Market Analysis

Random Musings on Markets IX: The Man With the Golden Musing

In this week’s not-weekly roundup, we feature Australia’s revolving door, a public toilet’s lessons about land-use policy, California’s good intentions, rare books’ Bernie Madoff parallel and more.

This clearly not weekly roundup features Australia’s revolving door, a public toilet’s lessons about land-use policy, California’s good intentions, rare books’ Bernie Madoff parallel, how tariffs stir confusion over one regional paper’s publication schedule and a look back at a business model inspired by August’s happenings.

Australia’s Revolving Door Frustrates Madame Tussaud

After much speculation, Australian Prime Minister Malcolm Turnbull became former Australian Prime Minister Malcolm Turnbull last week following an intraparty leadership challenge called a “spill” in Oz. In is former Treasurer Scott Morrison, who is largely expected to continue Turnbull’s policies.

That being said, Turnbull’s policies never really amounted to much because of extreme political gridlock down under. Energy policy? Didn’t pass. Corporate tax cuts? Dying on the vine as we type. Migration issues, tied to refugees arriving by boat? He flip-flopped, achieving little.

This shouldn’t shock. Australia takes gridlock to the extreme. Consider: No Aussie PM has completed his or her full three-year term since 2007. Labor’s Kevin Rudd almost did, leading from December 2007 to June 2010 before fellow party member Julia Gillard deposed him in a spill. Gillard won re-election later in 2010 but never finished her term, as Rudd returned the favor in June 2013. He lasted less than three months before a coalition of the Liberals[i] (led by Tony Abbott) and the National Australia Party defeated Labor in September 2013’s federal election. Two years later, Abbott was deposed by Turnbull in a Liberal party leadership spill. Now Turnbull got his … turn.

Most Aussie media consider this political soap opera something of a national disgrace. But here is what it isn’t: an economic risk. Yes, yes, some will disagree—like Madame Tussaud’s Wax Museum in Sydney, given they have canceled their hall featuring Aussie PMs because they can’t keep up. But Australia hasn’t had a recession in 27 years, growing through the global financial crisis and the recent commodity downturn, notable due to Australia’s huge mining industry. This illustrates a point we have long made: In developed, competitive economies, active governments are a bigger risk than inactive. Businesses adapt. Businesses like the tote bag maker who launched a business last weekend featuring bags with the moniker, “BAN THE SINGLE USE PRIME MINISTER.” She sold 400 of them in 36 hours.[ii]

Perhaps this all proves the wisdom in Aussie historian Donald Horne’s legendary 1964 quote: “Australia is a lucky country run mainly by second-rate people who share its luck.” Thing is, we aren’t so sure that is unique to Australia.

Annals of Privatization

A Cornish toilet perhaps isn’t as dazzling as a Greek island, but it is by far the most interesting item on the world’s current list of government assets for sale. Cornwall isn’t just the setting for Poldark or a Mecca-like destination for fans of Aidan Turner’s abs. It is also home to a 325 square-foot stone cottage currently housing a public bathroom near the seashore. The local council, facing budget cuts, has closed several public toilets in recent years and is now selling off the former structures. This one, according to the auctioneers is “just a few paces or so away from Newlyn’s picturesque working harbour, where one can enjoy fantastic views over Newlyn and Mounts Bay.” Their sales pitch goes on to encourage buyers to make it a tiny seaside home. It could all be yours for just £15,000! Plus the obvious renovation costs.[iii]

It is expected to be a hot ticket, and why not. This isn’t oceanfront property in Arizona. It is a chance to get a foothold in a hot-ticket coastal area. It also strikes us as the epitome of everything presently wrong in real estate markets in desirable areas. You see, if markets were allowed to function properly, no one would need to think about buying a tiny public bathroom and spending £100,000 or more on the upgrades (and cleaning) necessary to make it a home. There would be actual homes under construction. They would have toilets, but they would not be toilets. And it isn’t just Cornwall or the UK! We reckon the city of Sunnyvale could get over $400,000 for one of the public bathrooms at Serra Park. A teardown in Fremont just sold for $2 million. All because a slower-than-molasses permitting process and arbitrary decision making block a ton of residential real estate development. Newsflash: When you artificially limit supply while demand goes through the roof, you get wackadoodle prices. And you apparently get people who are happy to live in a (former) toilet.

Hey! Maybe Elisabeth can Airbnb her bathtub! Oh, wait, her town just banned it. Harrumph.

This Week in Californian Virtue Signaling

Speaking of California, Sacramento is at it again with some surely well-intended but ill-thought-out rules. SB 100, passed by the State Assembly Tuesday and set to cruise through the Senate next week, mandates a 100% carbon-free energy grid by 2045. No more natural gas. No more coal. And we presume, this being California, new nuclear plants aren’t in the cards. So that leaves us with wind, solar and hydroelectric. Industry gurus expect costs to go through the roof, which is unpleasant news for a state whose electricity costs are already 50% above the national average, according to the Department of Energy.

The problem here, in addition to the state’s huge electric vehicle push, is storage. As The Sacramento Bee explains:

Natural gas-fired plants, which account for 33 percent of the state’s electricity, can be ramped up and down as demand fluctuates. But wind power can only be generated when it’s windy; solar power only works when it’s sunny. They can’t be stored up, and sometimes supply doesn’t conveniently sync up with demand. For instance, [UC Berkeley energy expert Severin] Borenstein said wind generation is most plentiful at night — when skies tend to be windier — but that’s when electricity consumption drops. Solar matches up better, but there are still times when demand is high but supply is scarce, such as early evening.[iv]

For those of us who lived in Gray Davis’s California 17 years ago, this naturally conjures up memories of the Season of Rolling Blackouts, when PG&E had to ration electricity due to sky-high demand and shaky supply. For those of us who follow international news, it conjures images of South Australia, where electricity prices topped $1,000 per megawatt hour last year after state officials mandated 100% renewables. The high prices and accompanying rolling blackouts eased only when regulators let utilities strike a deal to import natural gas-powered electricity from neighboring Victoria.

Look, we love this planet, dislike pollution and want everyone to live under crystal-clear blue skies. But the words volatile and power grid are two things you really don’t want to go together. If it were time for renewable energy to take over the grid, it would be more reliable. It would be cheaper. People would voluntarily put solar panels on houses without government subsidies, mandates or PG&E kickbacks. Efficient storage would abound. Heck, manufacturers would probably be able to produce solar panels without all that toxic waste. We are sure they will get there one day, but they need time—just as the oil & gas industry needed time to figure out how to make fracking cleaner and less of a strain on water supply. (Spoiler Alert: They figured it out.)

Pittsburgh’s Rare-Book Bernie

Ten years ago, when the financial crisis revealed Bernie Madoff’s gigantic Ponzi scheme, media treated the matter as if it were a one-off. Many claimed no one could see this coming, given Madoff’s sterling reputation, long history in the financial industry and connections to the Jewish community (which he heavily marketed in). Those features gave him a trustworthy veneer, while his claims of huge, consistently positive returns piqued folks’ greed. Finally, and importantly, Madoff’s firm took custody of client assets (no third-party custodian means less oversight). All this gave him a stream of business, access to help himself to client assets and the ability to send fake statements to mask his actions.

But Madoff’s scheme was really only notable for its size. As our boss (and Fisher Investments’ founder) Ken Fisher explained in this 2009 book, How to Smell a Rat, custody, affinity marketing, an air of trust and unrealistic returns are par for the course among would-be Ponzi artists.

It also seems similar to the recipe used in a recently uncovered rare book heist. A librarian at Pittsburgh’s legendary Carnegie Library (allegedly) conspired with a book dealer to (allegedly) steal some rare books from the library’s collection and peddle them to other, unsuspecting dealers. Like Madoff, the dealer had a long history and many well-cultivated relationships—the trustworthy veneer. Like Madoff, the librarian had access to the books, with little third-party oversight. (The Carnegie Library, it appears, hadn’t audited the collection since the 1990s, something we are guessing they will do more often now?) Like Madoff, they used falsified documents to assure would-be buyers nothing untoward was up.

All this gave the perpetrators means and opportunity. The motive is, of course, money. One estimate pinned the total value of books stolen at over $8 million. Investigators told the Pittsburgh Post-Gazette, “[the librarian] said, ‘I should have never done this. I loved [the antique book] room, my whole working life, and greed came over me.’” One such book inscribed by Thomas Jefferson (allegedly) yielded the librarian $1,000. His (alleged) partner in crime (allegedly) sold it for $5,000. The unsuspecting buyers, in turn, sold it for $36,000. A huge return! Eventually the book found its way online, listed for a whopping $95,000. It never sold, though, because the Library (finally) audited its collection in 2017 and reported the book missing. Appraisers found it online.

This saga shows a few things. One, greed and sleazy behavior aren’t limited to financial services. Two, the recipe for Ponzi and book heists are similar: Trust, access, lack of third party oversight, lack of due diligence, big expected returns. For investors, it is a reminder: Don’t let reputation, locality and shared affinities blind you. Ask questions. Demand the manager use a third-party custodian to limit their access to your funds. If returns sound too good to be true, be skeptical.

Finally, though we aren’t professional book-heist investigators, we have a small suggestion for the Carnegie Library folks: The New York Post reported the government auctioned off a bunch of Bernie Madoff’s stuff early this month. Included? Some rare books. Maybe the library ought to check them out.[v]

Tariffs Make—or Break—the News?

Staying with one muser’s hometown, another tidbit from Pittsburgh caught our eye this week: The Pittsburgh Post-Gazette, the city’s primary print-news publication, will reduce hardcopy distribution from seven to five days a week, effective August 24. Already fully digital competitor The Pittsburgh Tribune-Review claims the two days cut will be Tuesday and Saturday. “E-delivery” will replace the hard copy on those days. Woe is the paperboy.[vi]

The Post-Gazette claimed its decision was influenced by the Trump administration’s slapping a 20% tariff on Canadian newsprint—which most papers use, proving the economic maxim if you tax something, you get less of it. The Tampa Bay Times also laid off 50 workers tied to the same. But we wonder what they will do now, given the International Trade Commission just nixed that tariff. Will the Tampa paper rescind the layoffs? Will the Post-Gazette return to a seven-day print schedule? Stay tuned!

Bigger picture, this seems overall like another sign all isn’t well financially in media. Print papers nationwide are gradually disappearing or thinning over time. Many industry experts expect them to vanish in the long run. That seems logical to us, although we don’t traffic in long-term forecasts. (Or hard-copy newspapers, but we digress.) Adapting to a digital marketplace has been exceedingly hard on the news industry, which is forced to compete for eyeballs with lots and lots of other outlets. The result, as Michael Hanson wrote on these pages last year, is a quasi-return to yellow journalism. Only there are no kids on street corners imploring you to, “Read all about it!” We have social media and banner ads for that.

Putting the ‘Silly’ in Silly Season

With September starting tomorrow and Labor Day about to herald the ceremonial end of summer (if not its calendar end), the traditional “silly season” of slow news and meaningless headlines is officially behind us. To toast its passage, we present you with a foolproof business plan culled from some of August’s wackier business-related news items.

Step 1: Devise an alcohol-free, caffeine-free wellness beverage that can clear your skin, make your hair shiny, shrink your waist and add two inches to your height.
Step 2: Infuse it with cannabis.
Step 3: Make it clear so that it can be big in Japan.
Step 4: Get on Twitter.
Step 5: IPO.
Step 6: Get Elizabeth Banks to record a podcast about your bold move to include goji berries instead of açai.
Step 7: Get Elon Musk to announce he is considering taking your company private at $420 a share—which in no way has anything to do with Step 2—funding secured.
Step 8: When your drink factory inevitably can’t keep up with demand and you can’t meet your pledge to produce 5,000 bottles per week of your eagerly anticipated turmeric-infused coconut water with fermented aloe and 45 superfoods, motivate workers by staying at the factory 24/7, breaking only to nap for a couple hours in your sleeping bag on a conference room floor.
Step 9: Have Jack White play a free concert for your tired employees.
Step 10: Spill your guts in a tear-filled New York Times interview.
Step 11: Decide not to go private after all.
Step 12: Deny that the New York Times interview was tear-filled.
Step 13: Make your grand comeback with a million-selling young adult novel all about how terrible it is to be alive today.
Step 14: Solve the Los Angeles Dodgers’ post-game traffic issues.
Step 15: Pray nothing happens to resurrect the team’s original nickname, the Trolley Dodgers.

Enjoy your weekend!

[i] In Australia, this term is used in the classical sense. The Liberal party is center-right.

[ii] And one to Elisabeth shortly thereafter.

[iii] Unless…

[iv] “An All-Renewable Energy Grid ‘Definitely Feasible’ for California. But at What Cost?,” Dale Kasler, The Sacramento Bee, August 29, 2018.

[v] Disclosure: No pun was intended initially.

[vi] Ok, not really, as the paperboy (or girl, as the case may be) was already long extinct. Also, disclosure: Todd had a paper route for the (long-defunct) Pittsburgh Press eons ago to earn spending money.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.