There is no equilibrium
September 18, 2019

Blain's Morning Porridge

"There is no equilibrium, we invest into unstable constantly changing markets. "

Why so calm? Even as the Fed meeting pondered raising rates by a smidge, it had to intervene to pump money into the short-term US financial system for the first time since the 2008 crisis. That's a clear sign of financial dislocation – but markets seem utterly unconcerned.

The wires all quote issues such as tax payments and an imbalance between new funding and low redemptions to explain the sudden lack of cash, but none of my money market chums are convinced. They fear something else, a big No-See-Em is underway.

The last crisis started in money markets. Add that to the ongoing questions about the Saudi bombings, and there seems to be a curious sense of false calm in markets. No volatility, no concern and gold hardly moving. I can't help but think of ducks; serenely floating upstream while their legs are furiously paddling below the surface. Something is happening, and we don't know what it is..

Since I don't know either, today is the day to take a pop at the Green Puritan movement. There is a great comment from Bill Gates in the Financial Times - Fossil fuel divestment has "zero" climate impact, says Bill Gates. Worth a read, and maybe get yourself thinking about what damage ESG/Green group-think nonsense is doing? It's distorting the global economy and voiding perfectly sane investment strategies. As regular readers will know, I absolutely believe climate change is The Big Threat – but I'm more and more convinced that much of the ESG/Green Investment bandwagon is utter nonsense!

We are not going to solve climate change by going back to the Stone Age. It will require technological solutions. Yet, a whole green investment industry of advisors, influencers, and whatever the financial equivalent of an Instragram is, has taken over the agenda. They've become the market equivalent of whinny millennials, brutally offended by everything, but failing to realize how much they offend us and hold back solutions. They are fleas looking to feast. Every time I read some tosh about a wonderful and insightful Green Bond conference I reach for the barf bag. The organizers are fleas biting into bigger fleas.

The Gates article hits it squarely. Divesting from the oil majors will not change the world. Changing the world will change the world – Doh! And the best way to do that is to get everyone on the same side – understanding the problems and the costs of solving it.

Let me give you an example: we all accept renewable energies are critical to replace fossil fuels pumping Co2 into the atmosphere. It makes perfect sense to replace dirty coal-fired power stations with sustainable solar, hydro and wind power (and I hope tidal soon).

But building a new wind generator, or an array of solar cells, or the turbines for a hydro scheme, requires high-grade steel. Steel is a wonderful material – you can recycle and reuse it. But you also need carbon, from coking coal, to make it. A typical offshore wind generator requires 250 tonnes of Met Coal to make. It's a 1.8 billion tonne per annum market, and it's in increasingly short supply. It's known in the business as metallurgical coal – because that's what its used for. Met Coal is a high value, clean commodity – but can you fund it? Nope..

That's because most fund managers have ESG and Green guidelines that start and end with Coal is evil. They don't want to propose it to investment committees as they might reject it for "reputational risk" reasons. As a result, it's bundled alongside dirty coal and cannibalism as too difficult to fund – meaning any smart investor should be taking notes on the basis that Met Coal investments are cheap and rewarding. Making them attractive is a more difficult matter – but it has to happen.

And yes – I am working on such difficult deals. If your investment committee hasn't already been taken over by the ESG pod-people or Green Puritans activists, and you want to make proper returns from real assets that are good for the planet – then give me a call…

Repeat the same exercise on anything that might be a wee bit polluting, environmentally challenging, squishes a few crested newts while saving the rest, and you rule out loads of perfectly good investments that are likely to be as environmentally sound as anything the Green lobby sticks a Green Finance label on.

If the default scenario is don't do it – then we are missing opportunities. The right way to save the planet is to mitigate, solve, fund and finance things in such a way the environment is protected, the climate improved and things to solve the crisis get made. I believe Greta Thunberg is absolutely on the right track. It's not her I'm mocking…it's the lack of bravery by investment managers to do right thing in the face of misguided and ill-informed environmental populism led by Green Puritans! If you want a decent omelette – you need to crack a few eggs.

Back on Planet reality…I'm struggling to find the time to do more in-depth digging on Softbank, but I'm more and more convinced we're looking at a massive negative feedback loop. I won't say it's headed into a death spiral.. (for that might get me a wrist-slapping), so I'll let you draw your own conclusions.

What we do know is Softbank's strategy of investing in disruptive tech companies to bring them to IPO is creaking. The plan looked brilliant – hype up disruptive tech opportunities and rewards, ignore the lack of profitability, talk up their own expertise to spot and fund opportunities, then pile millions into start-ups and reap billions from the ones it could quickly bring to market.

It worked as long as hype preceded reality. Reality caught up as it became clear disruptive technologies are only unicorns if they work, are uniquely monopolistic and catch money. The ride-hailing market is awash with competitors. Streaming is something everyone wants a piece of.

The critical point is Softbank valued WeWork at nearly US$50 billion a few weeks ago. Or think about it this way. Softbank pumped $100 billion into tech start-ups, creating its own market in its own holdings. What are they really worth?

Uber was a wake up moment. The embarrassment of the WeWork failed IPO demonstrates how far off kilter they now are. As a strategy, tech disruptive hype has had its time. Sure, there are more unicorns that will likely become multi-billion businesses to be snapped up, but how many does SoftBank have on its books? How much less hyped will prices be? How much less when you strip out Softbank and other tech funds making their own prices on their own investments?

Softbank's investors sound unhappy. Backers of Vision Fund 2 are pulling out. It's clear the Saudi SWF Public Investment Fund and Abu Dhabi's Mubadala are not best pleased. They invested $60 billion into the $100 billion fund. How much have they made? And will firms like Apple really want to put money into Vision 2 as the model creaks from the WeWork catastrophe?

Next couple of weeks are going to be very interesting. I'll stick to my earlier thesis that WeWork would be the IPO to break the Tech craze, but now I think it could bring down Softbank as well..

Out of time and back to the day job!

Bill Blain

Shard Capital





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Blain's Morning Porridge

"There is no equilibrium, we invest into unstable constantly changing markets. "

Why so calm? Even as the Fed meeting pondered raising rates by a smidge, it had to intervene to pump money into the short-term US financial system for the first time since the 2008 crisis. That's a clear sign of financial dislocation – but markets seem utterly unconcerned.

The wires all quote issues such as tax payments and an imbalance between new funding and low redemptions to explain the sudden lack of cash, but none of my money market chums are convinced. They fear something else, a big No-See-Em is underway.

The last crisis started in money markets. Add that to the ongoing questions about the Saudi bombings, and there seems to be a curious sense of false calm in markets. No volatility, no concern and gold hardly moving. I can't help but think of ducks; serenely floating upstream while their legs are furiously paddling below the surface. Something is happening, and we don't know what it is..

Since I don't know either, today is the day to take a pop at the Green Puritan movement. There is a great comment from Bill Gates in the Financial Times - Fossil fuel divestment has "zero" climate impact, says Bill Gates. Worth a read, and maybe get yourself thinking about what damage ESG/Green group-think nonsense is doing? It's distorting the global economy and voiding perfectly sane investment strategies. As regular readers will know, I absolutely believe climate change is The Big Threat – but I'm more and more convinced that much of the ESG/Green Investment bandwagon is utter nonsense!

We are not going to solve climate change by going back to the Stone Age. It will require technological solutions. Yet, a whole green investment industry of advisors, influencers, and whatever the financial equivalent of an Instragram is, has taken over the agenda. They've become the market equivalent of whinny millennials, brutally offended by everything, but failing to realize how much they offend us and hold back solutions. They are fleas looking to feast. Every time I read some tosh about a wonderful and insightful Green Bond conference I reach for the barf bag. The organizers are fleas biting into bigger fleas.

The Gates article hits it squarely. Divesting from the oil majors will not change the world. Changing the world will change the world – Doh! And the best way to do that is to get everyone on the same side – understanding the problems and the costs of solving it.

Let me give you an example: we all accept renewable energies are critical to replace fossil fuels pumping Co2 into the atmosphere. It makes perfect sense to replace dirty coal-fired power stations with sustainable solar, hydro and wind power (and I hope tidal soon).

But building a new wind generator, or an array of solar cells, or the turbines for a hydro scheme, requires high-grade steel. Steel is a wonderful material – you can recycle and reuse it. But you also need carbon, from coking coal, to make it. A typical offshore wind generator requires 250 tonnes of Met Coal to make. It's a 1.8 billion tonne per annum market, and it's in increasingly short supply. It's known in the business as metallurgical coal – because that's what its used for. Met Coal is a high value, clean commodity – but can you fund it? Nope..

That's because most fund managers have ESG and Green guidelines that start and end with Coal is evil. They don't want to propose it to investment committees as they might reject it for "reputational risk" reasons. As a result, it's bundled alongside dirty coal and cannibalism as too difficult to fund – meaning any smart investor should be taking notes on the basis that Met Coal investments are cheap and rewarding. Making them attractive is a more difficult matter – but it has to happen.

And yes – I am working on such difficult deals. If your investment committee hasn't already been taken over by the ESG pod-people or Green Puritans activists, and you want to make proper returns from real assets that are good for the planet – then give me a call…

Repeat the same exercise on anything that might be a wee bit polluting, environmentally challenging, squishes a few crested newts while saving the rest, and you rule out loads of perfectly good investments that are likely to be as environmentally sound as anything the Green lobby sticks a Green Finance label on.

If the default scenario is don't do it – then we are missing opportunities. The right way to save the planet is to mitigate, solve, fund and finance things in such a way the environment is protected, the climate improved and things to solve the crisis get made. I believe Greta Thunberg is absolutely on the right track. It's not her I'm mocking…it's the lack of bravery by investment managers to do right thing in the face of misguided and ill-informed environmental populism led by Green Puritans! If you want a decent omelette – you need to crack a few eggs.

Back on Planet reality…I'm struggling to find the time to do more in-depth digging on Softbank, but I'm more and more convinced we're looking at a massive negative feedback loop. I won't say it's headed into a death spiral.. (for that might get me a wrist-slapping), so I'll let you draw your own conclusions.

What we do know is Softbank's strategy of investing in disruptive tech companies to bring them to IPO is creaking. The plan looked brilliant – hype up disruptive tech opportunities and rewards, ignore the lack of profitability, talk up their own expertise to spot and fund opportunities, then pile millions into start-ups and reap billions from the ones it could quickly bring to market.

It worked as long as hype preceded reality. Reality caught up as it became clear disruptive technologies are only unicorns if they work, are uniquely monopolistic and catch money. The ride-hailing market is awash with competitors. Streaming is something everyone wants a piece of.

The critical point is Softbank valued WeWork at nearly US$50 billion a few weeks ago. Or think about it this way. Softbank pumped $100 billion into tech start-ups, creating its own market in its own holdings. What are they really worth?

Uber was a wake up moment. The embarrassment of the WeWork failed IPO demonstrates how far off kilter they now are. As a strategy, tech disruptive hype has had its time. Sure, there are more unicorns that will likely become multi-billion businesses to be snapped up, but how many does SoftBank have on its books? How much less hyped will prices be? How much less when you strip out Softbank and other tech funds making their own prices on their own investments?

Softbank's investors sound unhappy. Backers of Vision Fund 2 are pulling out. It's clear the Saudi SWF Public Investment Fund and Abu Dhabi's Mubadala are not best pleased. They invested $60 billion into the $100 billion fund. How much have they made? And will firms like Apple really want to put money into Vision 2 as the model creaks from the WeWork catastrophe?

Next couple of weeks are going to be very interesting. I'll stick to my earlier thesis that WeWork would be the IPO to break the Tech craze, but now I think it could bring down Softbank as well..

Out of time and back to the day job!

Bill Blain

Shard Capital



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