countries alike have been lending, borrowing, crashing–and recovering–their way through an extraordinary range of financial crises. We just had a major generational financial crash just ten years ago. Yet, that harsh lesson seems like distant history. Total global debt levels have reached a whopping $246 trillion as of Q1-2019 – up from $164 trillion in January 2009, the time of the last financial crisis. This level of debt represents almost 320% of global GDP. The “time” might be different, but the outcome might be similar.

Here are some economic and financial topics that are just mind numbing. Feel free to reach out to discuss any.

  • We are apparently living in a period of “strong” economic growth, though it has been slowing down a little bit lately. Still we are at full employment and wages are rising. Normally during good economic times the government might call for a budgetary surplus. This is, basically, standard Keynesianism. But instead governments are running major deficits like they are trying to get out of a major recession. This situation raised three important questions that I don’t see anybody talk about:
    1. What will governments do to stimulate the economy when a real recession hits? The classic economic 101 textbook response is more stimulus/deficit/debt.
    2. This led to question #2: How are we going to pay for these deficits? Of course we can’t raise taxes of 1) it won’t help the economy and 2) Good luck getting re-elected. So it has to be more money printing and monetary stimulus.
    3. I don’t see any politicians, or financial media being alarmed with the ever growing deficit. There are long term consequences to this type of action. The deficit problem is not urgent right now but if we don’t address the problem, the problem will eventually address us and that’s not good. We are perpetually “kicking the can down road” until the can becomes a massive iron wrecking ball that is stuck in the middle of the road. Any attempt to kick it will break your foot. Worse, it might roll back and crush us.
    4. I asked a leading economist in Canada these questions and his answer was: “Good questions”.
  • If the economy is so “strong”, why can’t it handle interest rates north of 2.5%. Really, 2.5%, it’s not much. To be relative, the rates were at 19.5% in 1981. Imagine buying your house on a credit card. To be fair, homes were a fraction of today’s cost (a prolong period of low rates led to very expensive housing). Now the Fed has lowered its rate in July and has indicated that it might go lower. Actually they have clearly indicated that they don’t know what they are doing to do. Read: Fed’s George: It’s ‘too soon’ to judge next move on rates.
  • Then there’s M.M.T. that is gaining a lot of traction. Politicians on the left and economists are talking about M.M.T., which sounds like the street name of a new drug. M.M.T. actually stands for Modern Monetary Theory, which is pushed by Bernie Sanders adviser Stephanie Kelton. Mrs. Kelton, the face of M.M.T., believes the government should just print more money. When asked “How will we pay for it?” she says that it shouldn’t be a central question in American politics. Simply printing more money is always the answer. When I first heard of M.M.T. it sounded like a joke an economist would tell. But economists are not known for their sense of humour and the joke got picked up by politicians and the media and M.M.T. is now a real “serious” discussion topic. How does it pass the common sense test? But the problem is by asking that question we are assuming there’s common sense left out there. M.M.T. is a polarizing idea. Kelton has been described as an economist with an idea “that will either solve the world’s problems or send it into ruin!” Didn’t Zimbabwe and Germany, among many others, went down that road in the past? Historically speaking, printing too much money led to hyperinflation. But I guess this time is different. Kelton is working on a book, “The Deficit Myth” which will come out next year. It will be in the accounting & finance section, not fiction.
  • The puzzle of negative interest rates. Imagine lending money to someone and having to pay for the privilege of doing so. Or being asked to invest and informed of how much money you’ll lose. What if I said I wanted to borrow $100 from you and pay you back $98 five years later? Would you do it? Sounds absurd, but increasingly that’s the global bond market these days. There are currently more than $16 trillion (30%, and counting, of the global tradable bond universe, according to JPMorgan) in negative yielding debt around the world as central banks try to ease monetary conditions to sustain the global economy. This is possible because Denmark, as well as Sweden and Switzerland, has seen rates in money markets drop to levels that turn banking upside-down. Swiss banks in particular, where interest rates are negative at -0.75 per cent, have been passing on these rates to clients with high cash balances. Credit Suisse and UBS had held fire, but recently said they would have to start passing them on, too. Jyske Bank will effectively pay borrowers 0.5% a year to take out a loan. How? Jyske Bank is able to go into money markets and borrow from institutional investors at a negative rate, and is simply passing this on to its customers. Negative rates are counterintuitive, unprecedented — and to my mind — mind-bendingly insane and downright scary. They are like a parallel universe where everything you’ve ever learned about finance and human behavior is turned upside down. Worse, negative rates are being normalized by economists, bankers, and commentators. Worse, I have a funny feeling this will end badly. Negative interest rates have all the hallmarks of serious trouble for the financial markets; an anomaly growing in scale which seemingly came out of nowhere that is under-recognized, poorly understood and dismissed as not consequential. I’m not sure what form the ugliness will take or, more vexing, what we should do about it.
  • A lot of people think cash is the safest bet in a world of negative interest rates….there’s a cost: inflation and referring to investors who have stayed on the sidelines and missed out on the great bull run in equities. Yet perception of risk is an emotional thing. If people feel comfortable paying extra money in the form of negative rates for the known loss they will suffer on cash versus the unknown and potentially larger loss on riskier assets, it can be hard for wealth managers to talk them out of it.
  • Brexit is a full-on terra incognita. That’s a storm nobody has figured out how to navigate. The Americans and English have a thing for turning politics into awesome theatrics performance. How is this the real world?
  • The WeWork IPO is being sold as the holy grail of investments…The mission of WeWork is to elevate the world’s consciousness. That’s very nobel for an office space rental business. The company disclosed last month of net losses of more than $900 million for the first six months of 2019 on revenues of $1.54 billion. It will achieve 5-star status when the losses are higher than the revenues. WeWork has long-term lease obligations at $17.9 billion that is financed by short-term assets, a recipe of disaster when the next downturn comes. Basically the short-term assets melts and you are stuck with the debt. This stock screams “buy” when the CEO and co-founder cashed out of more than $700 million from his company ahead of its IPO. But at least he returned around $5.9 million worth of stock to the company, which he had originally received in exchange for the “We” trademarks. I’m not making this stuff up. Maybe the trademark “I” is my ticket into the sun. Yet, despite the tons of red flags in their S1, WeWork is expected to be valued around $47 billion because WeWork consider themselves as a “platform tech” in the “space as a service” segment instead of where it should be: real estate. Who is buying this stuff? What I noticed is that stocks listed on the stock market are either trading at 10x P/E or 100x P/E.

To conclude, governments and central banks are acting like they are in a recession with big budget deficit and excessive monetary stimulus policy. Any attempt to normalize the situation has encountered hiccups, like the tamper tantrum (a bout of panic selling after Federal Reserve hinted at a reduction in stimulus) and the December 2018 mini-correction.

For investors, attempting to figure out how to play these developments is a crazy game. Just don’t. Add in a dose of trade war, political circus, political uncertainty, Twitter and you have an instant aging formula.

Happy fall,



The Story of a Great Monopoly

I found this great read while doing some research. It’s from The Atlantic’s archive. It was published by H.D. Lloyd on March 1881. The article grabs the climate of the time on railroads, Standard Oil, Rockefeller, the Vanderbilt, corruption and politics.  The article address the “railroad problem” of the time and the power of monopolies. It’s a big article and it will take a while to read. If you read the book Titan, you will like this article.

Currier & Ives - Library of Congress
Currier & Ives – Library of Congress

The Story of a Great Monopoly

Repost from The Atlantic
By H.D. Lloyd

”These incidents in railroad history show most of the points where we fail … to maintain the equities of ‘government’—and employment—‘of the people, by the people, for the people.’”

Continue reading “The Story of a Great Monopoly”

The Oaktree Capital and Brookfield Marriage

I had the pleasure to be back on The Intelligent Investing Podcast with Eric Schleien to discuss the Brookfield-Oaktree transaction. Below are some notes on the transaction.

Bruce Flatt from Brookfield Asset Management and Howard Marks from Oaktree Capital Management are getting tie up. Two of the brightest investment mind are coming together. This is a deal where best in class meets best in class. It’s a win-win situation for both Oaktree and Brookfield.

Howard Marks doesn’t need an introduction. Marks built a reputation for making sharp bets on undervalued assets and in the process becoming one of the most famous figures in investing. Marks is frequently seen sharing his wisdom on financial TV and is active on the public speaking circuit. His memos, full of insights, are must read material. His first book, The Most Important Thing, is outstanding and has been endorsed by Warren Buffett. Read it. Marks has a new book out, Mastering the Market Cycle, but I haven’t read it yet. As for Bruce Flatt, I’ve covered him in the past here, here, and here. Flatt might not be as well known as  Marks, but his investment record speaks for itself. You can read the latest shareholder letter here. Here are BAM’s performance:

BAM Performance
Brookfield Asset Management Performance. Source: BAM 2018 Shareholder Letter

The Deal

  • Here’s the press release.
  • BAM is buying 62% of OAK for $4.7b.
  • 38% will remain with current management
  • Brookfield will acquire all of Oaktree’s publicly traded A shares for either $49 per share or 1.077 Brookfield shares. This is a 16% premium over the 30-day value weighted average price. Or a 12.4% premium over the closing price before the announcement.
  • It is also buying 20% of the privately held B shares for a total of 62 per cent of the business.
  • Total consideration paid by BAM will be 50% and 50% shares.
  • BAM can be a total owner at the earliest in 2029, pursuant to a liquidation plan that starts in 2022.
  • OAK employees has 92% voting power.
  • The combined entity will have $475 billion in assets (BAM $355b + OAK $120b). The deal will put it in the same region as Stephen Schwarzman’s Blackstone (BX).
  • BAM is expected to earn $2.5b in fee related earnings.
  • Both firms are expected to stay independent.
  • BAM will have 2 board seats on OAK.
  • Howard Marks will have a board seat on BAM.
  • The entities can’t be fully integrated because they want it that way, but also for regulatory reasons.
  • OAK will keep their brand, management, and investment teams.


Continue reading “The Oaktree Capital and Brookfield Marriage”

On Star Stockpickers

We have a fascination with stockpickers. Big name stockpickers like Peter Lynch or Carl Icahn, comes to mind. Star stockpickers are glamourized because investors think they have the magic wand to make fast and easy money. They know the secret to the next big name that will make them rich. And when you hold the secret to riches, the star stockpicker gets outsize attention. The star stockpicker appears on magazine covers and TV. Barron’s Magazine dedicates an annual roundtable to them. It’s very tempting for an investor to follow the recommendations of the stars. After all aren’t they the best of the brightest? They have done the research and analysis. Their past returns are juicy. They look rich and successful and you probably want to put your money where their mouth is.

First, it doesn’t work that way. Getting rich off stock tips would be too easy and it’s not supposed to be easy. I don’t know anybody who got wealthy buying stocks off a one minute TV pitch. However I’m pretty sure I can find a good sample size of unrich people that took the dive.

Second, let me hit you with the classic buzz killer “past performance is no guarantee of future results”. Why does every investment disclosure insist on including the oft-repeated phrase? Aside the legal obligation and the statement hold its weight in terms of truth.

The phrase also goes to the heart of something important if you want to make intelligent decisions and manage your risk: It is the process that counts, not the recent scorecard. There’s more on this below.

Third, chasing high returns can cause problems for your portfolio. The typical stock pitch is in a hot sector and as a result viewers pull their money out of their other investments and pour it into the new object of their affection. The investor is reacting out of emotion, most likely greed or the fear of missing out (FOMO). There’s no shortage of study documenting that investors are constantly buying and selling at the wrong time.

Fourth, there are many things we don’t know. There’s a lack of information. There a chance that we don’t understand what we are investing in and that can lead to trouble.

We don’t know the motives of the stockpicker. Is the stockpicker doing this out of self-interest? Is he trying to pump a stock where he has a loss position? Is he trying to raise money for his new fund? Is he trying to get a particular company’s business for a stock issuance? Or maybe he is simply trying to help us. We ignore “the when” and “the why” that triggers the stockpicker to get in and out of his recommendation. We don’t know when the stockpicker changed his mind and got out of the position. The viewer might be tempted to invest a sizable amount with the aim of making good money. But the allocation to the stock recommended is likely a small percentage, much likely less than 2-3%, of the total portfolio.

Fifth, some stockpickers have the “it” factor. “It” is the personality to make great TV. You are not going to see a boring Carl Icahn interview. He squared off against Bill Ackman in one of financial TV’s most interesting moment. But if you followed Carl Icahn in some of his purchases, like SandRidge Energy or Hertz, you would have seen your investment melt 60% or more. The mix of the right personality trait and charisma can get to somebody’s head. I should mention that not all star stockpickers are in media hungry. Seth Klarman of Baupost Group has been labeled media shy.

My take on star stockpickers can be seen as overly negative. I don’t want to disparage the individual pitching stock. They are not doing anything wrong. They are fun to watch. It’s entertainment. They are smart individuals and some of them are very successful, like Carl Icahn despite what I wrote in the previous paragraph. I believe they have the right intention and after all the whole point is to make money.

So what should you make of this?

Of course you might make money off the occasional stock pitch just like you can hit red at the roulette table. There’s an element of luck and speculation has its moments. I’m not saying you can’t money off ideas sourced on TV or in a magazine. It’s the behavior that is wrong. Jumping on the cool stock of the moment violates the bigger picture. Speculation violates the “why” you are investing.  You have a plan to build long-term wealth and bandwagoning on cool stocks is not contributing. I understand that respecting the investment process is not sexy. But messing around with your retirement fund or pension plan is not supposed to be sexy. And losing money is very unsexy. One bad decision can be a killer for your portfolio. Don’t forget that the beneficiary is you. You are impacted by your decisions. Humans are terrible are market timing. Studies after studies mention that asset allocation is responsible for 90% of the returns. Not picking stock skills and not hot TV stocks.

If there’s one thing to retain is that the next time you get a hot stock tip, resist the urge to open your trading app on your mobile to have a feel good moment. You can wretch your portfolio with just a few clicks.

Berkshire Hathaway 2018 Shareholder Letter and Interview

*Update: I fixed the link to the podcast.

I reviewed the Berkshire Hathaway (BRK)’s 2018 letter and listened to CNBC interview that followed. I also share my comments on The Intelligent Investing Podcast with Eric Schleien from Granite State Capital Management.

My Take

During Warren Buffett’s career of over sixty plus years, whatever needed to be said about investing has been said. You are not going to get a shocking change of opinion from an 87 year old man. The latest letter doesn’t contain any surprises and he was notoriously sphinxlike during the three interview on CNBC. Buffett can talk for hours but rarely said anything that you could use.

There are things that never change. The letter contains what you would expect, including the classic hits; “I’m younger than Charlie”, “stocks are better than gold”, and “invest in an index fund” among others.

Warren used his shareholder letter to talk to his shareholders and to educate them. Now he probably feels like he’s writing the letter for everybody to read. It gets picked up in the media and is quoted everywhere. If you are an investor looking for more technical content, the Warren Buffet Partnership letters are great.

Warren Buffett is a household name. When you think of the greatest golfer of all time, Tiger Woods comes to mind. When you think of the greatest investor of all time, you think Warren Buffett.  When you achieve this level of fame you have an outsize audience. The new investors, students, people with savings, professional, and non-investors are turning to you for advice. Warren realizes that he has to be careful with what his words.

However I will mostly remember this letter for what’s wasn’t being said.

  • In the letter Buffett talked about “diseased trees”, companies that will not be around in 10 years. No details on that out of respect for the workers there. But I think as a shareholder I would like a little bit more clarity.
  • I wish there was a deeper look at industrial businesses.
  • No comments on Apple, which is now the 2nd biggest position on his equity portfolio.
  • It would be fun to hear from the investment managers Ted Weschler and Tom Combs, and from Greg Abel and Ajit Jain. Maybe they can write a letter too?
  • No details on his Fintech investments, Paytm and StoneCo.
  • No details on his healthcare venture with JPMorgan and Jeff Bezos.

In the letter Buffett talks about focusing on the forest and not the trees (the companies), and he divides his trees into five groves to simplify things. I appreciate anything that simplify life. But as an investor in the company, I should know more about BRK’s investments. I like to learn about bushiness. I would like to learn more about the companies inside BRK, not just the 4-5 big ones. I don’t need a full 10k of details. For example: It would be fun to learn about what is Brooks working on? What’s their vision of the shoe of the future? Where do they see the company in five or ten years? How’s Dairy Queen doing?  It could be a paragraph or two. I understand there are like two hundred companies. Since BRK decentralized everything, the manager of these companies can write a separate report. Brookfield Asset Management, another company with many moving parts, does a good job talking about their various investments without getting immersed or entangled in details or complexities.

For Berkshire Hathaway, I see three possible paths forward.

  • Return cash. Accept that BRK must be less ambitious but will likely not go down that path.
  • More takeover but expensive. That’s Buffett preferred route.
  • Wait for a crash and load up on stocks.

The Letter

I reviewed Berkshire Hathaway (BRK)’s 2018 letter and listened to the CNBC interview that followed.

Here are some notes:

BRK outperformed the S&P 500 for the third year in a row, 4 out of the last 5 years, and 7 out of the last 10 years (2009-2018). The shares increased at a 17.3% (11.5%) CAGR during 2013-17 (2014-18), compared with a 15.8% (8.5%) average annual return for the S&P 500.

It’s worth noting that BRK’s returns are after-tax and the S&P are pre-tax with dividends included.

2018 Returns:

  • Per-share change: 2.8%
  • Book value per share: 0.4%
  • S&P: -4.4%

Compounded Annual Gain per share from 1965-2018: 20.5% vs 9.7% for the S&P 500 (dividends included). Over the past 54 years, book value has increased from $19 to $348,703.

It’s amazing that BRK can still outperform at its current size ($500b market cap). For the longest time, Buffett and Munger remind us year after year that they do not expect to outperform the S&P but they still do. BRK is the 7th largest most-valuable publicly traded company. The other 6 are tech companies. I do not expect Berkshire to be able to consistently increase its book value per share at a double-digit rate going forward–a feat the firm achieved six times during 2009-18.

Regular readers of the annual letter probably noticed that Buffett diminished the annual change in BRK’s book value because over time that number has become out of touch with BRK’s economic reality. What really counts of course is per-share intrinsic value. But that’s a subjective figure and book value was a useful tracking indicator when book value and intrinsic value were much closer. For the large majority of its existence BRK’s assets were then largely securities whose assets were continuously restated to reflect their current market price.

Today BRK has shifted in a major way to owning and operating large businesses and many are worth far more than their cost-based carrying value.  That number is never revalued upward. Consequently the gap between BRK’s book value and intrinsic value has material increased. That’s why BRK has introduced the historical record of BRK’s stock price to the performance table.

In the letter Buffett cited three main reasons for that:

  • BRK’s value is now mostly derived for the operating businesses that it owns. It used to be derived from its massive stock portfolio
  • Accounting rules dictates that equity holdings are marked-to-market (market prices) and operating companies at their cost-based carrying value, which is below their current value and not reflected in the financial statements.
  • BRK will likely buy more if its shares over time above book value but below intrinsic value. If you do it right, each transaction will make per-share intrinsic value go up, while per-share book value will go down.

BRK’s intrinsic value far exceeds book value, that’s why it made sense to repurchase shares at 120% book value made sense. Now that policy has been dropped and BRK now repurchase shares when it feels it below intrinsic value.

2018 Earnings

BRK earned $4 billion in 2018 and how we arrived at that number is broken down below.

Buffett 1

Because of the new mark-to-market rule, the last item brings wild swings to the bottom line. BRK has an equity portfolio of $173 billion. So a 1% change is either a 1.7% accounting gain or loss. The $20.6b loss was no actually triggered.  It’s a change in value. It’s an accounting number that distort the true economic value of the company. That’s why it’s important to focus on the operating earnings. Operating earnings is a better performance metric than net income, since the latter is subject to numerous accounting rule. Continue reading “Berkshire Hathaway 2018 Shareholder Letter and Interview”

Fyre Festival Scam

Me and my wife watched the Fyre Festival documentary on Netflix. We only watched it under recommendation of my brother because the trailer wasn’t appealing to us (kids partying on the beach with Ja Rule…pass). My brother’s track-record of recommendation is rock solid, so we gave it a shot. I told my wife let’s give this thing 10 minutes and we ended up watching the whole thing.

While the documentary focus on the Fyre Festival fiasco, there are lessons for the investor. The head of the group, convicted fraudster Billy McFarland, took everybody for a massive epic failure of a ride. It reminded me of Theranos founder, Elizabeth Holmes. She was the perfect package and turned out to be the perfect fraud. While Billy wasn’t as refined or smart as Elizabeth, he always had some kind of hustle on (mostly scams). Billy had ambition, vision, and could talk a great game and people fell for it. Here are 3 key ingredients for a great person: brain, energy, and integrity. If you have the first two and no integrity, you have a recipe for disaster. That’s when people like Elizabeth Holmes and Billy come in. They are terrible for society but they make a great documentary.

The lesson: Have a healthy dose of skepticism. When pitched with the a revolutionary way of doing something, a great idea or an awesome product, make sure that the people involved have integrity. Because if you bet on a person with high energy, high intelligence, but low integrity and you’ll get a smart, fast-moving thief.

This is what they promised:

  • The biggest party of the decade on Pablo Escobar’s old island
  • A line up of musicians, artists, celebrities.
  • Supermodels everywhere
  • Private jets from Miami to bring guests
  • Gourmet food
  • Luxury villa
  • A treasure hunt with over a $1m in prizes.
  • Party yachts

What was delivered:

  • A dump of a site with hurricane relief tents.

A lot of people got burned. People paid a lot of money to show up to realized they got scammed. A lot of hardworking people didn’t get paid. Investors got ripped off. Everybody got ripped off. Expectation and reality clearly weren’t aligned. Billy is probably safer in jail.

Related imageImage result for fyre festival expectation vs reality

The gourmet food:

While the website promised 'chef-curated culinary pop ups' one reveler posted a picture of a basic cheese sandwich served out of a polystyrene box. McFarland claimed that this picture was fake and not actually taken at the festival 

McFarland was charged with defrauding investors by presenting them with fake documents while seeking investment in his company, Fyre Media. He’s currently in jail for 6 years/

Billy McFarland


Podcast: Investing in Cuba

Copyright Eric Schleien

I was back on the The Intelligent Investing Podcast with Eric Schleien of GSCM to discuss Cuba. In a previous post I talked about my recent trip to Cuba. While the post has more of a global approach to Cuba (politics, economy, reforms etc…), the podcast is more geared towards investing. Of course they are opportunities but it’s not easy to invest in Cuba and it would require a lot of work (even more if you American).

The podcast is a about 45 minutes long, perfect for the work commute. If you can’t stand my accent, or you prefer reading, Eric published a transcript on SA.

Other platforms:

The Bond That’s Still Paying Interest, 280 Years Later

Here’s a lesson in inflation. The WSJ has an interesting story on bonds that are perpetual. They will pay interest forever as long the issuer doesn’t default. While that sounds nice, the problem is inflation will eventually eats your income away. Remember your grand-parent’s stories about how far they could go on with $1? That same dollar today lost its purchasing power. That’s inflation. It’s also a reminder that some debts never really die.

Reposted from The Wall-Street Journal

By Christopher Whittall and Georgi Kantchev

The French government has owed Marie Verrier’s family money for a long time. Almost 300 years.

All Ms. Verrier and her husband, Jean, have to do to claim the world’s oldest government debt is prove they are the descendants of an obscure 18th-century lawyer.

The question is whether it’s worth the effort: Three centuries of inflation and shifting currencies mean this debt yields just €1.20 a year, the modern-day equivalent of the long-defunct livres the bond was issued in.

“That [yield] would allow you to buy a baguette of bread once a year,” said the 81-year-old Mr. Verrier from the couple’s home in the Parisian suburb of Asnières-sur-Seine.

Bonds that never mature, or do so after a century or longer, aren’t just museum pieces. The ultralow interest rates of the last decade have encouraged governments and corporations to borrow for increasingly long periods, with some even selling 100-year bonds now.

Argentina, Mexico, Oxford University and the Wellcome Trust, one of Britain’s largest charities, have been among the issuers bonds that will mature in a century. Countries including Japan and Germany have issued so-called perpetual bonds, which never mature. Continue reading “The Bond That’s Still Paying Interest, 280 Years Later”

Cuba: After 50 Years of Total Government Economic Controls There’s No Such Thing As A Free Lunch

“Capitalism is the unequal distribution of wealth – but socialism is the equal distribution of poverty.” – Unknown

Dear friends,

This is my last post of the year. I recently got back from a special place, Cuba, a country of particular interest to me and one that has obsessed Americans over several decades. Americans, they know Cuba. I understand the fixation; at one point in 1962 this small island just 90 miles south of the coast of Florida had nuclear missiles pointed at them, in an episode called the Cuban Missile Crisis (spoiler alert: it ended well). They are also very aware of Cuba because of the Bay of Pigs, Fidel Castro, Guantanamo Bay, the Elian kid, which some people said that Al Gore lost the presidency over it. Many people remember the shooting down of two civilian planes by Cuba. And many people remember Alan Gross and their five spies—or heroes, as you wish—who were incarcerated in the United States. So since the U.S. is always having this tense, fraught relationship with Cuba.

It was my 2nd time to Cuba. As a Canadian citizen we are very welcome. We are also a major contributor to their biggest economic sector; tourism. We bring the hard currency their desperately need and in exchange they give tourists monopoly money, also known as the Cuban Convertible Pesos (CUC).

This time it was a different trip. We were twelve people. Three couples with 6 kids all 4 years old and under, or as my wife put it, 3 moms + 9. Travelling with very young kids is a different kind of trip.It’s not a vacation. It’s basically travelling with very young kids. In other words, we were a mobile daycare. This is not a post about travelling with little kids, a topic that could be turned into a series of popular self-help books for families. I’m here to give an update on Cuba.

Why write this post? If you ever wondered what a country would look like after 50 years of total government economic controls, you need only to make a trip to Cuba. While the era of the socialist experiment is over, the nostalgia surrounding it is growing (think Bernie Sanders). This is about learning from the past to prevent future mistakes.

Tale of Two Economies: Singapore And Cuba


In 1958, Fidel Castro, Ché Guevara, Raul Castro, and their companions drove out forces loyal to Cuban dictator Batista and rode triumphantly into Havana. Then Cuba embarked on a massive social experiment.

After the revolution Castro’s Cuba soon gravitated toward communism and openly courted the leaders of the Soviet Union. Of course, communist Cuba would be a thorn in the side of the United States for decades, triggering international incidents such as the Bay of Pigs and the Cuban Missile Crisis. After Cuba nationalized approximately $1 billion of US-owned property without compensation, the United States imposed a trade embargo in 1962 that led to years of hardship for the Cuban people. By the way that embargo hasn’t made sense for a while now.

The results of the revolution haven’t made Cuba a rich country. The Cubans are poor, but not poor in the sense that Haitians are poor. It’s poor in a different way. Doctors, pharmacists, lawyers, and clerks alike all make 25 Cuban pesos a month (~$33US). This may seem like an absurd income, but everything is paid for. They have free healthcare and free education. Their housing is paid for. Almost all their basic needs are met by the government. Cubans get a ration book that entitles one person to buy per month: it includes a small bag of coffee, a half-bottle of cooking oil and five pounds of rice. Then that’s it. It doesn’t get better.

It sounds nice to have the government taking care of its people. It’s a debate we have in society here today. We want free everything, especially healthcare and education. But we all know deep inside that’s there’s no such thing as a free lunch. The Cubans pay for it in other way. There’s an old saying: “Capitalism is the unequal distribution of wealth – but socialism is the equal distribution of poverty.”

Despite having their basic needs covered there’s no lack of critics for the Cuban regime. There’s lack of freedom of speech and liberty. Many Cubans are in jail for opposing the regime. A lot of Cubans managed to leave in the 80s to pursue a better life in America or elsewhere. Cubans are generally not allowed to leave the island, and from what I’ve seen, they are basically second-rate citizens in their own country — the tourists get the best of everything. The best beaches, food, treatments…That’s kind of ironic because the revolution was based on the idea of fighting exploitation and injustice.

Right now Cuba remains a country of extremes. Proud locals make much of the fact that their health services and education system is extraordinarily good. But their doctors and teachers often moonlight as tour guides or taxi drivers because they need the money. Everyone is hustling for cash. A taxi driver can make 5 to 10 times the monthly government wage. That’s how you improve your quality of life.

Cuba the Survivor

Cuba is a survivor. It just won’t die. It’s not strong, but it’s hanging on. We have seen countless examples of countries that have turned to communism/socialism thinking they are helping the people. We now have a century of data, starting with the Bolshevik Revolution in 1917. The conclusion is clear: A centrally planned economy has killed, hurt, and destroyed the quality of lives of millions.

After the collapse of the Soviet Union, pundits expected Cuba to be the next domino to fall. But it didn’t. Cuba managed to survive, thanks mostly to a shift to tourism. Then Venezuela came along and Cuba became a dependent on the oil rich country. Now Venezuela is in even worse shape than Cuba. We are currently living the real-time the fall of Venezuela. If getting toilet paper is a luxury, then you have serious questions to ask your leaders. At the moment Cuba is surviving the loss of its main supporter. Now the communist regime can no longer rely on the generosity of its allies. Cuba’s favorite economic stratagem—extracting subsidies from left-wing allies—has had its day.

Market Reforms

Bound by a socialist straitjacket, Cuba produces little else that other countries or its own people want to buy. Farming, for example, is constrained by the absence of markets for land, machinery and other inputs, by government-set prices, which are often below the market price, and by bad transport. Cuba imports 80% of its food. Paying for it is becoming harder. What appears in shops often depends on which of Cuba’s suppliers are willing to wait for payment.

Cuba has started to experiment with capitalism. The government gradually loosened its tight restrictions on foreign travel and also began allowing some private economic activity among its citizens. It has about 600,000 cuentapropistas (self-employed workers), including restaurateurs, hoteliers and so on. But the government mistrusts them. Their prosperity provokes envy among poorer Cubans. Their independent-mindedness could one day become dissent. Raúl Castro, the country’s former president, railed against “illegalities and other irregularities”, including tax evasion, committed by cuentapropistas. He did not admit that kooky government restrictions make them inevitable.

The government should make things easier for entrepreneurs. Cuba doesn’t produce anything (other than doctors, sugar, rhum, cigars). They need to open its markets so entrepreneurs need to import the input they need.

Another bigger step would be a reform of Cuba’s dual-currency system, which makes state-owned firms uncompetitive, keeps salaries in the state sector at miserable levels and distorts prices throughout the economy. The dual-currency system is one the most confusing aspects of travelling to Cuba is figuring out what currency is used in Cuba, and what to bring. Cuban pesos circulate alongside “convertible pesos” (CUC), which are worth about a dollar. Although for individuals (including tourists) the exchange rate between Cuban pesos and CUC is 24 to one, for state-owned enterprises and other public bodies it is one to one. For those entities, which account for the bulk of the economy, the Cuban peso is thus grossly overvalued. This delivers a massive subsidy to importers and punishes exporters. A devaluation of the Cuban peso for state firms is necessary for the economy to function properly. But it would bankrupt many, throw people out of work and spark inflation. Countries attempting such a devaluation usually look for outside help. But, because of American opposition, Cuba cannot join the IMF or World Bank, among the main sources of aid.

Cuba suffers from a capital allocation problem. There’s no price signal in the economy. My barista was a doctor. My cab driver was a lawyer. The people and resources are not being used in their best capacity.

In an ironic twist of history, Guevara owes his posthumous pop culture success to old fashioned property rights and the pursuit of profit.

Failed Experiment but…

The Cuban social experiment is a massive fail economically (almost bankrupt, no productivity), politically (one party system, totalitarian), and socially (the best people left, are jailed or died). But they did get some things right. Cuba has massively invested in their human capital (I’m sure they hate that term). Their healthcare system is one of the top in the world. Cuba produces a lot of doctors and many of them are in disaster areas (e.g. ebola). Its workforce is highly educated. A culture that appropriates art and education above consumer culture can’t be all bad.

Yes Cuba is a poor country by most measures. Like I said, that statement is, in a way, very misleading. Poor though they are, the Cuban people don’t suffer a lot of the same deprivations found in other poor countries.

Cuba also doesn’t suffer from the big problems that plague our society. I know this is a generalization but there’s no drug problem, homeless people, crime, cops killing minorities, or mass shooting. I’m not even sure if they know what prescription drugs are. We have a high level of dropout rate and unfortunately we have a lot of uneducated people in a society. The literacy rate in Cuba is effectively 100%, according to UNESCO. These are not the conditions that would be found in your typical poor country.

Then again, good luck finding the new paint that 99% of the buildings desperately need.


Cuba is a beautiful country filled with many friendly people, who have lived in poverty and deprivation for decades. Socialism in its purest form simply didn’t work.

The government fights wealth, not poverty. There’s a slight difference. When you are fighting wealth, you are keeping everybody poor. When you are fighting poverty, you are trying to make everyone better off.

The U.S. also needs to improve relations with Cuba. How can the U.S. have a country that is 90 miles off their shore their enemy? That is crazy. This opens the door to Russia and China. The U.S. needs all the Caribbean to be allies and friends. There is no doubt in my mind that Cubans are deprived of essential freedoms, but I don’t that the U.S. policy of isolation is an effective way to bring about change. I believe that the best way to promote change in Cuba is by empowering the Cuban people. Helping to keep them poor and isolated only helps the Communism party to maintain control.

Cuba is a special place that will hopefully keep its traditions and spirit intact as it moves from its time-capsule past into the present.

Getting Into The Weeds On Marijuana Stocks (Transcript)

Following the last podcast we did together back in October, right before the marijuana legalization in Canada, Eric Schleien took the time to publish a transcript of the podcast. Just in case you didn’t catch my accent, or you are the more visual type, you can read the entire thing here on Seeking Alpha: Getting Into The Weeds On Marijuana Stocks (Transcript) You can also catch the podcast here and my related article on SA here.


Here’s a sample:

ERIC: Regarding actual publicly traded marijuana stocks, are there any of them that you see as viable investments or is it all equivalent to gambling in your view?

BRIAN: Just to make sure that the listeners understand, I’m not endorsing any of these companies, investors beware, they are at sky-high levels and I wouldn’t even touch them.

ERIC: can you really can you really do a proper valuation on these things or do you really have to approach it more like a venture capitalist?

BRIAN: Oh, totally like a VC, we barely know anything honestly. I called Canopy Growth last week to prepare for the podcast… I’m like… hey, what’s going to happen when Canada legalizes marijuana… and they don’t know. Canopy Growth is the most legit company here, let’s talk about them. Canopy Growth had a head start over everybody else. They used to be North Street. It’s a nice little story. Just an hour south of Ottawa is a town called Smiths Falls. Smith Falls is an old school industrial town where they used to do manufacturing. A lot of these jobs are gone and about 10 years ago there was a Hershey chocolate factory that closed down and that was a major part of the town and it hurt the town a lot. The company which is now renamed Canopy Growth bought it. They bought the chocolate factory and it into the biggest marijuana company in the world. So, good for them, Canopy Growth is first class. These guys are ahead of the game, they are in a lot of fields, they’re the biggest, they have access to capital, there produce weed, they have a lot of it, they’re in the medical sector, they are all over the world. I think they’re very well managed. This company is the real deal. I’m telling you all these things that are all positive, but the thing is the market valuation of the business. The key question is how much are you willing to pay for it? So, let’s work some numbers here. The company has exposure to what they believe to be a $9 billion dollar market and they say it’s going to take a couple years for the legal space to crush the black market space. If you take all the big marijuana companies in Canada we have a total market cap of $60 billion with a potential of a $9 billion industry. So, you just see how out of whack it is right? So Canopy Growth will just have a portion of that maybe you know a good size of it but how so where is the opportunity so they’re looking at international, they’re not just looking at Canada because obviously Canada it’s just a drop in the bucket. We’re such a small country. Yes, we consume weed but as a percentage of international consumption, we’re nothing. So, they’re really looking at the international opportunities and they’re really looking at the United States when it becomes legal. There’s also Aurora Cannabis (ACB) which is the second biggest in Canada with a market cap of 11 billion. These guys are using their overvalued, inflated, sky-high shares to make acquisitions. Their stock is currency. So, they’re buying everybody and everything in fields such as: medical research, distribution, and dry cannabis retail. They’re trying to have a hand in everything and Aurora Cannabis is more flashy and aggressive than Canopy Growth. Another producer that’s interesting is Aphria (APHA). The company is smaller, and these guys play a different game. They don’t want to be like the Canopy or Aurora. Instead, these guys are only focusing on one thing and that’s being the low-cost producer. So, they’re focusing a lot on costs. They are doing that by focusing on the greenhouse which currently costs them $55/sqft. They keep their costs lower by being outside where they have natural light which lowers electricity bills compared to the people growing inside. Also by being and also by being outside, you’re using a lot less fertilizer. So, less electricity, more light, and less fertilizer, which equates to cheaper costs. So, that’s their game. I think they know that’s going to be important especially for the dry cannabis so they’re sticking with that approach. Another small company is Hexo (OTCPK:HYYDF) which is based in Quebec. What makes them different is that they’re the exclusive weed seller for the government of Quebec. When the government of Quebec opens their stores, they’re going to be the exclusive provider. So, that’s really good and their market valuations are high but not as crazy as the other guys. And they just graduated from the venture to the big TSX. There’s also Tilray (TLRY). Have you heard of them?

ERIC: Of course