Mark and I are heading into our second week on the ground here in Mongolia, enjoying the beautiful summer weather.
In the last few days we’ve met with a young American who recently launched a forex operation, travelled out to the countryside to do preliminary due diligence on a small dairy operation, had dinner with entrepreneurs from Holland, Malaysia, Belgium, France and Canada, and perused a local artists workshop hoping to identify Mongolia’s version of Jeff Koons.
It’s been 5 AM to midnight every day…phew!
It’s incredibly exciting. As Mark stated in his last post, On the Ground in Mongolia, capitalism is alive and well here.
Unfortunately that isn’t the case everywhere.
Many variances of economic and political systems exist today, making the task of dissecting them all extremely time consuming. I certainly can’t give it the attention it deserves in a blog post, so I’ll just touch on a couple important points.
- Politics often dominate market perception and reality.
Most politicians may as well speak in tongues, because what they say and what they do differ enough for them to be from a distant land.
It’s important to watch what a country’s leaders are actually doing, and see where it matches up with their words. Sometimes we find anomalies worth exploring, and occasionally setups where we can place capital in situations which can turn out to be very lucrative.
Myanmar is an example where the politician’s actions are speaking very loudly. It’s why people all over the world are taking notice and investing their capital into the place. Singapore is consulting with the country’s leadership to help them set up a system that will work. That’s not a bad country to model from.
The American’s just relaxed more of their sanctions, and it’s only a matter of time before they are lifted altogether and capital pours in from American businesses and investors.
Myanmar and it’s opportunities are intriguing enough to Mark and I that I recently moved my family to Thailand to be as close to the place as possible. If I didn’t have two school-aged children I’d likely have planted myself right in Yangon – that still may happen.
It might not be Western-style capitalism, but as far as I can see the West no longer runs a capitalist system. Once upon a time it did, but certainly not today.
- The West is running a system I’d refer to as “predatory capitalism”.
The predatory capitalists are engaged in carnal intercourse with the politicians. They buy the government via their conduits, who are affectionately referred to as “lobbyists”. The lobbyist’s job is to distort and coerce the market forces to the advantage of their employers – the predatory capitalists. How is this any different from corruption?
Show me one large US bank…heck, any large European bank, that is not raping the public via bailouts while enjoying carnal intercourse with the government and it’s regulatory bodies?
Was anyone really surprised by MF Global, AIG, GM, and the terrible twins of Freddie and Fannie?
A country’s politics should always be viewed as a game of salesmanship. Who is selling what and why? What is their motivation and where are their interests aligned?
Mark and I are used to this sort of thing. Frontier markets certainly offer their own challenges: nepotism, stealism, screwism, nationalism and a handful of other “ism’s”. What should concern investors today is that the West’s so-called stable, democratic, and “regulated safe” markets are anything but, and becoming increasingly less so.
Astute investors realise that the current pricing of most assets is not fully reflective of this reality…both under and over.
The flip side of this coin is that many of the frontier markets are already more capitalist in their actions than those in the West.
That trend is gaining momentum, and at the same time the pricing of this “reality” is not fully functional. The truth is there is no such thing as a free market anywhere. At least not that I’ve found, and Mark and I have probably covered most of the planet by now.
- The challenge is not in finding free markets, but rather finding assets which are mis-priced relative to the particular market they are in.
Most frontier markets offer us less competition, less regulation and much less liquidity, which translates into severe mis-pricing of assets. I accept that I have to deal with differing levels of corruption, red tape and difficulties in frontier markets, and I, and other investors price the assets there accordingly.
We met with the CEO of a large Mongolian conglomerate today who came here a decade ago and bought 3 apartments for $10,000 each. His rental yields were 60%, not to mention the cap gains. He identified severely mis-priced assets and jumped on it. Fast-forward ten years and those 3 apartments have been leveraged into a fortune that goes well into the 9 figures.
That kind of ridiculous wealth creation is why we are happy to play in the frontier markets, especially those where the political structure is mis-understood, mis-represented or the risk it poses is simply overblown.
When the dust clears on our Mongolia Meet Up we’ll be talking a lot more about Myanmar, and another country that’s a bit more off-the-radar – Fiji. It’s a place where we see a lot of price distortion, especially in real estate. We attribute it solely to the fact that a dictator is running the place. Nevermind that he’s far less dangerous or sinister than most modern-day Western leaders, all dressed up in their Brooks Brothers…
“If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the state to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.” – Joseph Goebells