Tuesday, July 5, 2016

Want a tough job - try collecting debt door to door in the council estates of Northern England

I was reading the accounts of Provident Financial Group - a UK subprime lender. I have no position - but this appears to be an old relatively well run subprime lender with a prohibitively high price to book ratio.

Whatever - they are growing now through a credit card business where they are hawking cards on the street. And they are shrinking their foundation business which involves selling loans and collecting debt door-to-door.

That business - Provident - has a network of 5,500 agents who call each week at the homes of 900 thousand people in the UK. That is 32 homes each per working day.

And they originate credit and collect loans.

Here is an extract from the annual report:




According to this the agents are primarily paid commission on what they collect, not what they lend.

Just imagine this job. Being paid for collecting on tough debts in the rainy, dark north of England, a bit like an old rent collector, just a little more seedy.

By comparison my life (and probably yours) is sheltered and easy.




John

Monday, July 4, 2016

Some thoughts on the Medicare scare campaign

Warning - this is a very Australia specific post and is probably the only thing I will say about the election

Australia has a socialised medical system (called Medicare) that by most objective measures works well. Health outcomes are good. Health expenditure as a percentage of GDP is not outrageous (but is on the high end of the non-USA OECD).

Medicare it is very popular.

Indeed if you polled conservative voters in Australia they would resoundingly vote for socialised medicine.

Medicare has been so well run and is so accepted that it has become a sacred cow in Australia. A politician who even tinkers with it takes considerable risk.

That said, it does not work perfectly.

Many years ago when I was a public servant the then Labor Government introduced a copayment for pharmaceuticals for pensioners. Up until then pensioners could get their scripts filled for free. After that there was a very small (two dollar) copayment introduced.

The then government had an estimate how much money this would save. And they were wrong. It saved more, much more.

It turns out that there were a surprising number of elderly women (and they were mostly women) whose idea of a social life was to go to a different doctor every day, get a different script filled every day and go to a different pharmacist. After all those young doctors really are handsome men.

Adding a trivial copayment drastically reduced these behaviors. It saved money and improved heath outcomes.

To get more rational use of healthcare you did not need to hit these people with the full marginal cost of their services. Just a little bit of market did most the work that market does.

And the lesson was learned, socialised medicine works better with just a little bit of market in it - just to make sure the incentives are lined up. Its a lesson I have held ever since.

I disliked the Abbott (conservative) government in Australia a great deal. But they did try to introduce a general copayment (five dollars) for visiting a doctor in Australia. It was howled down in political protest. Like a lot of Abbott policies it was a bit ham-fisted. The welfare effects could have been ameliorated by introducing for example a maximum number of copayments. But none of that was tried.

Most importantly the government did not sell the policy well. The discussion above was not part of the discourse.

And it also gave the (conservative) government in Australia a reputation for tinkering with Medicare. That reputation for tinkering came back to haunt them.

--

We just had an election on the weekend. The conservatives were not beaten - but the swing against them and to minor (sometimes extremist) parties was strong.

One element of that result was a the scare campaign about Medicare. That is a great pity because there really are tweaks around the edges that will make it work better.

Some of those involve small copayments. But others are very left-field. For example teaching elderly people to use Facebook and smart-phones probably saves Medicare money. People are just less lonely with Facebook.

I don't know how we have a bipartisan debate on this stuff in Australia. A "Medicare taskforce" requires "scare quotes".

But I think it is also a good idea. Indeed demographic trends for socialised medicine are not pretty - and this sort of tinkering might be necessary to protect the system.




John

Friday, June 17, 2016

Some thoughts on very low interest rates

I have been having twitter arguments with people I usually respect who think that it is self-evident that very low rates (even negative rates) are a function of Fed intervention - and not a function of the supply and demand for funds.

I don't normally blog about macroeconomic issues because I know enough to know that I will be wrong most the time. However I feel I need more than the 140 characters on twitter to explain why I am unconvinced that negative rates are that unnatural.

Alas you are going to have to go through a fairly long-winded argument. And I am far from sure of all this - so I really want the comments to criticise my thesis. I am apt to change my mind.

---

Step 1: the impossibility of collectively deferring consumption

Very roughly almost everything I have consumed this year was made this year. The restaurant meal, the haircut, even the flight I took. There are a few exceptions. The plane trip that I made was made in a seven year old plane (but it wasn't made in a 20 year old plane).

Very few services I consume at all are produced in any way more than say a decade ago (or with capital equipment more than a decade old).

There are a few exceptions.

  • I snitched a 15 year old bottle of wine from the cellar last week (it was very nice).
  • And much more importantly the housing services I consume are in a house that was built 30 or 40 years ago.

But with those exceptions what I consume in this decade is almost entirely produced in this decade.

And for that matter what I consume in the five years from 2030 to 2035 will almost entirely be produced in those five years.

I can inter-temporarily move consumption around (saving money/capital now) and consume a little more than I earn in 2035.

Everyone individually can do that. That is what capital markets are for in part.

But collectively we can't.

You see everything that everyone consumes in the years 2030-2035 will roughly be made in the years 2030-2035.

We can all save individually saving money, deferring consumption, but collectively we do not defer consumption. We just rearrange claims on that consumption.

Step 2: ageing populations

In every country that matters economically populations are ageing - very sharply. Indeed this is the most rapidly ageing population in human history.

And ageing people want to defer consumption. Individually we have huge populations wanting to defer consumption.

Step 3: the problem - we cannot collectively defer consumption

And now you see where I am going. Individually we all want to defer consumption. Collectively we cannot because what is consumed in 2030-2035 will roughly what is produced in those years.

So I am going to assert that collectively we are very likely to be disappointed. People will not get (in returns) what they expect to get.

Step 4: How is this disappointment to be settled on people?

Since I am asserting that collectively we are going to be disappointed (as we can't collectively defer consumption) the next twenty to thirty years will be in large part trying to work out how to settle that disappointment on people.

And if you can work out all the ways (and timing) that settlement is disappointed on people you should be able to make money (trading the other side). I would love to be able to do this. But here are a few suggestions.


  1. Pensions default. We all think by working hard and earning a pension we are looking after ourselves - but collectively we are disappointed.
  2. Inflation takes away our savings
  3. Interest rates don't keep up with inflation - we have 20 years of negative real rates - maybe sharply negative after taxes,
  4. Asset prices in real terms fall for decades - so your Singapore apartment isn't going to be worth what you think it is - nor is that Sydney or London place, and equities are destined to disappoint.
And it won't matter if you used socialised methods of savings (pensions) or capital-market measures of savings (equity accumulation funds) you can't in aggregate escape the disappointment. Returns are negative. Get used to it.

Is there any out?

There are a few outs. The first one is such large productivity growth that you don't disappoint anyone because just so much more is produced in 2030 than now that you can give the then dissavers a low share and still not disappoint them. I know my Silicon Valley friends are optimistic enough to believe that is possible but I doubt it.

I doubt it for a good reason. Economic growth has to be faster than the ageing population - but the main innovation is likely to be in life-extending medicine - thus exacerbating the ageing population issue.

The second out can be done for some countries but may not be done globally. And that is to muck around with the age profile of your population. Age profile for a country is a choice. Our former finance minister Peter Costello used to argue that mothers should have three kids, one for him, one for her and one for the country. But that was what you did (as Australians) if you wanted to solve the population age-profile issue and you still wanted a white Australia. You can have any population profile you want if you take immigrants. And if you want your welfare/retirement-savings systems not to collapse you are probably going to have to do it. (Nigel Farage and his ilk want a population profile that makes your pension default. But I doubt UKIP will tell that to the voters.)

But beyond that I see no outs.

Implications

There are dozens of implications - and I am far from sure of any of them.

But one is pretty obvious to me. The market clearing real interest rate is negative and should be for some time.

There is nothing in capitalism that guarantees you a positive rate of return and the legion of people who argue that the Fed should raise interest rates just because they believe returns should be positive should be labelled for what they are: ideological capitalists against market clearing. (Okay - now I teasing a little - but I am surprised that people think they are entitled to positive returns.)

I am happy to be argued with here. I am very uncertain of all this stuff. Much less certain than many of the twitterati who prompted this post.







John

Thursday, June 9, 2016

What passes for Japanese innovation now (Kirin edition)

When I was young all the most innovative products seemed to come from Japan. And so I find myself gently disappointed reading the Kirin Company annual report. To quote the interview with the President and CEO:

We have a competitive edge in our ability to create value. 
The Kirin Group leverages its advanced technological capabilities and manufacturing capabilities to produce high-value products, and it has superior capabilities in the creation of value. One example is Kirin Hyoketsu®. With this product, we have created an invigorating drinking sensation by mixing refreshing vodka with juice, selling it in an original diamond-cut can. 

If mixing vodka and fruit juice is leveraging your "advanced technological capabilities" I should be able to cope even when plastered...





John

Tuesday, May 17, 2016

Uber as a predatory lender

If you want to understand where Uber's business model is going read this stream on Twitter:

https://twitter.com/groditi/status/732417874627678210





John


PS. I am currently on a business trip to the United States. Maybe it is just bad luck - but the quality of Uber service has dropped fairly dramatically since the last time I was here. I no longer feel the need to recommend Uber to friends - and indeed am coming close to advising against it.



J

Monday, May 9, 2016

Catching up with the Narwhal Empire in Nashville

Got a reasonable day off in Nashville. (You got to recover from jet-lag somewhere!)

Wound up at a cool blues bar on Bourbon Street. But the highlight was a busker. Her name was Heidi Keltner and she had a great sense of rhythm, a decent bluesy voice and could hold the crowd she had built up.

Its got to be a tough life trying to be a musician in Nashville. Heidi had to leave later to start a 3AM shift at UPS...

The street scene wound up as a jam with a drunk African American woman trying to do Aretha Franklin (whilst holding onto me for physical support and complaining I smelt like a white guy).

But lets stick to Heidi. Her original songs were fine.

Her YouTube channel is badly underproduced. But put on headphones and listen to this. You won't be disappointed. (The band is called the Narwhal Empire... but I only saw Heidi.)








John

Saturday, May 7, 2016

If someone disagrees with you they are certifiably crazy: Bill Ackman, Valeant and Herbalife edition.

The US Senate has released a lot of Valeant documents. Link here

There is quite a deal here - but I got to this email from Bill Ackman to Mason Morfit (of ValueAct) and Mike Pearson (the then CEO of Valeant). I can't resist posting it.

Mike and Mason 
Happy Thanksgiving. 
Please see below from my PR folks. The idea that Ubben blames me for the decline in VRX stock is absurd. I don't care but I think it is not good for Valeant. 
I had never previously heard of Andrew Left and I don't think his short position was motivated by animus for me. I just think he wanted to make money. With respect to John Hempton, I have never met him or spoken to him. He happens to be long Herbalife and certifiably crazy. How can I be responsible for his behavior? 
With respect to my email apology for the WSJ article, I don't understand what value it brings Valeant for the recipients to have shared it with the FT. I did my best to shape the WSJ article in a way that would be good for Valeant and I didn't love the outcome. I therefore apologized. Isn't that the appropriate thing to do?



Bill

I just want to put this up for posterity. But I wish to assure Bill that on both stocks I am research driven and quite sane.




J

Monday, April 25, 2016

Valeant's new CEO

Joe Papa has just accepted appointment as CEO of Valeant.

a. I am glad my short is mostly - not entirely covered. Joe Papa is a fabulous appointment - far better than Valeant deserved.

b. Papa has his work cut out for him. Valeant deserves to go bankrupt - and will go bankrupt unless the goodwill of bond holders and pharmaceutical payers is forthcoming. If I were auditor I would still qualify the accounts with a "going concern" qualification.

Given the treatment of stakeholders it will be hard to earn and maintain goodwill from bond holders and pharmaceutical payers. Valeant owned Philidor which was a systematic attempt to defraud pharmaceutical payers. It will take a lot of work to settle all the litigation and to get the payers to continue to pay inflated prices for Valeant drugs.

Joe Papa is far more likely than anyone I can think of to earn the goodwill of payers and bondholders and thus save Valeant.

I still think Valeant will go to bankruptcy, but I am less sure about it.

Even if Valeant files bankruptcy Papa should logically remain CEO. He will run the business better than most alternative CEO candidates.

This does not mean that I think Valeant should race back towards $100. Survivability is a long way from generating enough profit to meaningfully dint that $32 billion debt load.

Still for once I am not unremittingly bearish this company.




John

And here you will get me to say something I did not think I would say. If Bill Ackman was responsible in part for convincing Mr Papa to take the job then Mr Ackman has done Valeant and his investors a great service.

Thursday, April 7, 2016

The great matrimonial housing short-squeeze

It's a fairly consistent view around our office that house prices are absurd in Sydney - and winning a Sydney property auction is not a route to security, rather a route to becoming an indentured servant to a bank.

Alas we have one staff member married a few years with an 18 month old son.

I caught him looking at realestate.com.au. He told me his wife was looking.

His tart comment: short-squeezes come in many forms.




John

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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.