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.
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”→
Memo from: Bognor Consulting Group. To: Santa Claus, North Pole hq, Lapland.
Thanks for asking us to have a look at your business model. Our staff have now recovered from their frostbite and have a number of significant suggestions for a revamp before next year.
First, the brand name. The business seems to use several different monikers, including St Nicholas, Santa Claus and Father Christmas. We suggest settling on one of the three. Father Christmas is clearly paternalistic and gender-biased. St Nicholas is too overtly religious. Santa Claus is a much more inclusive term. Once trademarked, there is a ton of money to be made from merchandising rights, particularly from greeting-card companies and department stores. Frankly, your intellectual property is an underutilised resource.
Making better use of it could help address your most glaring challenge: the lack of any revenue stream. Mince pies, carrots and glasses of brandy are not a sound basis of remuneration for a multinational organisation. And who pays for the raw materials needed to make the presents? Given the lack of paperwork about your funding, we are surprised that the authorities have not launched an investigation into money-laundering.
Next, the distribution system. We admit you have an excellent record to date. However, in attempting to deliver millions of presents from a single point over the course of one night, you have been flying by the seat of your sled. It would take just one injured reindeer or a chimney accident and the whole system would grind to a halt. It is far from clear how you co-ordinate your flights with air-traffic-control systems.
Outsourcing is the obvious answer. Amazon, Fed Ex and ups would do the job just as efficiently. If the chimney-delivery route is still preferred, then small drones may be the answer.
Now let us turn to working conditions. Basing your operation at the North Pole exposes your workers both to extreme cold and, thanks to climate change, melting ice. It is a health-and-safety (or should that be elf-and-safety) nightmare. Speaking of which, our human-resources department is unsure whether employing elves should be classed as an admirable diversity policy or discrimination against Homo sapiens. As with distribution, the operation could be outsourced. The elves could be retrained, perhaps as shoemakers.
Our team was also very concerned about animal welfare. Asking reindeer to fly around the world in one night, pulling a heavy load, must put an enormous strain on their physiques. One of the reindeer has a very shiny nose and we recommend immediate veterinary attention.
The next issue is data protection. You tell us you have a “list” which records whether children are “naughty or nice”. We are afraid that checking it twice is simply not an adequate safeguard. Children, and their parents, have the right to inspect the list to see whether they agree with your assessment. Even keeping the list is a breach of data-protection rules around the planet. And how are the data compiled? The fact that you see children when they are sleeping, and know when they are awake, suggests surveillance on an Orwellian scale. This must be stopped immediately. If you insist on pre-gift monitoring, simply look at the children’s Snapchat accounts. That should tell you all you need to know.
While we are on the subject, how do you know which families celebrate Christmas and which do not? In some jurisdictions, you may be liable to a religious-discrimination lawsuit.
We are also worried about succession planning. No insult intended but the white beard suggests you are past retirement age and your rotund physique does not bode well for your health. You need to hire a graduate, preferably from an Ivy League college such as Yule University.
The good news is that you do live up to many of the precepts of modern business theory. Just-in-time delivery, a flat management structure and a purpose-driven ethos are all things we recommend to other clients. And no one can say that flying reindeer are not “agile”.
Finally, we need to talk about the terms of our bill. Our expenses were considerable; have you seen the price of a first-class seat on Lapland Airways? Your offer of a train set and slippers was very kind, but we prefer a bank transfer. Mind you, if you could drop a hassle-free Brexit solution down the chimney, the people of Britain would be very grateful.
“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.
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?
Charlie Munger used Monish Pabrai as an example because he’s one of the rare to used the original Buffett Partnerships free structure. Monish went 10 years without taking fees, just living off his capital. That’s tough. But this is the right way to do it. It’s extremely rare to see investment managers use that formula because it’s simply too hard.
The formula is 0/6/25:
0% Management fee
6% Annual performance hurdle with high water mark. That means you need a minimum of 6% gain to start getting paid. The high water mark is the highest peak in value that the investment has reached. The manager cannot collect an incentive fee unless the fund’s value is above the high water mark and returns are above the hurdle rate.
25% fee on gains over 6%
A good question is do you think that formula would incentive a manager to take higher risk just to get over the hurdle rate? Or does it align the interest of the shareholders with the manager? I think the answer depends on the manager.
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).
“We try to stick to companies gushing free cashflow. Huge returns on capital, meaning they deploy their capital well.
That avoids some of the value traps from ‘traditional’ value. I think that brings up the point – we don’t really think of value as low price-to-book, low price-to-sales investing. We’re actually valuing businesses based on cashflow, like a private equity investor would.
So if you’re trying to figure out what a company’s worth and buy it for less, at a bigger discount, that will never go out of favor even if value as defined by companies like Morningstar, which is low price-to-book or low price-to-sales investing. That may or may not stay in vogue. It may be out of favor sometimes, in favor, it may not even outperform the market going forward.
That doesn’t mean that much to me because those have been correlations that have worked with more than your fair share of companies that are out of favor. I imagine they’ll come back a some point. We’re actually valuing businesses based on cashflows. That’s what stocks are, ownership shares in businesses.”
