The Woodstock Of Crony Capitalism

April 28, 2016 9:01 PM


It’s been a while since I've attended the Berkshire Hathaway (BRK:NYSE) annual meeting. Between the tedium of little kids asking questions about how to live life, to the feel-good nature of the thing, I simply got repulsed. Why do a bunch of hard-nosed capitalists choose to act like Ned Flanders for a weekend—in Omaha of all places? It’s illogical and completely artificial.

BH

Then, a few weeks back, as friends asked if I was attending this year, I had a certain realization—all this play-acting is simply Buffett, the puppet-master at his most brilliant. As he plows capital into highly regulated industries, he has the upper hand because he has skillfully crafted the image of the Mid-Western grandfather that can do no wrong. He can cozy up to regulators and politicians and get what he wants—without the added costs and distractions of lobbyists and consultants. Who wouldn’t want to get their permits in half the time and with a fraction of the cost? Want to block a Canadian pipe-line that would compete with your cherished rail-road? Become the President’s “economic advisor.” Want to abuse tax loopholes? Bemoan that your secretary pays a higher tax rate than you. You want to obstruct solar energy in Nevada? Elon Musk is a foreigner, Omaha is as American as it gets. Your railroad has an atrocious safety record? Well, at least we don’t have to worry about global warming from that pipeline...

I can go on and on, but I went from disgusted to awestruck. In this horribly overregulated world of ours, Buffett has evolved into the apex predator. Why wouldn’t he? Over his career, he’s consistently gone where the opportunities were. He’s gone from investing in “cigar-butts” when few other investors knew how to look for companies trading for less than cash, to branded products with pricing power that could thrive during the increasing inflation of the 70’s and early 80’s to a diversified book of high return on capital businesses during the great bull market that began in 1982. Over this time, he realized that he could leverage his bets with an insurance business that not only gave him access to cheap capital, but removed the headaches associated with bond maturities and margin calls.

Over the past fifteen years, the US has undergone a massive increase in pernicious regulation. Therefore, it seems only natural that opportunities would exist in the most regulated sectors of the economy. If you can get your permits and deny those permits to others, if you can avoid environmentalists and NIMBYs, if you can dodge taxes, if you can charm the cliques in Washington, you have an opportunity to earn outsized profits—especially if you have an endless fire-hose of cheap insurance float to deploy.

crony 2

Crony capitalism is highly lucrative and as a Berkshire shareholder, I’ve reaped the rewards. Now, I once again want to sit at the feet of the master. How do you make people like you to the point that they give you a free pass on whatever you want? When you call up a regulator, do you even talk about the issues? Or do you talk about your Ukulele skills and Omaha little league? You have to admire what he’s accomplished and I will be there to watch him amuse the petite bourgeoisie. I see a world that continues to become more regulated—where a cloistered elite uses special interest groups to crush opponents and destroy businesses. Either you’re calling the shots, or you’re getting abused like a peasant.

The Koch Brothers spend hundreds of millions on elections. Soros spends similarly on fringe groups that break windows and overturn cars. Neither really accomplishes his goals. Buffett gets what he wants. In Davos, they chug bottles of Chateau Lafite Rothschild and plot how to pillage small nations. At Berkshire, we will eat Dilly bars and plot how to pillage the middle class. Capitalism is beautiful and crony capitalism is the end product of politicians who prostitute the laws. I don’t have the power to change the current rules, but I can certainly learn to thrive within them.

This is a long-winded way of saying that after a few years of sitting out the meeting, I’ll be there. If you want to grab a drink, email me and I’ll tell you where I am. Beer with friends is fun—free beer at someone else’s party is the true definition of value investing.

 

Disclosure: Long Berkshire Hathaway

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Colombia Not Columbia...

September 3, 2015 3:23 PM


So, I was sitting in the Plaza De Los Coches in Cartagena, Colombia. It was past midnight, but still 95 degrees with an asphyxiating humidity that I have yet to experience in Miami. Fortunately, I had a cold beer in hand and was surrounded by good friends. In any case, I was transfixed by the parade of drunken tourists, prostitutes and the awkwardly comical pollination of the two. Yes, for over four centuries, despite revolutions, plagues, endemic crime, pirate induced destruction and a whole host of other calamities, Cartagena has carried on in much the same way—pure spectacle—travelers and prostitutes, money and drugs, all passing through its prized port. Hong Kong is the gateway to China and before the Panama Canal; Cartagena was the gateway to most of South America with its gold, silver and other riches. There is indeed a reason why the Spanish built the largest fort in the Americas overlooking Cartagena.

Cartagena 1

Historic Cartagena

As always, my focus was on the opportunity here. While Pablo Escobar’s ghost lingers over all of Colombia, my friends and I continually spoke about the peace dividend and the re-birth of Colombia—but what did that really mean? Sure there was opportunity. All around us, we saw signs of construction and rebuilding, but this was still Latin America—the spirit of mañana encompasses everything—including my ability to get served another beer.

“So Kuppy, name me one product pioneered in South America—one South American company that dominates its field globally?”

I took a deep sip of my beer and realized I needed a whole lot more time. Sure, the boys at 3G Capital have created huge conglomerates, but that’s just cost cutting and financial engineering. There are massive banks and retailers, but they mostly copy US models. There are plenty of commodity exporters, but that’s not exactly innovative. Was there not one company that I admired, from a continent of nearly 400 million people? It was late at night, but even with the help of the internet, I remained stumped. Why were there so few innovators on this continent?

In the end, we all agreed that the most innovative businesses in South America were involved in the production and export of narcotics to North America. Think about it, South America didn’t invent the iPhone or Amazon—instead; the best and brightest are focused on inventing long-distance submarines using supplies from a Home Depot. Why should they focus on anything else? Throughout history, the most entrepreneurial have focused on what makes the most money. South America was settled by thugs who wanted to steal Inca gold—now their progeny focus on selling plant extracts to Americans.

Cartagena 3

Cartagena 2

It takes some serious theatrics to differentiate your watermellon stand from the dozens that surround you...

So that brings me back to the opportunities in Colombia. Despite flying there to attend a conference on investing in Colombia, my take-away was that Colombia is very much like the rest of South America—in a perpetual sine curve. There are good and bad decades, but minimal progress. The nicest buildings in Cartagena were built centuries ago and you can still see kids playing in raw sewage a mile or two from the tourist district. I’m sure that in a few centuries, not much will change—it hasn’t changed much in the last few centuries.

However, that doesn’t mean that there isn’t opportunity. In particular, it was obvious that a decade-long rush of money entered the country to focus on mining and oil. Now, the economy was hopelessly dependent on high commodity prices. One only needs to look at the Colombian Peso, which dropped a few percent each day I was in Colombia, to realize that something was going horribly wrong.

The joke about Argentina is that they seem to have a crisis every ten years and it lasts about a decade. Despite the clarity elucidated within, there have been some great windows to buy Argentine assets on the cheap and make many times your money when the economy normalizes between crises. The rest of South America isn’t too different. Substitute revolution, socialism, currency crisis, commodity crisis, expropriation of foreign assets, coup, civil war, indigenous rebellion or any combination of the above and you can re-live almost every crisis in South America for the past two centuries. In two centuries, these will remain the facts—only the dates and countries will change. Fortunes can be made by buying the crisis and selling into that rare moment when they can induce foreigners to believe that “this time is truly different.”

On that note, it does seem as though Colombia is a few years past the top and a few years from some sort of bottom. The Colombians are committed to maintaining the peace dividend and tourists will eventually flock to the country. It is beautiful, the food is great, the people are friendly, it’s stunningly cheap and it’s less than 3 hours from Miami. This tourist boom will eventually offset the fall-off in commodity investment and certain commodities are primed to come roaring back in price. Until then, for the adventuresome, it’s time to start exploring for bargains. I’d personally be focused on buying up old buildings in Cartagena as the sustained peace dividend will eventually bring huge numbers of cruise ships with their cargo of American shoppers. Additionally, it doesn’t hurt that property prices just dropped by over 60% with the Peso.

Cartagena 4

cartagena6

The conversion of historic buildings into high end tourist shops is proceeding everywhere. For the brave, this is the opportunity...

Then again, I’d rather focus my energy on countries with real futures. Colombia is nice to visit. Economically, it will rise and fall repeatedly—much like it has over the past few centuries. Those paying close attention will do well there, but it’s unlikely that I’ll do anything investment related unless prices take a much more substantial tumble.

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Colombia

July 12, 2015 10:52 PM


As many of you know, I live in Miami—what you probably don’t know, is that without the cocaine trade, Miami would still be a backwater like Fort Meyers—good weather, some interesting architecture, but not much modern development. Instead, Miami is the capital of Latin America. It got to that pinnacle through the activities of a motley band of Colombians—none more famous than Pablo Escobar.

With the cocaine coming in, the money had to go out or at least get laundered into something. As you look at the skyline from my pool deck, you can see the many towers that were built with cocaine money—along with the many small banks that got their start from laundering this gusher of illicit funds. If cocaine built Miami, Pablo Escobar was inadvertently the creator of Miami’s modern economy.

With this firmly in mind, in late August, I will be joining my friends from Capitalist Exploits in Medellin, Colombia—which was ground zero for Miami’s renaissance. Fast forward a few decades and the Colombian economy has advanced a long way from the days when its principle exports were cocaine and violence, while importing little more than CIA funds to be siphoned off by drug kingpins.

Colombia is now experiencing a resurgence on the back of commodity exports and a relative peace dividend. I intend to take it all in, explore Medellin, see some old friends and figure out where the opportunities in Colombia are. It promises to be a very enlightening experience.

If you would like more information, please click this link Medellin, Colombia Meet Up

Or email Chris directly at chris@seraph.vc

 

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Cuba--Por Que Hay Un Bloqueo

February 13, 2014 6:51 PM


Cuba Bloqueo

Let’s say that Cuba’s socialist utopia doesn’t quite appeal to you—shocking right? How do you escape? Well, actually, it’s a simple process. You need to start by scavenging for materials, building a floating contraption of some sort, piling your worldly possessions into that contrivance and setting out for Florida. Along the way, you must evade the Cuban Coast Guard, who will imprison you for trying to escape and the American Coast Guard who may alternatively; turn you over to the Cubans, spray you with water cannons, capsize your boat, or let you continue floating north depending on America’s capricious Cuba immigration policy.  

US Citizenship can be yours, if you can successfully cross the Straits of Florida and then physically step off your boat onto mainland American soil. This is known as America’s “Wet Feet, Dry Feet” policy—you need to get at least one “Dry Foot.” Unfortunately, there are some unique wrinkles in America’s policy; such that the Dry Tortugas, despite being part of Monroe County Florida, are considered an unincorporated area of Florida (whatever that means), hence they’re not officially “Dry” and that disembarking on bridges and other man-made structures, not connected to land, do not count as “Land.” The important thing to remember is that despite a Cuban internet blackout, you should make sure to research the hundreds of “Dry Feet” rules, because they’ve likely continued to evolve by the time you read this.

If “Wet Feet, Dry Feet” sounds like a game created for a kindergarten playground, it is only because it was created by Congress, the world’s most august kindergarten. Unfortunately, thousands of people have now died while playing this game, proving conclusively that the Castro Brothers do not have a monopoly on asinine Cuba laws. However, no policy is as ridiculous as the five decade long US Embargo on Cuba.

cuba ocean

Staring at his dreams in Florida...

 

Let’s face it; embargos as a rule rarely achieve their intended goal of overthrowing governments—55 years later, and the Castros are still there. Instead, embargos tend to deprive the poor of basic necessities, enrich government cronies while giving the government an excuse for why their economic policies are failing. If anything, embargos help to entrench the very governments that they are meant to overthrow.

As I wandered Cuba, it was interesting to see which American products were available. Coca-Cola was ubiquitous, as were household P&G products, meanwhile, I never saw a single Pepsi product. The shops were full of knock-off luxury clothing from China, but there was also plenty of US clothing—no one knocks off Old Navy (or do they?). Red Bull was cheaper than in Miami (not American) as were most American whiskeys (damn liquor taxes in America). In fact, with a few notable exceptions (no American cars older than 1959) most American products were getting through the embargo just fine.

What was not getting through was the fact that the embargo was not particularly responsible for Cuba’s economic predicament. While even the most ardent Communists that I met with agreed that Cuba’s economic policies were holding back the country—most Cubans placed a majority of the blame on the embargo. I have a hunch that the embargo is the only thing keeping the Castro Brothers in power. Without the embargo, the people would recognize the immediate failings of Cuban Socialism.

This brings me back to the title of this piece—the question that pretty much every Cuban asked me while I was there: “Why is there an embargo?”

 

 

Some More Cuba Images

cuba chinatown

Yes, Havana has a Chinatown...

cuba soda\

Tu Kola Is Pure Adrenaline...

cuba tropicana

Not quite the same without the mafia running the joint...

 

cuba museum of revolution

For a government that does NOTHING except celebrate the revolution (literally), you'd think that they'd at least maintain the Museum Of The Revolution.... What's the Spanish word for state sponsored irony....

Cuba Painters

I spent most of my trip convinced that no paint ever made it through the embargo, but then I saw this... In a country that has not repainted a single building in 55 years, they're instead painting the fence around a renovation site, for a building that they will probably never renovate.... Just when you think Cuban Socialism is starting to make sense, you have to throw away the puzzle pieces and try to figure it all out again...

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Cuba--The Economy

January 21, 2014 4:42 AM


Che 1

If the secret to economic prosperity was the erection of Che Guevara murals, Cuba would be the wealthiest nation on Earth. Unfortunately, revolutions are meant as transitions between an inferior form of government, and one that is supposed to be better. Revolution itself isn’t a form of government and socialist sloganeering only takes you so far. In the end, you need to produce things that people need. As one Cuban pointed out, Cuba produces cigars, sugar and more Cubans. That isn’t exactly the making of an economy; ironically, since the advent of communism, all three have seen their production decline.

During my second day in Cuba, a very wise taxi driver tried to explain socialism to me as;

“A big puzzle where you spend years putting the pieces together, only to learn that the last few pieces won’t fit how you want them to. Therefore, every decade, you need to disassemble puzzle and put it back together again so that you can get more of the pieces to fit this time.”

A few devoted socialists humored me by explaining that Cuba had finally created a perfect socialist state without classes. It was working, except that the state didn’t earn any hard currency to pay for imports. Cuba had no choice, but to re-do the puzzle—the foreign currency piece would not fit, yet by redoing the puzzle, they unfortunately took a step away from socialism.

Che 2

Cuba then opened up parts of the economy to tourists in an effort to attract foreign currency. At first, it was anticipated that tourists would choose to essentially seclude themselves in beach communities, surrounded by specially selected Cuban workers. The problem was that tourists had money to spend, and it didn’t all go to the state. Suddenly an unregulated market sprung up, driven by tourists. 

In the communist critique of capitalism, whoever has the highest income, is the most valued in society. Today, in the tourist driven economy, prostitutes make the most, followed by tour guides, taxi drivers, bar keepers, waiters and anyone else who is paid in cash, either for services rendered or in tips. Meanwhile, doctors earn roughly US $20 a month while working for the state. Multiple people pointed out that if doctors are now choosing to become prostitutes and taxi drivers, how will there continue to be free health-care? It sounds like socialism in Cuba is having an existential crisis—is it time to re-do the puzzle?

Che 3

As one very devoted former communist youth leader pointed out, “Cuba now needs a handful of millionaire businessmen—otherwise prostitutes will dominate the social strata. Too many people have seen spendable money in their hands from tourists, for us to go back to the old system. The current system isn’t tenable. Cuba will have to move forward and continue to liberalize the economy—there is no other choice.”

As investors, that is all that you need to know—they’re about to re-do the puzzle again—now, none of the pieces fit. Once you start to liberalize an economy, the trajectory is set—it will only accelerate from there.  

It has already begun to accelerate. Despite turning economic mismanagement into a science, we saw many Cubans buying flat screen TVs and designer clothing. Somewhere between a massive black market economy, tourism and overseas remittances, many Cubans are actually doing quite well—which I did not expect. That said, the majority are still mired in a form of socialist inspired poverty, where their needs are taken care of, but they cannot get much more than basic food.

Che 4

The situation with the currency is emblematic of the problems created by Socialism. The National Peso (CUP) is used by the government to pay government employees or the majority of the people. Meanwhile, the Convertible Peso (CUC) is meant for the tourist economy and only supposed to be accepted by certain businesses catering to tourists. In theory, one US Dollar is worth one CUC which is worth 25 CUP. Of course, in Cuba, it doesn’t work that way. At the government run exchange booths, $100 US Dollars are worth 87 CUC—talk about a wide spread. Meanwhile, CUC cannot convert back to US Dollars and the government mandates that all transactions happen at a handful of government exchange booths. No one will take US Dollars in a transaction outside of the exchange counters and Cubans are not allowed to possess US Dollars. Finally, the vast majority of stores will only take CUC for transactions and will refuse to take CUP—which is what most Cubans actually have.

So you enter the country with US Dollars, convert them into CUC at a horrible spread, but get most of your change back in the CUP that no one will accept. It is like the county fair where you have to buy either food tickets or ride tickets and you always end up with too many of one and not enough of the other. They might cost the same per ticket, but you cannot exchange them for each other. Meanwhile, the kid running the tilt-a-whirl will let you pay a dollar to ride it instead of 8 tickets because he wants to pocket the money. On the way out, you give the food tickets to some cute kid in line because you can only eat so much fried dough before your stomach decides the matter for you. Cuba is that dysfunctional carnival.  

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After the first time that I exchanged for CUC, I wised up to the fact that all the hotel employees are tipped in CUC yet desperate for US Dollars. I have been to many black markets in my life, but exchanging currency in Cuba has the feel of a drug deal, because it is equally illegal. In the bowls of the luggage storage rooms of various hotels, I asked why the bellhops would give me parity or better for my US Dollars.

“Castro says I cannot have it, so I probably want it.”

“When I escape this stupid island, my CUC won’t be worth much in Miami.”

“I can only pay the bribe for my travel visa in US Dollars. Since I won’t return from my travel, I won’t need CUC.”

Like most things in Cuba, there is an element of the surreal in everyday life, but that is to be expected when a government tries to interfere in the economy.

Che 6

Che's Victory?? What Victory??

The economy clearly isn’t working right in Cuba, but then again, I certainly expected a whole lot worse. Cuba actually scores very high on GDP per capita for Latin America and I continually wondered how it was all held together given the natural failings of a planned economy.

On one hand, I continually wondered if maybe the Cuban government had a plan after all. Then I realized that no matter how much a government tries to screw up the economic system of a country, people somehow find a way to persevere and survive. When you see the thousands of vintage cars on the streets of Cuba, you will understand what I mean. Given some freedom, Cuba will once again prosper.

 

 

 

In terms of the images, I cannot let Che get all the attention. There's plenty of Socialism to go around....

Che 7

Che 9

Che 8

Trust me, excluding the food, Cienfuegos is indeed failing...

 

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