Saturday, December 26, 2020

Job Interview Questions: Plus 500

I gave someone a quick job interview today. It was kind of miserable except the kid was enthusiastic and came with a lot of (what he thought were) good ideas.

Chief amongst his good ideas was to short XRP - the crypto-currency associated with Ripple.

His case was primarily "have you read the SEC complaint?"

Anyway my concern wasn't that. It was how do I actually execute this trade? What broker would I leave my collateral with to do this and why should I trust this broker.

The problem is acute. I am most likely to win in this trade in the event of a collapse in crypto-currencies generally - and that is the time the broker is most likely to default and wind up not paying me.

I can imagine it being a really bad trade whatever the market outcome. If I am wrong and crypto just keeps going up I will lose money. If I crypto collapses I can't collect my winnings - indeed I just lose my collateral.

Okay - his thought - do it at a broker which is not crypto-dominated. He thought Plus 500 which he told me was ASIC regulated. (ASIC is the Australian securities regulator.)

The ASIC regulated status I was amused by. They have never been particularly good at hunting debacles before they happened. And beside Plus 500 is an Israel/Cyprus operation listed in London - and is rather hard for ASIC to regulate properly. I could just imagine the ASIC officer trying get a holiday in Cyprus on the public purse because he wanted to do a site visit...

Whatever - he was convinced.

And so I left him a task. Could he analyse Plus 500. It is a listed company. Could he tell me whether I should own the stock or whether I should trust it with my precious collateral.

The accounts are public after all.

Does anyone think this is a reasonable task for a job applicant?

Asking for a friend.


Thursday, December 17, 2020

Delusion, fraud and the role of the SEC - the General Electric long-term care case

Luckin Coffee just settled with the SEC for a fine which I guess will be paid by shareholders. Given that the whole thing is a massive admitted fraud being paid by "shareholders" is a pretty moot case. There is not much evidence that the shareholders have anything left. Other than any part of the fine that might be distributed to them I doubt the shareholders ever get a penny.

Whatever: this prompted a twitter debate about the fine paid by General Electric after their long-term-care debacle.

This tweet by Francine McKenna is where it started.

I disagree sharply. 

First let's explain what that $24 billion cost at GE was.

a). GE wrote a lot of business in now sold/closed insurers insuring against the need for people to go into nursing homes. It would pay for the nursing home if that unfortunate situation actually arose. This insurance is called "long-term care insurance".

b). Long-term care insurance has been a near universal disaster for the insurance industry. Almost everyone who touched it lost money. The reason is that people lived longer than expected, they lived more of those years in nursing homes than people expected and the cost of nursing homes went up more than expected. Insurers did not deliberately lose money in long-term care - but everyone lost money in the end. That is the nature of insurance - it is full of surprises - and the surprises are mostly negative.

c). GE had a keepwell agreement with (State) Insurance Commissioners that required that they keep the long-term care subsidiaries capitalised at 300 percent of statutory minimums. This meant that negative surprises at the subsidiaries caused a cash call on the parent company of 3x the negative surprise. 

d). The long term care companies were under-reserved by $8 billion - a mistake that was common in the industry - but in this case a pretty nasty mistake.

e). Because of the keepwell agreement the cost to the GE Parent company was $24 billion. If the book of business runs off as GE currently expects much of that $24 billion - will be returned over time. After all the bulk of it is agreed "excess" capital.

By constrast Luckin Coffee was a fraud from when it listed and was purely a device to extract money from shareholders.

The GE long-term care business was not a fraud from when it listed. Indeed they were blithely writing long-term care insurance in the expectation it would be profitable. So were many other insurance companies.

At some point they will pay out far more than they took in (and the business will not have been profitable). I am not even sure that line has been crossed yet - but as of a couple of years ago when GE took the charge it had not been crossed.

But at some point on that path it will become obvious to anyone who takes a dispassionate view that the line will be crossed someday in the near future.

There is a sequence here.

First there is an honest mistake (writing the business).

Then there is just error - not noticing the models that you wrote too are wrong by a large enough amount to cause problems.

Then the error - under-reserving - becomes delusion. After all it is very hard to admit a mistake even to yourself. I have held a stock way too long when I am wrong and most people who invest have done this. Error is human. And sometimes that error becomes delusion and that is human too.

But there is a nasty line here. Sometimes that delusion becomes fraud. It is fraud when you start to lie about it and know you are lying about it

Luckin Coffee was a fraud from before the IPO. To even equate it to the GE thing is to downplay how much malice was involved in the Luckin Coffee fraud.

Now GE did pay a fine. 

I have a strong view here. If the SEC could prove that certain GE execs crossed the line between human delusion and fraud they should have criminally prosecuted.

And if they could not prove that then they should have not fined at all (except maybe for insufficient financial controls). 

As far as I know they could not prove it. But hey - GE settled quickly on a civil case. 

I can see how this happens. The SEC has lots of powers and it sort of forces GE to settle. But this is not what should happen. 

Either the SEC has a case - in which case it should have been criminal - or they have no case at all - in which case the fine is inappropriate.

My guess here is that the fine is just inappropriate. It makes me respect the SEC less. 

So was the fine against Luckin' Coffee appropriate?

By my own logic the fine against Luckin' Coffee was not appropriate either - what should have happened is criminal charges.

But the SEC has a real problem. The real problem is that the malefactors are in China. 

And it is awful hard to criminally prosecute them.

They may want to come to the United States (or some country with an extradition treaty one day). So settling for a fine works for them.

Whether it works for America I do not know. Sure some money came back Stateside - and maybe that was all that was ever able to be recovered.

The SEC notes it is really hopeless. To quote the press:

“While there are challenges in our ability to effectively hold foreign issuers and their officers and directors accountable to the same extent as U.S. issuers and persons, we will continue to use all our available resources to protect investors when foreign issuers violate the federal securities laws,” said Stephanie Avakian, director of the SEC’s division of enforcement, in the regulator’s announcement on Luckin.

The SEC is nastier against GE because it can be

The Luckin case was criminal - and all it got was a fine. That was because the malefactors were in China.

GE was probably not even fraud - and they got a fine.

That is because they were American. Nothing more.

Yeah, it is not fair.

But that is the world we are in. 

Francine McKenna pontificating just exaggerates that unfairness. But whatever.


Saturday, October 10, 2020

Charity auction: fishing the Manning river with local professional fisherman (and me)

In March/April I sought to donate money to a few charities hard-hit by COVID-19. My family wound up donating to three women's shelters.

One of these was Great Lakes Women's Shelter hit by the double-whammy of bushfires and then COVID. They are at Forster, about three hours north of Sydney.

2019-20 was rough for them. Needs had gone (way) up and their usual sources of funds had evaporated.

Anyway this developed into a conversation about how we could raise more money. And so comes to you one of the most interesting charity auctions you will ever see.

There is a wonderful documentary (Teach a Man to Fish) about Leigh Saunders (a well known aboriginal documentary maker) learning - as a middle aged man - how to fish from his father. It is poignant and beautiful.

Well Ray Suanders has volunteered to teach me and a lucky reader how to fish too. 

The Women's Shelter is running an auction for a day fishing on the Manning River. It will be on a Friday (professional fisherman are prohibited on the river on weekends). It will be gas fun.

We will also probably meet a few of the local aboriginal elders over the weekend too. Lets make a weekend of it.

You can bid here

I am donating a further 10 thousand dollars to kick it along.

Happy bidding.


Monday, June 22, 2020

Olaf Scholz - the German Finance Minister is delusional

Wirecard - a major German fraud - is unwinding as I write this. They have withdrawn several years of accounts and they wonder whether the business (their main profit generator) was conducted at all.

Over 2 billion euro is missing.

This fraud has been well telegraphed for a long time, with several short cases and some excellent articles by the Financial Times providing a rare glimpse into a major fraud real time.

The financial regulator did no investigation of the fraud. But they investigated short-sellers for market manipulation, threw some in jail and filed criminal charges against the journalists who wrote ultimately correct articles about the company. 

As someone with "anglo" sensibilities I tend to think there is a real problem when bureaucrats throw people in prison and raise criminal charges for telling the truth. I thought that ended in Germany when the Wall came down (but I am clearly wrong).

No apology though.

To quote the Financial Times:
...Olaf Scholz, Germany’s finance minister, rebuffed calls for tighter regulation as a consequence from the Wirecard case. “The supervisory institutions worked very hard and did their job, which we see today,” said Mr Scholz in a video interview at the summit.
Mr Scholz is delusional. No rational outside observer thinks this was a good job.

But may I ask some questions:

a) if ignoring the evidence and prosecuting whistle-blowers is a good job what is a bad job? 


b) are German standards really this low - or is it only Mr Scholz's standards?

Just asking

John Hempton

Wednesday, June 17, 2020

Will the market lend USD500 million to a Canadian reverse merger with a collapsed stock, marginally unprofitable gold mines in China, and a non-legally binding State guarantee?

China Gold International (CGG-TSE) is a Canadian listed company with two not particularly good gold mines in China. One of these mines is very large (but is also directly mortgaged to Chinese banks).

The stock was a reverse merger back-in-the-day. But that was almost twenty years ago. The name on the original reverse merger document is Rui Feng. This is the same Rui Feng associated with Silvercorp Metals. Silvercorp had a famous but ultimately inconclusive fight with short-sellers who alleged fraud.

There are a long collection of past directors who merged in companies with names like "Rapid Results" and who have a record of association with collapsed reverse mergers but those people are long gone.

China Gold International has risen far beyond its origins. It has two real (but sharply underperforming) gold mines. And it has a very high quality shareholder.

Top if the register with over 39 percent is China National Gold.

China National Gold is
  • one of only about 100 centrally owned State Owned Enterprises (SOEs) in China,
  • the biggest gold miner in the world by ounces and revenue 
  • able to borrow as a AAA in China, and having recently completed large bond offerings at low spreads obviously fairly liquid.

This is a very high quality shareholder - especially for a company with reverse-merger origins.

The high quality shareholder however can't be particularly pleased with the stock they bought into.

China National Gold bought into what was then Jinshan Gold Mines Inc buy buying out a position held by (Robert Friedland's) Ivanhoe Mines. They paid Canadian $3.18 per share and they also paid out Ivanhoe on some minor debt provisions. You can find the original press release here (and original source here).

The stock had a little bit of a run-up and then a run down - and then in 2011 China National Gold purchased another 412 thousand shares in the open market. You can find the original press release here (and the original source here).

But since then the stock has just gone down and down and become very illiquid. Here is a chart for the stock over the past ten years courtesy of CapitalIQ.

The stock is now Canadian 56c down from a peak around $6. It is a little worse if measured in Yuan or US Dollars because the Canadian currency has also lost some value. Measured in Yuan the stock has lost well over 90 percent of its value.

The market cap is now Canadian 222 million or 163 million USD. The China National Gold stake is worth about USD65 million if they could sell it. They probably could not because the Canadian stock now has low liquidity.

This is consistent with mines that have (fairly sharply) underperformed the engineering and reserve studies laid out for them about a decade ago.

China Gold International traded debts

Being a shareholder is not the only relationship that China National Gold has with China Gold International. They are the (sole) customer for metal concentrates and gold dorĂ© produced and they provided most of the equipment and engineering services needed to actually build the two above-mentioned mines.

By the time you get to the 2013 annual report (copied here) the company has extensive related party transactions where the mines are developed almost entirely by paying China National Gold subsidiaries for detailed engineering services. By the end of 2013 the company owed China National Gold a lot of money (and it still had more money to pay to China National Gold). [The multiple pages detailing related party transactions start on P.16.]

In 2014 China Gold International with the support of China National Gold went to the Hong Kong market to pay for all this. They issued USD500 million in three year debt in 2014. That debt was repaid in 2017 and another three year debt was issued. The 2017 issuance is due for repayment in early July of this year and as of the time of printing China Gold International clearly does not have the money (though may be able to raise it).

This debt is issued through Skyland Mining (BVI) limited - a British Virgin Islands company that was at one stage the owner of the more valuable of the two China Gold International Mines. The debt is guaranteed by Canadian parent company.

I wondered whether it would default. That would of course make China Gold International (the guarantor of the debt) a great short. The combination looked pretty sweet to me. A large amount of short-dated debt and underperforming mines on a stock that is an old reverse merger is is the sort of thing that makes short-sellers salivate.

Alas it is not so simple. Bloomberg says pretty clearly that the debt is guaranteed by China National Gold.

Here are some cut-and-snips from our Bloomberg machine. Here is what Bloomberg says about the bond issue:

This clearly delineates the issuer as Skyland Mining BVI LTD and states unequivocally that there is letter of support by China National Gold Corp.

As China National Gold Corp is amongst the more solvent and liquid Chinese SOEs this debt trades as a quasi-Chinese sovereign debt.

If you go back to the press releases when the debt was issued Bloomberg also clearly states that the debt was issued with a letter of support.

And this is where a short-case ends. I do not feel like shorting the Chinese National Government. This debt trades at par, and if it is really supported by China National Gold it deserves to trade at par.

Trust but verify

I am however an intense fan of Ronald Reagan's approach to dealing with the Russians (or in this day-and-age the Chinese). The Reagan approach was to "trust but verify".

I went looking for the original offer document to find this letter of support.

Bloomberg had no document that verified that a letter of support existed.

So I looked a little harder. Actually a lot harder. And here is what I found.

The 2014 debt issuance

The 2014 debt issuance is explained in the 2014 CGG annual report. To quote:
On July 10, 2014, the Company, its wholly-owned subsidiary, Skyland Mining (BVI) Limited (the “Issuer”), China National Gold and Standard Chartered Bank, Citigroup Global Markets Limited, Merrill Lynch International and CCB International Capital Limited (the “Joint Lead Managers”) have entered into a subscription agreement (the “Subscription Agreement”) pursuant to which the Issuer has agreed to issue to the Joint Lead Managers, and the Joint Lead Managers have agreed, severally and not jointly, to subscribe for bonds in an aggregate principal amount of US$500 million (equivalent to approximately HK$3,900 million) at an issue price of 99.634% (the “Bonds”) bearing interest at the rate of 3.5% with a maturity date of July 17, 2017, rated BBB- by Standard & Poor’s. The bonds were unconditionally and irrevocably guaranteed by the Company. The net proceeds would be used for working capital, capital expenditures and general corporate purposes of the Company. 
On July 17, 2014, all the conditions precedent to the issue of the Bonds as set out in the Subscription Agreement were satisfied and the issue of the Bonds was closed. The Bonds were listed on the Stock Exchange of Hong Kong Limited on July 18, 2014. Details of the Subscription Agreement are stated in the Company’s announcements dated July 11, 2014 and July 18, 2014.
You will note that in this China National Gold was a participant in the subscription agreement.

Also to confuse matters the press releases are not dated 11 July and 18 July. They are in fact dated 10 July and 17 July. I guess this could have been an effect of the International date line between the Hong Kong listing and the Canadian listing.

That said you can find the 10 July press release here (original here) and the 17 July press release here (original here). They detail all the conditions of the bonds.

The 10 July 2014 press release starts as follows:

VANCOUVER, July 10, 2014 – The Board of Directors of China Gold International Resources Corp. Ltd. (TSX: CGG; HKEx: 2099) (the “Company”, the “Guarantor” or “China Gold International Resources”) is pleased to announce that on July 10, 2014, the Company, its wholly-owned subsidiary, Skyland Mining (BVI) Limited (the “Issuer”), China National Gold Group Corporation (the “Keepwell Provider”) and Joint Lead Managers as defined below, have entered into a subscription agreement (the “Subscription Agreement”) pursuant to which the Issuer has agreed to issue to the Joint Lead Managers, and the Joint Lead Managers have agreed, severally and not jointly, to subscribe for bonds (the “Offer”) in an aggregate principal amount of US$500 million (equivalent to approximately HK$3,900 million) at an issue price of 99.634% (the  Bonds”) bearing interest at the rate of 3.5% with a maturity date of July 17, 2017, rated BBB- by Standard & Poor’s.

This press release clearly states that China National Gold Corporation is a "Keepwell provider".

CapitalIQ also has the original offering documents. For those with a CapitalIQ subscription you can find them here - but I have downloaded here. This document confirms China National Gold as a Keepwell provider. [Incidentally the dates on the Capital IQ releases match the annual report again suggesting that it was a dateline issue.]

We can be pretty sure that the credit on the 2014 bond issuance was supported by China National Gold.

You would expect it to be money-good regardless of the performance of the underlying mines.

And it was. The issuance was repaid in 2017 and another USD500 million was borrowed in the Hong Kong market.

The 2017 debt issuance

The 2017 debt issuance looks somewhat different. Again we can find a description in the CCG annual report (in this case the 2017 annual). Here is the text:

On June 27, 2017, the Company, Skyland Mining, China International Capital Corporation Hong Kong Securities Limited, Citigroup Global Markets Limited, CCB International Capital Limited, Industrial Bank Co., Ltd. Hong Kong Branch and Standard Chartered Bank (the “Joint Lead Managers”) entered into a subscription agreement (the “Subscription Agreement”) pursuant to which Skyland Mining agreed to issue to the Joint Lead Managers, and the Joint Lead Managers agreed severally and not jointly, to subscribe for bonds in an aggregate principal amount of US$500 million (equivalent to approximately HK$3,880 million) at an issue price of 99.663% (the “Bonds”) bearing interest at the rate of 3.25% with a maturity date of July 6, 2020, rated BBB- by Standard & Poor’s. The Bonds were unconditionally and irrevocably guaranteed by the Company. The net proceeds are used for repaying existing indebtedness, working capital and general corporate purposes of the Company. 
On July 6, 2017, all the conditions to the issue of the Bonds as set out in the Subscription Agreement were satisfied and the issue of the Bonds was closed. The Bonds were listed on the Hong Kong Stock Exchange on July 7, 2017. Details of the Subscription Agreement are stated in the Company’s announcements dated June 27, 2017 and July 6, 2017.
This differs in one key respect from the 2014 disclosure. China National Gold is not a party to the subscription agreement.

The press releases dated June 27, 2017 is here (original here).

The press releases dated July 6, 2017 is here (original here).

Here again is the opening paragraph of the first release.

VANCOUVER, June 27, 2017 – The Board of Directors of China Gold International Resources Corp. Ltd. (TSX: CGG; HKEx: 2099) (the “Company”, the “Guarantor” or “China Gold International Resources”) is pleased to announce that on June 27, 2017, the Company, its wholly-owned subsidiary, Skyland Mining (BVI) Limited (the “Issuer”) and Joint Lead Managers as defined below, have entered into a subscription agreement (the “Subscription Agreement”) pursuant to which the Issuer has agreed to issue to the Joint Lead Managers, and the Joint Lead Managers have agreed, severally and not jointly, to subscribe for bonds (the “Offer”) in an aggregate principal amount of US$500 million (equivalent to approximately HK$3.88 billion) at an issue price of 99.663% (the “Bonds”) bearing interest at the rate of 3.25% with a maturity date of July 6, 2020, rated BBB- by Standard & Poor’s.

You will note that China National Gold appears nowhere in this. The "Keepwell" has disappeared. China National Gold is not mentioned in either release.

Again CapitalIQ has a page on this bond (here) and if you have a subscription you can download a longer-form offering document. I have saved it here.

Again it contains no reference to China National Gold or to a Keepwell agreement.

Bloomberg isn't right here - but it turns out it is not unequivocally wrong

Bloomberg is pretty unequivocal - the 2017 bond expiring in early July this year has a letter of support from China National Gold.

But that letter of support does not exist in China Gold International's own press releases.

Bloomberg however is a pretty reliable source normally and so after much scrounging we actually got a copy of the offering document from one of the original brokers. You can find it here.

This offering document lays out what is meant by the letter of support - because yes - there is a letter of support from China National Gold.

The Letter of Support is neither legally binding nor a guarantee, and the Company is not legally obliged to support the Issuer and the Guarantor in the manner contemplated in the Letter of Support. 
The Letter of Support is not legally binding on the Company [which in this case is the SOE]. See “Summary of Letter of Support”. It is not a guarantee by the Company for the payment obligations of the Issuer under the Bonds or the Guarantor under the Guarantee, and there is no assurance that the Company will provide support to the Guarantor in the manner contemplated in the Letter of Support. The Trustee will not, in any circumstances, be able to bring any action against the Company to enforce the provisions of the Letter of Support. Even if the Company intends to provide direct financial support to the Guarantor to meet its outstanding debt obligations, such financial support may be subject to governmental approvals which may not be obtained.
They go on in the offering documents. All it says is that China Gold International occupies a strategic position in the China National Gold group. And hence it is likely that China National Gold will support the debt. It is a non-guarantee guarantee.

Now those 2017 bonds are about to expire (early July this year) and so China Gold International needs to refinance them.

And it is fair to say that the underlying gold mines have sharply underperformed expectations in those three years with the company producing losses in both 2018 and 2019.

China Gold International are cumulatively unprofitable reverse merger with over a billion USD in debt and a collapsed stock price. They are not repaying the money unless someone lends them another cool half billion.

But as they have to come to market they are trying to come to market.

There is a press release in Chinese that explains that they are coming to market for a debt issue of unspecified size. The press release mentions a letter of support from China National Gold but no mention as to whether this letter is a guarantee (as per the 2014 debt issue) or a prop with no legal power (as per the 2017 debt issue).

I guess if there were legally binding state guarantee as per the 2014 issue then there should be no problems getting this done. I guess this is a test of what is required get a deal done.

But as it stands this is a test if a company which barely trades at all and with a collapsed stock and some sharply underperforming gold mines can raise a half billion dollars supported by what appears to be a fictional quasi-government guarantee.

But in this market even that seems likely. As long as it yields over 100 bps. Long live loose monetary policy.


Disclosure: we have no position in the stock. We have a small position short the bonds.

Friday, May 15, 2020

Open letter to Institutional Investor Magazine

Last night Australian time Institutional Investor published a piece on Bronte Capital's position in Herbalife.

To quote the opening sentence:

Australian hedge fund manager John Hempton, the co-founder of Bronte Capital, has turned out to be a true believer in Herbalife, the controversial multilevel marketing company that has been under investigation by one federal agency or another for several years. Over the past year, Hempton doubled down on Herbalife...

I observed on twitter that contrary to standard journalism ethics the author (Michelle Celarier) did not seek our comment before publishing.

She told me to check my email. So I did. Ms Celarier did in fact send something.

Here it is:

Michelle Celarier
01:15 (12 hours ago)

Hi John 
I am writing a news story for Institutional Investor about your investment in Herbalife, as you disclosed updated filings for the quarter.   
I note that you've been adding to your position over the past year, according to the SEC. 
I also quote from your recent letter about Herbalife-- and note your performance this calendar year. 
Just wanted to let you know about this. I'm on deadline, so if you have further comment please respond asap. 
Thank you 

Michelle Celarier
917 971 0279 
Follow me on twitter @mcelarier
You will notice that this came at 1.15AM Australian time. It came when I was (and could reasonably be expected to be asleep). The story was published before I woke up at approximately 6AM.

This is a clear breach of journalist ethics. But it is also sloppy and demonstrates what happens when you do not check your facts.

There are two reasons our Herbalife position has increased.

a). Our fund was closed and it re-opened. We got considerable flows. We adjusted the Herbalife position to match the flows.

b). We sold a large position in the 50s (when Bill Ackman covered) and we repurchased it (and then some) at lower prices.

The second one is instructive. If you sell a $1000 worth of Herbalife stock at $53 and buy it back at $27 you will wind up with more Herbalife stock. (This trade matches some of what actually happened in our book.)

For these reasons our Herbalife stock position (measured in number of shares) has increased considerably.

But the position measured in the percentage of the fund at cost has actually shrunk. We did not "double-down" as the article suggests - we actually took some off the table.

The article is false and should be withdrawn.

The statement that we doubled-down is contrary to both our risk management policy and what actually happened.

That said: for the record we still think the stock is a good value at this price. We have a full-sized position now (or we would buy more). But that is not a newsworthy story. The only story Michelle Celarier has is that a fund manager is bullish about a stock they own.

John Hempton

Monday, March 30, 2020

Watch what the Chinese do

I don't easily believe Chinese statistics - especially regarding something as awful as COVID-19. Believe your eyes and common sense over Chinese statistics.

When China (officially) had 19 deaths they started building massive field hospitals. Believe what you see (the hospitals) but take the 19 deaths as a rather dubious estimate (as per that time).

By contrast when the Chinese Government say COVID-19 is highly controlled in China you can believe them because there are Westerners and Western companies throughout China and what you can see (Shanghai and Chongqing as functional cities) comports with the statements and the actions of the Chinese Government.

My general view: watch what the Chinese Government does - rather than what they say.

This is a story about journalists returning to their home in Beijing before a Government crackdown on foreigners. 

Watch it.

You can see the Chinese take COVID-19 very seriously indeed.

We can conclude that

a. The Chinese have seen the virus. They think they know what it can do. They are scared. Do not believe the Chinese numbers. The truth is much worse. But believe the Chinese actions. They think fear is appropriate.

b. The Chinese have proven that a super-hard lockdown lasting seven weeks in affected areas 2.5 weeks in Shanghai etc can work. Their major cities have low virus load and major Western cities have not.

c. The Chinese Government are super-scared of reintroducing it.


Thursday, March 19, 2020

Coronavirus – getting angry

I am going to give you a few stylised facts about severe acute respiratory syndrome coronavirus 2 and the data.
First – no matter what you say about the Chinese data – and the Chinese data was full of lies at first – China has controlled the outbreak. Shanghai, Beijing, Chongqing are all functional mega-cities with no obvious health catastrophes.
The virus has been managed to very low infection rates in Singapore and Taiwan. The numbers (completely real) in Korea show a dramatic slowdown in infection.
Korea has not shut restaurants and the like. The place is functioning. But it has had rigorous quarantine of the infected and very widespread testing. It has complete social buy-in.
China tests your temperature when you get on a bus or a train. It tests you when you go into a classroom, it tests you when you enter a building. There is rigorous and enforced quarantine.
But life goes on – and only a few are dying.
In Singapore nobody has died (yet) though I expect a handful to do so before this over. This is sad (especially for the affected families) but it is not a mega-catastrophe.
There is a story in the Financial Times about a town in the middle of the hot-zone in Italy where they have enforced quarantine and tested everyone in the town twice. They have no cases.
The second stylized fact – mortality differs by availability of hospital beds
A.    Coronavirus provided you do not run out of hospital beds probably has a mortality of about 1 percent. In a population that is very old (such as some areas in Italy) the mortality will be higher. In a population that is very young base mortality should be lower. Also co-morbidities such as smoking matter.
B.    If you run out of ICU beds (ventilators/forced oxygen) every incremental person who needs a ventilator dies. This probably takes your mortality to two percent.
C.     Beyond that a lot of people get a pneumonia that would benefit from supplemental oxygen. If you run out of hospital beds many of these people also die. Your mortality edges higher - but the only working case we have is Iran and you can't trust their data. That said a lot of young people require supplementary oxygen and will die. If you are 40 and you think this does not apply to you then you are wrong. Mass infection may kill you. Iran has said that 15 percent of their dead are below 40
I will put this in an American perspective with a 70 percent strike rate by the end.
Option A: 2 million dead
Option B: 4 million dead
Option C: maybe 6 million dead.
By contrast, Singapore: a handful of dead.
China has demonstrated this virus can be controlled. The town in Italy has demonstrated it can be controlled even where it is rife.
Life goes on in Singapore. Schools are open. Restaurants are open in Korea.
The right policy is not “herd immunity” or even “flattening the curve”. The right policy is to try to eliminate as many cases as possible and to strictly control and test to keep cases to a bare minimum for maybe 18 months while a vaccine is produced.
The alternative is literally millions of people dying completely unnecessarily.
What is required is a very sharp lockdown to get Ro well below one – and put the virus into exponential decay.
When the numbers are low enough – say six weeks – you let the quarantine off – but with Asian style monitoring. Everyone has their temperature measured regularly. Quarantine is rigid and enforced. You hand your phone over if you are infected and your travel routes and your contacts are bureaucratically reconstructed (as is done in Singapore). And we get through.
And in a while the scientists save us with a vaccine.
The economic costs will be much lower. Indeed life in three months will be approximately normal.
The social costs will be much lower.
Every crisis has its underlying source. And you want to throw as much resources (and then some) close to the source. Everything else is peripheral.
The last crisis was a monetary crisis and it had a monetary solution.
This is a virus crisis and it has a virology solution.
Asian Governments are not inherently superior to ours – but they have done a much better job of it than ours. The end death toll in China (probably much higher than stated) will wind up much smaller than the Western death tolls. I do not understand our idiocy.


PS. Longtime followers of this blog will know that I have rarely publicly agreed with Bill Ackman. I do here. This minimises economic and social cost of the virus. I am not sure the stock market bounces hard with a rational policy, only that it minimises the damage.

I regard the current course of English speaking democracies (other than New Zealand) as mass murder by the political elite. I think history will regard it that way too.

Monday, March 2, 2020

Coronavirus is more popular than sex (except in South Africa)

I was wanting a way of judging just how serious the coronavirus outbreak is in Iran. Alas government figures are not to be trusted. And figures from other sources - mostly anti-government blogs and the like - are also not to be trusted (as they have an agenda).

I went for the old fall-back. Google Trends.

Here is the google trends for coronavirus in Iran. It is clearly skyrocketing.

Okay - but this does not help me. I needed something to judge it against.

I figured that it would need to be something that was searched for a lot. So I went for the staple: sex.

Here is coronavirus vs sex in Iran.

I am beginning to conclude that coronavirus is more popular than sex (at least as a search topic).

It sounds pretty serious.

So I thought I should benchmark it.

I figured the British are likely to be big searchers of sex. Maybe I am mistaken - but there seems something desperately English-schoolboy about googling "sex".

Yep - coronavirus is more popular than sex in the UK too.

And so it was with almost every jurisdiction I tried.

Except South Africa.

Sex is more popular than coronavirus in South Africa.

Is that because the South Africans are really into sex or that they are not scared of coronavirus?

I have no idea.

Not all research is productive.


Thursday, February 13, 2020

Pretium Resources: short memory

This post requires correction/clarification.

There are at dozens of press reports that state the mining accident happened at the Brucejack Mine. See here for example. 

However some reports (and some supporters of the company) state the accident happened to a mine worker at the mining camp.

This is supported by the production statistics - which did not show a major interruption at the time.

The company has never met it grade requirements - or at least the grade as outlined in the original mining plan. But it has usually (if not always) met the tonnage plan (as in tonnes mined).

There was no large interruption.

Further correction. The 2018 first conference call explicitly says the accident happened at camp and not at the mine.

The old post

I am not going to comment about the results of Pretium Resources. But the first few sentences of the conference call made me sick. To quote:

Joseph J. Ovsenek CEO, President & Director 
Good morning, everyone. Welcome to our 2019 results and 2020 outlook call. Participating on the call with me today is our CFO, Tom Yip. 
First and foremost, I again want to thank everyone at Brucejack, Smithers and here in Vancouver for their hard work that contributed to another profitable quarter. Our Brucejack Mine has proven itself to be a safe and a consistently profitable mine ever since achieving commercial production 2.5 years ago. 

Now mining accidents happen. Mining is a dangerous profession.

But Pretium had a death at the mine less than two years ago. Which of course proves the mine is "safe".

Maybe this is a definition of "safe" that I was not previously familiar with.

If you die working for these guys they will soon forget it and forget you. And of course declare your workplace to be "safe and consistently profitable".


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The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.