January 6, 2010

1) You?d think with the spectacular performance I was fortunate to bring in last year, I would have new investors pouring in over the transom, bombarding me with requests for offering documents, and asking for presentations to investment committees. The sad truth is that I?m pouring over my list of limited partners, trying to decide who to keep and who to dump. The diplomatic, patient ones who took me out to lunch at Gary Danko?s, invited me for a day on San Francisco Bay in their mega yachts, and went on extended vacations when the markets turned ugly, are in. The others who made law suit noises when I had one down month, sicced an army of due diligence consultants on me, and even hinted at withdrawals, are history. Keeping my life simple by limiting investors to a coterie of buddies who love me, come hell or high water, is a consideration. But my main concern is that the House is certain to pass legislation this year forcing hedge fund managers with more than $150 million in assets under management to register with the SEC. No, I?m not worried about a surprise visit from the federal agency, certain that my own accounts and reporting are accurate down to the last farthing. After all, SEC registration didn?t clip Bernie Madoff?s wings, or stop him from stealing $65 billion from clients, despite multiple canaries loudly singing that something was rotten in Denmark. For me, it?s just a cost issue, as the continuous filing and inspection requirements and legal fees can run into millions of dollars. Why bother? I?d much rather pass this savings on to my clients. And why become a witch, just as the Salem witch trials are starting? The harsh reality is that hedge fund managers are being scapegoated and demonized for the financial crisis, ignoring the fact that no hedge fund was bailed out, took any TARP money, or threatened any systemic risk. The funds that went under took a few wealthy limited partners down with the ship, as they so richly deserved when they didn?t understand the strategies, skipped the due diligence, and were simply trying to buy last year?s track record. If the government has to regulate, it would make much more sense to do so with the top one third of funds that control 95% of the industry assets and can afford it. But sense never seemed to be a prerequisite for legislation coming out of Washington.

 

2) Deal of the Week. I was blown away when I heard that Korea Electric Power won the contract to build four giant 1.4 megawatt electric power plants in the United Arab Emirates for $20.4 billion. The announcement was a thumb in the eye for the French, whose EPR 1600MW reactor was thought to be the hands down winner. No doubt some old fashioned incentives were in play, but the harsh reality is that the KEPCO bid was thought to undercut competitors by as much as 50%. My only regret about this deal is that I will no longer be able to fly my Cessna down a long uninterrupted stretch of the Emirates coast, a restricted area almost certainly about to pop up on?? my navigation chart. The deal speaks volumes about the direction the global economy is taking. In one fell swoop, South Korea leveraged its low labor cost to take a great leap up the international value chain, using what is basically a simply technology. What is a nuclear power plant, but a fancy way to boil water? It reveals some clever long term strategic thinking is going on in the Emirates, which is expected to run out of oil well before the other Gulf kingdoms. You can forget all the platitudes the Arabs were mouthing over environmental concerns. Why burn this valuable resource locally for nothing, when you can sell it to idiotic, short sighted Americans for $82/barrel? Worst of all, this is a high value added?? industry that America once owned,?? and just plain gave away, because of irrational environmental fears. Bottom line: South Korea takes a quantum leap ahead in the race for global competitiveness, while the US falls further to the back in the dust. Better take another look at my favorite nuclear plays, Cameco (CCJ), and the Market Vectors Nuclear Energy ETF (NLR). And while you?re at it, revisit the South Korea ETF (EWY). And those who don?t see this as a life or death contest for economic survival that we can no longer take for granted better get their heads out of the sand.

 

3) For an iconoclastic, myth shattering, eye opening view of the true competitive threat posed by Asia, read the piece in? Foreign Policy magazine by Minxin Pei, a scholar at the Carnegie Endowment for International Peace. Power is not shifting from West to East; Asia is just lifting itself off the mat, with per capita GDP only at $5,800, compared to $48,000 in the US. We are simply moving from a unipolar to a multipolar world. China is not going to dominate the world, or even Asia, where there is a long history of regional rivalries and wars. China can?t even control China, where recessions lead to revolutions, and 30% of the country, Tibet and the Uighurs, want to secede. All of Asia?s progress to date has been built on selling to the US market. Take us out, and they?re nowhere. With enormous resource, environmental, and demographic challenges constraining growth, Asia is not replacing the US anytime soon. There is no miracle form of Asian capitalism; impoverished, younger populations are simply forced to save more because there is no social safety net. Ever heard of a Chinese unemployment office? Nor are benevolent dictatorships the answer, with the despots in Burma, Cambodia, North Korea, and Laos thoroughly trashing their countries. The press often touts the 600,000 engineers that China graduates, joined by 350,000 in India. In fact, 90% of these are only educated to a trade school standard. Asia only has one world class school, the University of Tokyo. As much as we despise ourselves and wallow in our failures, Asians see us as a bright, shining example for the world. After all, it was our open trade policies and innovation that lifted them out of poverty and destitution. Walk the streets of China, as I have done for nearly four decades, and you feel this. To read the story in its entirety, click here . I think I?ll reread it next time I think about doubling up my FXI and EEM positions.

 

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