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

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.

Conclusion

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.

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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.

Enjoy!

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

Inside John Malone’s World

John Malone and Greg Maffei.jpg
Credit: Barron’s. John Malone and Greg Maffei / Illustration by Michael Hoeweler

Barron’s has done a big article on John Malone’s Liberty empire. Barron’s took a deep dive into the world of Liberty and it’s various moving parts. Malone has been one of the greatest capital allocators of our time and investors that has followed him through the years has tremendously benefited.  Malone has been one of the subject in the famous book The Outsiders by William N. Thorndike (must read).

Article: John Malone_s Liberty is a different kind of media empire—and its stocks look attractive – Barron’s

Liberty Media

California

Here’s my missive on my recent trip to California. Because of its large size, I decided to break down in different posts.

I spent two days in Los Angeles to attend Charlie Munger’s Daily Journal meeting and various related investment events. Then I headed to the San Francisco-Silicon Valley area to have a better understanding of what’s going on in that special part of the world. Here are the posts:

As always, your feedback is welcome,

Brian Langis

Alphabet (Google)

I use Google every day. I use its search engine, gmail, Youtube, Chrome, cloud, photos and calendar. My phone runs Android. Google organized my life. It’s hard to imagine a world without Alphabet-Google. Today, Google is a global icon that regularly pushes the boundaries of innovation in a variety of fields.

Google classic search

I had the chance to visit their campus. Google’s campus is famous. Google is well known for doing things differently. Not only it is an awesome working place, it is famous for throwing tons of perks at its employees. Free gourmet cafeterias, massage rooms, nap pods, haircuts and onsite. Why would a company offer so much? Well they want to keep their employees happy and productive. They put in 12-14 hours day and they need them at their best. It’s good to have your employees on site. I worked for a company that hired a catering service for lunch because leaving work site brings too many distractions. Another reason for the generous perks is that the Silicon Valley area is competing for their services. Their talent are highly sought after, not just in the Valley for everywhere in the world. The lesson here is to attract smart-creative people and give them an environment where they can thrive at scale.

Google organized the world’s information. This is an organization that has improved our lives. The world is certainly a better with Google. Alphabet’s business model is to collect data on users and sell that data for targeted ads. Alphabet, already one of the largest companies on the planet, seems to be defying the laws of physics by continuing to grow like a startup. Despite being over $100 billion, revenue is still growing at a rate of over 20% per year. Here are some financials: Continue reading “Alphabet (Google)”

San Francisco Bay Area – Silicon Valley

Perhaps the strongest thread that runs through the Valley’s past and present is the drive to “play” with novel technology, which, when bolstered by an advanced engineering degree and channeled by astute management, has done much to create the industrial powerhouse we see in the Valley today.

— Timothy J. Sturgeon

I didn’t have official business in the San Francisco Bay area but I wanted to go see for myself what is going on in this part of the world. There’s something truly unique going on there. I had to go. Some of the companies that have a major influence on our life are all located in the area. Silicon Valley, the nickname for the region, is populated with the Google, Apple, Facebook, Amazon, Netflix and Intel of the world. Even traditional brick and mortar businesses like Walmart have a presence with a tech lab. I don’t think we realize how much these companies have penetrated our daily lives. We use their products all the time. We use our iPhone to go on Facebook or Youtube. Google Maps to get around. On a flight, Netflix and the iPad are great at averting a kid crisis. Our methods of communication, work, and the way we get our entertainment are all in the hands of a couple companies. And is it a coincidence that they are all located in the same area? How did that happened?

Silicon Valley
Silicon Valley, California. Credit: Credit: Samykolon/Wikimedia Commons

Silicon Valley is a unique place. It’s a place of dreamers. The belief is that if you can think it, you can code it. And if you can code it, you can make products that will improve our lives. Silicon Valley has the ability of attracting the smartest brains. The region has everything to gets things done. Money is not an issue with its legions of venture capital funds looking to fund the next big revolutionary idea. Some of the best schools in the world, Berkeley and Stanford, are located there. It attracts and retains some of the smartest people in the world. Silicon Valley has created this virtuous circle of attracting money and brains that build companies that improve our lives. Continue reading “San Francisco Bay Area – Silicon Valley”

Tesla, SpaceX and Musk

Tesla’s marketing budget: $0.

SpaceX RoadsterSpaceX Roadster

We all have seen the picture. The picture. The one that features Starman clad in a SpaceX astronaut suit. It is nothing short of epic. Musk’s SpaceX launched the Falcon Heavy rocket to much fanfare. The 27-engine behemoth is the most powerful rocket in use today. Because Musk though the launch wasn’t exiting enough, he put his own cherry red Tesla Roadster in the rocket to be released into space. There’s a live video feed of the Tesla floating through space.

If you work in marketing, I wouldn’t be surprised if your clients ask you to have a “stunt” marketing campaign with a $5,000 budget.

Its successful launch was a significant step forward for SpaceX and Musk’s eventual goal of sending people to live on Mars. President Kennedy was fixated on the moon. Musk is fixated on Mars.

I had the opportunity to visit the Tesla factory in Fremont but it didn’t work out. There are plenty of documentaries on the factory such as this one (Youtube).

I have written a post on Elon Musk after reading his biography. Musk and his accomplishments are an incredible story. We need more Elon Musk in this world. Musk has his share of critics. But he is also an easy target. I have no investment in Tesla and I don’t plan too. I would like a Tesla roadster but there’s no way I’m touching the shares. I can’t justify its valuation (TSLA). Tesla is currently trading at a $60 billion market cap and an enterprise value of $70 billion. And it makes no money. I know this is a bet on the future, but let’s say that once it is profitable, what will be its margins? 5-8%? I haven’t got into its financials. Tesla has a lot debt, losses, and burns a lot of cash. If you think its financials are bad, the critics are trashing the new Model 3 that just came out. The quality of the car has been compared to the 1990s Kia. In a normal rational world, none of this is good for the price of a stock.

So why, knowing what we know, is Tesla trading at astronomical levels? Tesla’s shareholders are like members of a religious cult. They don’t invest based on fundamentals (things like profits, cash flow, and assets), but instead the investment is based on faith. They believe that Tesla will revolutionize the world and they want a piece of the action (or wealthy). In my mind, they have no idea what’s about the hit them. But as long as the capital markets are there to support Musk’s vision he might succeed in accomplishing it.

But am I ready to bet against Musk? Hell no.

Elon Musk cult

Two Days In Los Angeles

I was in town on business and I only stayed two days. I need to come back to spend more time. I liked LA. I enjoyed my short stay. Here are some observations.

Population-Sanctuary City

Ask locals what is the population of LA and you will get different answers. There’s the official count which is 4 million people, according to the Census Bureau. And then there are the off the book numbers that range from 12 to 17 million. The answer varies on who you ask and what you consider to be Los Angeles.  If you include the greater LA area, the number jumps to 10-12 million. If you add illegal aliens, we could be taking about 17 million. Nobody really knows because how do you know how many illegals are there? It happens to be thaT Los Angeles is a sanctuary city. While there’s no clear definition of what a sanctuary city is, it understood that it limits local law enforcements cooperation with federal authorities. In other words, city employees are not assisting Immigration and Customs Enforcement (ICE) in enforcing federal immigration laws. Sanctuary cities are controversial and Trump has promised to crack down on them. It’s estimated that there are between 5 to 7 million illegal immigrants in LA. It’s near Mexico, the weather is nice, and it seems like everybody speaks Spanish, so why not immigrate there. LA is a majority-minority city. Latinos and Asians make a large percentage of the population. LA also has a huge homeless population problem. The official count underestimates L.A.’s homeless population according to a study. So who knows how many people are in the city of Angels.

What is Los Angeles?

If you tell somebody that you are going to New York, you are probably referring to Manhattan. Or else you would say I’m going to Brooklyn or Long Island. If you are going to LA, it’s not exactly clear where you are going. Los Angeles is a collection of neighborhoods. There’s Hollywood, Malibu, Beverly Hills, Inglewood, Anaheim, Compton, Santa Monica, Pasadena, Long Beach and many others.  Logistically speaking, these neighborhoods don’t connect well.  People in Pasadena don’t hang out in Inglewood and so forth.

There’s a downtown. Sort of. LA has been investing a lot in the last couple years to create regenerate downtown. The reason why LA is structured the way it is today is due to the way it was grown. LA’s growth exploded in the post-World War II suburbanization, thanks in part to defense spending. So its growth was sprawled out resulting in all these different neighborhoods. As the move to more suburban neighborhoods continued, the city’s population surged. Signs of decline in the central city, however, were becoming apparent. Downtown LA has declined in metropolitan importance for decades.

But in the last couple year gentrification began to take hold in downtown. I was only in LA for two days and I spent 90% of my time downtown. It was nice and clean but unfortunately it has a major homeless problem. I found that even though it was nice, it lacked “life”. I don’t have the exact words I’m looking for. They have this new art district. It’s beautiful. But it doesn’t feel organic. An art district has to look like it has grown on its own. You can’t put a painting up and call it the art district. Just like when there’s a Chinese restaurant that opens on your block, you can’t just call it Chinatown.  A local told me that you only go downtown if you need to, which is like never.

Sports

When I visit a major city, I like to get a vibe of the sports scene. In LA, the Lakers are #1 by far. It’s a Lakers’ city. The Dodgers come in 2nd. After that it’s college sports and the Clippers. When I asked somebody about the LA Kings (NHL), he thought I was talking about the Sacramento Kings (NBA). Nothing on soccer and zero mention of two NFL teams they have. After twenty years without a team, they now have two. You probably heard about the indifference toward the Rams and the Chargers in LA. The moves looks like a failure at the moment, but let’s give it some time. They will have a new stadium in 2020. My guess for the failure is that LA is a neighborhood city, so they probably don’t have the sentiment that its “their” team.

2020

I consider both current mayor Eric Garcetti and former mayor Antonio Villaraigosa great presidential candidates, in 2020 or later. They have done a good job with LA. Their diverse background could provide them with a broad appeal. Also California Lt. Gov. Gavin Newsom could be an interesting candidate. You can’t count out California Senator Kamela Harris which is increasingly positing herself for a White House run. It could be a crowded race.

Investment Collection Additions

I added a few links to the Investment Collection segment. Here are some new links:

 

The Investment Collection

I want to introduce a new section to the blog: The Investment Collection. It’s simply a collection of links and resources that I found interesting. I will try to update it when I have time. Why am I doing this? First, I wanted to gather some of the most important investment material under one roof. Second, somehow stuff gets lost on the Internet. The resources are not simply about investing. It is about becoming a better human being. Learning from the success and failure of others is the fastest way to get smarter and wiser without a lot of pain.

The best thing a human being can do is help another human being know more. – Charlie Munger, Berkshire Hathaway Annual Meeting, 2010