Thursday, December 18, 2014

Solar subsidies vs oil subsidies

If you're not yet contacting your congressman about energy policy you are asleep at the wheel. Let me break this down. Oil is a subsidized business. Fact. OPEC is a cartel run predominantly by government owned oil companies. Fact. Oil is trading below the price of production for most countries including many that continue to pump it at a loss. Fact.

No one is crying out about low oil prices. Congress ins't slapping import tariffs on Middle East oil even though Middle East governments are subsidizing low oil prices which is putting huge pressure on the U.S. shale industry.

The NYT is out with this today:

“These remedies come just in time to enable the domestic industry to return to conditions of fair trade,” said Mukesh Dulani, president of SolarWorld Americas. “The tariffs and scope set the stage for companies to create new jobs and build or expand factories on U.S. soil.”
This type of nonsense drives me insane. This is a lobbyist looking out purely for American solar companies that aren't competitive on the world stage. This solar policy is broken.

Some solar executives and advocates argue that the low prices have helped spur wider adoption of solar energy in the United States, creating thousands of customers and jobs.
And these solar executives are right! Of course cheaper prices increase adoption and yes that creates jobs in other sectors such as installation or design of smart grids or a million other things.

The solar tariffs add up to over 50% in some cases. That's ridiculous and keeps us dependent on fossil fuels and funding regions of the world that are unstable and taking our oil money and funding terrorism.

Saturday, September 6, 2014

Monetary Policy and Climate Change are Interconnected

Insurance blog Artemis has a great post from a few days ago titled Reinsurers (and ILS) may underestimate climate change exposure: S&P.

The first paragraph says it all (emphasis mine):

“Ratings agency Standard & Poor’s performed some analysis on the global reinsurance sectors exposure to climate change and found that, under a scenario it tested for, reinsurers may be underestimating their exposure to catastrophe losses by around 50%.”

This article confirms what I have long suspected. Reinsurers are more exposed to climate change than their rates would reflect. Living in a ZIRP environment is causing investors to chase yields into instruments like Insurance Linked Securities (ILS) with no clue as to the type of risk they are taking. I think the idea of alternative risk transfer has merit and that it is a great financial tool, however, I bet very few investors understand what they are buying and I question the incentive structure of reinsurers.

What's the difference between packaging subprime mortgages and packaging the equivalent of "subprime" insurance risk? If a reinsuer can simply collect a spread but pass off all or the majority of their risk then their underwriting standards can (and will) quickly become compromised. Caveat emptor.

Tuesday, August 19, 2014

Is Missouri the next Venezuela?

I can’t believe I just typed that title. I’m from Missouri, born and raised. I’m also the co-founder of Luz Para Venezuela a non-profit focused on reducing conflict in Venezuela. Unless you live in Miami with its vibrant population of Venezuelans you’d be forgiven for not being up to speed on the escalating tensions in this important South American country that just so happens to have more oil than Saudi Arabia. That’s ok because today I hope to change that for you since you do know where Missouri is and by this point you’ve definitely heard of a town called Ferguson.

My goal is not to repeat what you’ve already read in the media about Ferguson. My goal is to show you that our world is shrinking by the day and we are more interconnected than ever before. It is through this interconnectedness that we have a lifetime opportunity to make meaningful change towards a peaceful future.

Let’s start with the current backdrop in Venezuela. Since the beginning of 2014 civil unrest in Venezuela has escalated to levels not seen since the unsuccessful coup of President Hugo Chavez in 2002. His successor, Nicolas Maduro, has continued with a series of crushing economic policies that have pushed the country into experiencing soaring inflation and constant shortages of goods, particularly important basic necessities such as baby formula, toilet paper, and medicine. Crime has skyrocketed to the point that the government no longer publishes the shameful data. Estimates place the murder rate at approximately 24,000 annually making Venezuela’s murder rate nearly the highest in the world and for government corruption Venezuela is ranked by Transparency International as 160th out of 175 countries.

Venezuela has been reducing economic freedom for well over a decade by implementing disastrous policies that exacerbate the problems they are designed to solve. For example Venezuela is experiencing food shortages with increased frequency. When any food is in short supply its price naturally increases. Venezuela reacts to rising food prices by passing laws that freeze prices. Now that might seem like a logical thing to do in theory but let me explain how this works in practice. Let’s say that Apple’s new iPad is priced at $400. iPad’s are manufactured in China by a company called Foxconn. Let’s imagine for a moment that Foxconn has a catastrophic explosion at its facility and blows up. No more iPads will be made for at least a year. The public freaks out and prices for existing iPad’s start to skyrocket. Now let’s say that President Obama is concerned about rising iPad prices and that if the prices rise too fast schools that have been buying them for classrooms won’t be able to afford them. So President Obama passes a new law that freezes prices at $400. If no more iPad’s will be made for a year but the price is frozen at the regular price of just $400 how long do you think it will take before every store shelf is permanently cleared of iPads? About 24hrs. This is exactly how Venezuela works.

Now you might be saying to yourself well wait a minute why doesn’t the government pass a law during this iPad crisis that says only schools can buy iPads? Surely that would solve things. Matter of fact that’s exactly how governments usually react in such a situation. The only problem now is that the government has become entangled in determining who wins and who loses during the shortage. If iPads are only given to schools what happens to the architects that use iPads to design new schools? What happens to the solar companies that use iPads to collaborate with team members around the globe to get us off of fossil fuels? What happens to doctors in the field that use iPads to document potential pandemic diseases like ebola? The list goes on. When a law is passed in the manner I’ve described it rewards one group at the expense of another. There’s more to consider though because when iPad prices are frozen Apple as the seller can’t charge the higher prices necessary to replace or rebuild their supplier and thus ultimately the shortage in iPads which was supposed to be only a year becomes permanent. A bad policy prescription is at the root of this mess and in an effort to help with supply shortages the government has created more of them.

Now if you take the example I’ve just laid out and multiply it several times you’ll begin to get a picture of what Venezuela looks like today. Despite their vast natural resources their supermarkets are empty. You can probably imagine that if one bad policy is passed and the error in logic is not realized then a chain reaction of subsequent bad policy prescriptions will follow. And these policy prescriptions always end in excessive use of force. Why? Because as the situation deteriorates people get upset and civil unrest erupts. Not willing to accept blame for making the problem worse the government exerts physical enforcement of ever stricter laws. Not enough food? Well then the government will ration it for everyone. Companies not making enough food? Well then the government will take over these companies. It’s a downward spiral. Although corruption is a topic of an entirely separate article it is worth noting that corruption skyrockets in an environment of government intervention. As any government takes more control of a market, they de facto become the market and thus those in control become ever more incentivized to exploit their positions of power.

How does this all connect to Ferguson, Missouri? It is similar bad policy decisions that are meant to “protect” our nation that ultimately cause us harm. In the U.S. it is specifically our war on terror. In a stream of bad policies designed to keep us safe we have now reached the point where we are at risk of being innocently shot by our own police. Let’s take a closer look at this.

First of all why is excessive force on the rise in the U.S.? The simple answer is because we’re funding it. Another example will probably be helpful here. Let’s say you work at a Toyota dealership and you find out that there’s a program available via a simple application that will allow you to receive a free Lamborghini. What are the odds that you’ll be exceeding local speed limits on I-95 (or I-70 for my people in Missouri)? Yeah about 100%. Well thanks to program 1033 its the same thing for U.S. police departments. It’s like Christmas on steroids. Program 1033 facilitates the transfer of military equipment to police departments. The idea was to not waste all this equipment coming back from our wars overseas. Ok I’ll buy that idea if its sending over laptops but .50 caliber machine guns and tanks? The problem here should be obvious. It wouldn’t be much fun to have all this gadgetry and not put it to work. And thus we see camoflauge, armored vehicles, and an assortment of other gear designed for war used on our streets in America or to keep with our metaphor we’ve got fleets of Lamborghinis zipping through our neighborhoods. Someone is going to get hit.

So with a little education on policy we start to get an idea on how to unwind bad policies but we still have a wholesale corruption issue we need to address first. There actually was a proposed bill to severely place limits on the 1033 program. Congressman Alan Grayson (D-Florida) proposed just such a bill. Did you know that a whopping 355 members of congress voted against Congressman Grayson’s amendment? But wait there’s more. Website reported the following:

Representatives voting to continue funding the 1033 Program have received, on average, 73 percent more money from the defense industry than representatives voting to defund it.

Fifty-nine representatives received more than $100,000 from the defense industry from January 1, 2011 - December 31, 2013. Of those only four supported defunding the 1033 Program.

Simply stunning and inexcusable. And we accuse Venezuela of being corrupt? At least everyone there knows it. If you are not taking the time to message your congressmen and congresswomen to let them know their days in office are numbered please do so now. And if writing a letter will take you too long then catch them on Twitter since almost every one of them is on social media. Not fully motivated yet? I’ve got more so keep reading.

Here’s a few quick numbers to show how your tax dollars are being spent to protect you.

$35 billion in homeland security grants

$3.9 billion new homeland security headquarters

$2 billion for NSA building with another $2 billion in hardware

$601 billion - proposed defense budget for 2015

Feeling safer yet? No of course not. Americans are being innocently shot by our own police.

Another similarity between Ferguson, Missouri and Venezuela is the direct targeting by law enforcement of the media. In an alarming report on Venezuela from Human Rights Watch issued a few months ago the organization noted the following:

”In 13 of the cases of physical abuse documented by Human Rights Watch, security forces targeted individuals who had been taking photographs or filming protests. All but two were then arbitrarily arrested. Roughly half of these individuals were professional journalists, while the other half were protesters or bystanders using cell phones to document use of force by security forces. In these cases, when assaulting or arresting the victims, security force members reprimanded them for taking pictures or filming. In several instances, security force members told victims they were getting what they deserved for trying to undermine the reputation of security forces, or told them they did not want the images circulating online.”

Now you might be saying to yourself wait a minute its not that extreme in Missouri. Yes it is. Two reporters were arbitrarily arrested and then released without charges. News crews have had tear gas shot directly at them. No fly zones have been enacted by the FAA. Even as I type this Amnesty International has for the first time dispatched a team into the U.S. to monitor Ferguson. And if all that doesn’t convince you then let’s pause for a photo break. I’ve placed a photo from Venezuela and then one from Ferguson, Missouri - they continue to alternate in that pattern.

See the full article and images by jumping to this link

Friday, May 2, 2014

Carbon Dioxide Levels Unsustainably High

Can we imagine a different future?

Bloomberg is out today with this article

These are not the world records humanity wants to be setting.

The current policy towards reducing emissions is failing. It is time to completely rethink the policy response to environmental pollution. There are several policy points that we feel are missing from the dialog.

1. Monetary policy affects the environment. There’s never any discussion about this but if we run ever larger credit bubbles, such as right now, then we misallocate ever larger amounts of natural resources. Addressing the environmental damage and other economic damage created by artificial credit cycles must be addressed.

2. Fiscal policy is not being employed properly to address carbon emissions. The idea of a carbon tax needs to be tossed out. Carbon credits and carbon taxes and clumsy instruments that do little to solve the problem. An easier method would be to move to a consumption tax nationwide. Ditch the income, cap gains, corp tax, etc. Create a flat consumption (sales) tax at say 25% on all retail goods. Any retail good that is certified cradle-to-cradle i.e. sustainable, is exempt from charging consumers the sales tax. This tax system has several great features to it including incentivizing people to save rather than consume which is the opposite of our current tax system and incentivizing both consumer and producer to focus on reducing their environmental footprint.

3. Give the environment legal representation. New Zealand has done this and its worthy of a closer look. Creating environmental rights is important because our laws are designed to treat mankind as completely independent of our planet when in fact we could not survive without it.

4. Change accounting standards. What we treat as assets on many corporate balance sheets are actually liabilities. While we strongly believe in the value of property rights we should not ignore our basic obligations of stewardship. If a mining company has a $2B copper mine on its balance sheet we would argue that becomes a liability each time they dig into the earth. Where is the cost of replacing the land and environment destroyed in the process of mining calculated? We need to make this transparent and easy to assess.

There are simple things we can do to make our world brighter and we believe that there is a great shift taking place drawing more of the right people towards implementing creative solutions. Let’s build a future free of fossil fuel use and environmental degradation.

Wednesday, March 12, 2014

Ukranian Market Madness

Chart from
Amazing how often investors just don't learn.

Catching back up on Ukraine we’d like to point out that on December 15 we posted our observations about the country’s spiking overnight interest rates. When banking systems destabilize the canary in the coal mine is almost always the lending rate between banks. The overnight rate spike foreshadowed that things in Ukraine were about to go from bad to worse. Fast forward to today and the whole world is aware of what has transpired and watching to see what happens next. Nonetheless, investors seem to be slow learners as evidenced by this chart of Ukranian bond prices. Zero Hedge who deserves credit for the story notes that Goldman Sachs actually recommended to clients that they buy Ukranian bonds.

Big bailed-out institutions are completely out of touch with reality. Clients that still invest through these firms should really think twice about the type of investment advice they are being given. Not only could your institution be completely botching their analysis they could actually be on the opposite side of the trades the recommend for you. Using an independent asset manager that takes the same risks as a client and thus only makes money when a client makes money is the best way to go. That's how we operate and we wouldn't have it any other way.

Food Stamps

Entirely different from how we think about food stamps in the United States. In Venezuela food stamps are quite literal.

While U.S. news has been distracted by geopolitics in Ukraine things in Venezuela continue to escalate. Venezuela made a major decision last week by severing ties with Panama. On the surface this move didn’t seem surprising and the way the news agencies reported it would lead one to believe that it was purely because of Panama’s close ties to the U.S. There are a number of wealthy Venezuelans living in Panama and Maduro has suggested they are responsible for the unrest but in reality they have nothing to do with Maduro’s disastrous economic policies.

The real reason Venezuela called it quits with Panama is because of the money they owe to Panamanian companies for food and supplies. There have been rumors of defaults circulating for sometime and by severing relationships completely a whole bunch of businesses in Panama just officially got the middle finger from Maduro.

What does this mean for the people of Venezuela? More shortages. Just as we were drafting this post last night pictures emerged on Twitter showing more empty shelves of state run grocery stores and even more alarming photos like the one here show people getting stamps and numbers on their arms to wait in line for their food rations.

The bigger question everyone is asking is when do things change? Is there going to be a coup? Not yet in our opinion. Right now the country is largely divided between the working class and the middle class. This will change however as the lines continue to grow longer for food and basic necessities. With China on the brink of a credit bubble burst and other emerging markets hitting the skids it is possible we could see a drastic pullback in oil prices. We expect instability with food in the middle east this summer so Arab Spring 2.0 could keep prices stable but if oil were to decline below $80 per barrel it would crush Venezuela’s revenue and full riots with everyone involved would commence. Since we have a lot of friends from Venezuela we certainly hope this is not how things play out but with the current lack of structure for the protests it is hard to envision an alternative scenario.

Wednesday, February 26, 2014

Cause of Venezuela’s Protests - The Fall of CADIVI?

Is the elimination of state run CADIVI the catalyst for the riots in Venezuela? We think so.

I read this excellent article on Caracas Chronicles today and I could not agree more with their theory on the timing for the riots and protests in Venezuela.

For those unfamiliar with Venezuela’s currency system its in shambles. The government has their official rate around 6.3 to the U.S. dollar while the black market rate is near 90. CADIVI is the Venezuelan government body which administers legal currency exchange in Venezuela. Since 2003 exchange controls were put in place under CADIVI to limit capital flight. As anyone that has studied the use of capital controls knows when a government puts them in place it only exacerbates the problems. The challenge with CADIVI’s rate as one can imagine is under what circumstances can a local Venezuelan access the favorable 6.3 rate to convert their bolivares to dollars?

The answer is that there are few exceptions but the ones that exist have been widely exploited to the max. The most popular is called “el raspadito” and is well outlined in this article by the Guardian. It essentially works like this: Venezuelans travel abroad and are allowed to convert bolivares at Cadivi’s 6.3 rate up to $2,500 on their credit cards for purchases. If you know a friendly credit card operator you can take this as cash return to the country and then convert the dollars back to bolivares at the black market rate for an extraordinary profit. Now this is currency arbitrage trading if ever I’ve seen it!

As Juan Cristobal Nagel at Caracas Chronicles points out things in Venezuela have been getting bad for some time so why riots and protests at this moment? The tipping point as his theory goes is that it is due to the ending of CADIVI. A country full of currency traders just got the rug pulled out from underneath them. It would be interesting to know what percentage of the population was dependent upon currency arbitrage for being able to survive. I would love to see some stats on that.

Well we agree with Mr. Nagel about CADIVI. When a medium of exchange becomes highly diluted and alternatives to this deteriorating medium of exchange are eliminated chaos is sure to follow.

Friday, February 7, 2014

Maduro Threatens to Expropriate Businesses

With the so-called “Fair Prices Act” in place Maduro is ready to crush any violators.

This is a predictable progression of a desperate government. Of course Maduro’s government takes no responsibility for soaring prices, instead it is the fault of the “bourgeoisie” as he is fond of saying.

Come Monday expect to see some businesses get their doors kicked in for violating the act and don’t be surprised if those businesses, even if in compliance with the cap of 30% profits, are the last few ones generating any profits at all. Even a corrupt government that hates profits knows better than to seize unprofitable enterprises.

We expect to see black market rates jump on Monday or over the weekend. Current rates are approximately USD/VEF 81.20.

Friday, January 31, 2014

Venezuela and Argentina may not survive the month

Today Argentina’s government debt which is due to mature in 2015 collapsed as the market went nearly bidless sending rates up to 19%.

The debt was trading close to par only 30 days ago. The problems plaguing Argentina are nothing new. They have been following in the steps of Venezuela for the last couple of years although to their credit (if you can call it that) they have caught up with Venezuela’s economic destruction rather quickly.

Both countries suffer from policies that starve their citizens from making independent financial transactions to the mutual benefit of everyone. A centralized government can in no way handle the billions, if not trillions of economic calculations required to allow any economy to thrive.

Maduro recently mandated that no business of any sort is allowed to make more than 30% profits (see my twitter feed w/ comments directed straight to Maduro). This is pure insanity, the problem is that the people that are hurt the most are the ones in the worst position to understand what’s happening to them. The corrupt politicians loot their countrymen and tell them all their woes are the fault of the mighty businessman.

Media in both countries criticize businesses for raising prices yet no outlet is bold enough to put the blame squarely where it belongs, i.e. with a government that is diluting its own currency. A business MUST raise prices or not offer the services at all - which of course is what inevitably happens and why shortages in toilet paper and basic goods occurs.

The cure here is to help the poor understand they’ve been duped. No easy task for sure but its crucial to educate them on basic economic principles. If there’s any cartoonists out there that speak Spanish call me and we’ll put together some basic material.

In the meantime what we can do is encourage the entrepreneurs and hard working citizens of these countries to come to the U.S. These countries are practicing a form of economic terrorism and there is every reason to grant their citizens asylum here.

Wednesday, January 29, 2014

Turkey’s Central Bank Boosts One-week Repo Rate to 10% from 4.5%

Big moves in Turkey's exchange rate tonight.

Well for those nerds like us staying up watching emergency central bank moves, tonight was a big night. Turkey’s central bank in an act of panic has jumped their one-week repo rate to 10% from 4.5%. The overnight lending rate is now 8% up from 3.5%.

Here’s the FX market’s knee jerk reaction.

This will likely only help stabilize markets temporarily before the depreciation of the Lira continues. Realistically with the external debt financing needs of Turkey which are estimated at over $200 billion (500% of net FX reserves), there is no way they can handle the increased level of interest on their debt. We estimate that any rate on their 10yr debt over 8% will send them into a negative feedback loop.