Killing it like a hooker in Hong Kong

Bonds and the Political Economy: Bulletproofing

This is a game I’ve seen several times in emerging markets.

Entrepreneur raises money from private funds and takes over a large business which depends on a regulated government market. It could be utilities, energy, even tobacco or financial firm or bank.

Having taken over the company, he then quickly does a refinancing, inviting government pension funds and state connected banks to lend to his firm, even if it does not need the money.

He usually realizes very little savings in the refinancing or even ends up with a higher cost, because the original funding would have been USD based, while the refi would be local currency based.

Now the key factor in many of these deals is this: they ignore political or regulatory risk that scares away other potential bidders, allowing the entrepreneur to buy assets much cheaper than expected.

Why does this happen? Well firstly, the aforesaid entrepreneur is usually well connected politically, but often only as much as a good lobbyist would be.

More often, the local borrowings strategy is used to spread the political risk to the masses.

Good example is Malakoff, YTL and the other large Malaysian independent power producers. The IPPs got sweetheart deals in the 90s, and Tenaga Nasional has been trying to renegotiate these deal forever. The Malaysian government in 2008 threatened to change the payment formula but met with a chorus of opposition from: you guessed it: the government pension fund.


This is a lesson for any industry which is profitable and highly regulated. ISSUE BONDS. Get the institutions which protect pensioners investing in you, and you have a highly motivated political bench taking care of you.


Looking at the US, which industry is the biggest issuer of bonds: the finance sector obviously. This is one reason why financial institutions had to be bailed out by the taxpayer. Because you could either spread the pain to the taxpaying population, which by definition is still earning, or devastate the savings of the retirees, who would have taken the hit had you crammed down losses on the bondholders.


October 14, 2010 Posted by | Uncategorized | , , , , | 2 Comments

What does a depreciating US Dollar hold for the world?

Topic of the hour.

The problem the US has right now is that it is grossly uncompetitive. When an engineer hired in India and China for USD20k a year costs USD100k a year in the US, you have a problem.

A depreciating US dollar will solve this problem, but not in the way most people think it might.

The Chinese rightly point out that yuan appreciation will cause low end manufacturing to shift to other Asian countries, and this will do nothing for the US.

Also true.

Actually, what I think a proper USD devaluation will achieve is return the US to its role in the early 1900s, the world’s primary and most efficient supplier of commodities, especially agricultural commodities. When I think of American exports, that’s where I see the opportunity, not in manufacturing, not in Boeing but in Cargill.

However this implies a vast structural shift. How many factory workers are going to want to return to farming? There’s going to be some serious pain to come.





October 7, 2010 Posted by | Uncategorized | | 2 Comments

The man has left the building

Well, it finally happened. After a long slog of over 18 months, yours truly has left finance.

Good bye hedge fund world.

Closed out acquisition of a medium sized South East Asian consumer business, and left Hong Kong last week for Kuala Lumpur.

Speaking Bahasa did come in handy in the end, but the real kicker was friendships with all the guys involved. It’s literally been like getting together with three frat buddies to do something fun, and hopefully make scads of cash.

Also, after almost 15 years in the business, I did get awfully bored of shovelling shit from one place to the other. The lack of social value in finance does deaden you a bit. And you wonder if you are even capable of being more than a cog.

July 30, 2010 Posted by | Uncategorized | 1 Comment

Macro: Resource Bounded Expansion

I don’t often go into monologues about macro, about which I know very little, so this is a departure from my usual specific thoughts.

An article which I keep going back to is Jared Diamond’s 2008 Op Ed in the NYT, What’s Your Consumption Factor?

TO mathematicians, 32 is an interesting number: it’s 2 raised to the fifth power, 2 times 2 times 2 times 2 times 2. To economists, 32 is even more special, because it measures the difference in lifestyles between the first world and the developing world. The average rates at which people consume resources like oil and metals, and produce wastes like plastics and greenhouse gases, are about 32 times higher in North America, Western Europe, Japan and Australia than they are in the developing world. That factor of 32 has big consequence

Of course this is no different from Goldman’s emerging middle class consumption hockey stick, or any number of other theories in the market to justify the commodities boom.

Over the roller coaster course of the last 3 years, I’ve watched as the oil price peaked at 150, dropped down to 40 and now is back up at 80. The resources guys have been talking their book about the commodity super cycle, the China bulls theirs on how China is going to rule the world.

But again, I go back to Jared Diamond’s  consumption factor argument. What has basically happened with the advances in telecommunications and the internet, is that technological advances are now being communicated more or less instantly across the world. It took 60 years for the radio to become widespread around the world, 40 for the television, 20 for the Internet, and less than 5 years for the Iphone. This increase in the pace of technological advance basically means that technology derived competitive advantage has become a highly temporary phenomenon.

This also ties in with the “golden straitjacket” argument of Thomas Friedman, that policy choices between political parties has narrowed in all countries as a result of globalization.

The confluence of these factors implies that all nations, and all the middle classes of those nations, are reaching for the same goods that the West has enjoyed in the post WWII era.

This is what I am willing to believe will drive the commodity story over the next 20 years. It’s going to take a lot of coal, oil and copper to satisfy those masses.

July 16, 2010 Posted by | Uncategorized | , | 1 Comment

Jews are the new WASPs

Philip Weiss on the Kagan appointment:

The Kagan appointment means that we have entered a period in which Jews are equal members, if not actually predominant members, of the American Establishment. Obama’s two closest political advisers are Jewish, Rahm Emanuel and David Axelrod, and are said to be his foreign-policy braintrust. The economy is supervised to a large degree by Jewish appointees, Larry Summers and Fed Reserve Board chair Ben Bernanke (Time’s man of the year last year, a selection overseen by Rick Stengel, the Time magazine editor, who is also Jewish).

Recently a Jewish friend in the media said, “We’re the new WASPs,” referring to the patrician class that used to represent the elite in American society.

I’ve been thinking the very same thing for a while, and it’s pretty funny to hear someone else say it out loud.

When I was in Harvard, fresh from classless mass of Southern California, there was one thing I discovered. If you saw a smart white person, with dark hair, there was a 99% chance that he or she was Jewish.

Now this is not a commentary on the lack of blondes in the Jewish population, but merely that in schools like Harvard, which produce the American elite, Jews have been the new WASPs for quite a while, but have managed to be less visible than say Asians.

July 16, 2010 Posted by | Uncategorized | , , | 3 Comments

Warren Buffet is an asshole: Burlington Northern

Of all the people who rode the wave of monetary policy in the last 30 years, Buffett is the only one left who has not yet had his reputation tarnished. He annoys me the most because I see him as the most facetious and hypocritical of the bunch.  So as to not dredge up old history, let’s just focus on what has happened in the last few years. And I am going to try to keep this column going as a serial.

Burlington Northern acquisition – This is Buffet’s Steve Case move. In retrospect 10 years from now it will be viewed as the deal of the century.

What Buffett says happened: He saw the chance to acquire a great company at a great price and took it.

What actually happened? : Buffett prospered during an era of low inflation and low energy prices. This allowed him to make butt loads of money in the bond market. The problem now is that Berkshire is primarily a financial services firm, heavily overweight the insurance, banking, and financial services sectors. On top of that his holdings of consumer products firms, Coca Cola and the like, make him heavily short of energy and commodities.

He’s basically looking ahead and seeing an era of high inflation and high energy prices. So he needs to convert his soon to be devalued financial portfolio into one consisting of real assets and with exposure to energy. He needs to do a big deal and to do it fast, before 2011-2012. And he needs to do it without moving the market. If word gets out he is selling, the bond market would crash, and he simply has too big a portfolio for that not to happen. So the only way he could do this, is via a “transformative deal” , as he put it.

He doesn’t want to buy a mining firm, because the beta is too high, and he would have to take on serious operational risk. He wants a stable asset.

Enter Burlington Northern, which is basically an irreplaceable asset at this point. It’s an asset valued of USD50billion, with a replacement cost running into the trillions. Can you imagine how expensive it would be to acquire the land rights and build something of that scale again? So it a definite “real” asset.

As energy prices go up, trucking, shipping and all other forms of transportation which are less energy efficient will increase in cost much more than rail transportation will. Furthermore, as oil is depleted and more coal is eventually burned in the US, Burlington will have a prime position in transporting coal from where it is mined to where it is burned.

In about 5 years, you will start hearing politicians in Ohio start screaming as coal miners get fucked over by Burlington. And companies across the US scream as they convert from container trucking to rail.

Why Buffet is an asshole: This is an AOL like deal here. He’s basically managed to trade a less valuable paper asset for a much more valuable real one. But this is only going to be evident going forward. He’s managed to put out a great story, that this is a vote of confidence in the US, when actually it is the exact opposite, it is vote that high inflation and energy prices are going to put a serious dent in US economic growth, but through this deal he would have enhanced his relative position.

May 1, 2010 Posted by | Uncategorized | , | 6 Comments

Goldman Sachs hearing: Liveblogging 2.05pm

Watching this, with the older, folksy senators, trying to skewer the young, slick, slippery GS execs brings several phrases to mind…

inchoate rage

grasping at straws


April 28, 2010 Posted by | Uncategorized | | Leave a comment

Goldman Sachs hearing: Liveblogging 12.57 pm

The Goldman execs are just saying too much. Only Sparks seems to be on message. Birnbaum and Tourre come out looking like overeager boy scouts trying to prove they are in the right. They’re just saying too much which can and will be used against them later. If I were Fab, I would just claim the 5th and keep quiet. Damn it all. Then let Goldman handle the shitstorm.

April 28, 2010 Posted by | Uncategorized | Leave a comment

Goldman Sachs hearing: Liveblogging 12.16 pm

Dan Sparks get caught here

– “ratings agencies attempted to do their job” – attempted??

– “there was an element of competitiveness” – why admit to this?

April 28, 2010 Posted by | Uncategorized | | Leave a comment

Goldman Sachs hearing: Liveblogging 12.03 pm

Ted Kaufmann

– “Wall Street was sucking in these stated income loans”  – echoes of vampire squid

April 28, 2010 Posted by | Uncategorized | | Leave a comment