Regarding… Vol 2 no 12 – Malthusian Malady

Dear Fellow Investors and Friends

Welcome! I do appreciate you taking the time to read this.

I’m Piet Viljoen, and today is Thursday, the 4th of April, the 95th day of the year. There are only 271 days left until the end of the year. The other day, a friend of mine said – if you want to do something, you can’t wait; you have to do it now, or another year will pass. Amazingly, one-quarter of this year is already in the rear-view mirror.

I’m writing to you from beautiful Knysna, where the people have started to do things for themselves due to the utter collapse of municipal service delivery. Groups like Revive Knysna have taken it upon themselves to be agents of positive change. Our government doesn’t care about anyone except themselves; therefore, we as citizens have to look after ourselves. Knysna is getting with the program.

On this day, 56 years ago, Martin Luther King was assassinated. He is famous for his “I Have a Dream” speech. Today, it’s worth contemplating his powerful words.

“I have a dream that one day, on the red hills of Georgia, the sons of former slaves and the sons of former slave owners will be able to sit down together at the table of brotherhood.

I have a dream that one day, even the state of Mississippi, a state sweltering with the heat of injustice, sweltering with the heat of oppression, will be transformed into an oasis of freedom and justice.

I have a dream that my four little children will one day live in a nation where they will not be judged by the colour of their skin but by the content of their character. I have a dream today.”

Fast-forward 56 years, and the world does not seem closer to realising his dream. It is drifting further apart along many fault lines.

In fact, the fault lines are increasing dramatically in the political and social spheres. Many of today’s political debates boil down to one question: Are you a positive-sum thinker (PST) or a zero-sum thinker (ZST)?

PST is characterised by assumptions of abundance, high levels of social trust and a win-win mindset. It is rooted in Modernism.

ZST is characterised by assumptions of scarcity, mutual suspicion, and hierarchical dominance. It is rooted in Malthusian thinking or, as we know it today, Globalism.

PST helped create the world we are familiar with today. The formation of Modernism in Vienna marked the formal beginning of modern art in Austria, a nation at the time noted for its attachment to a highly conservative tradition. Interestingly, modernism was also an anti-state idea – is Knysna the first Modernist town in South Africa?

Fin-de-siècle Viennese culture was home to four of the movement’s leading lights: painters Klimt and Schiele, architect Otto Wagner and graphic artist Koloman Moser – though there were many others, too. Between 1890 and 1914, Austria was a melting pot of ideas. The wealth of the Habsburg Empire buoyed the city. Alongside them lived Jewish immigrants who had new money and full civil rights. This equality meant they could build avant-garde houses, commission interesting artists, and run salons where progressive politicians and establishment figures met and mingled with psychoanalysts, writers and painters.

Modernism can be seen as a socially progressive trend of thought that affirms human beings’ power to create, improve, and reshape their environment through practical experimentation, scientific knowledge, or technology.

In contrast, ZST is currently on the rise. Populism, conspiracy thinking, partisan tribalism, and support for authoritarian leadership are on the ascendancy across the globe – and they are especially ascendant in high-income countries.

Thomas Malthus was the original zero-sum thinker. In his 1798 book “An Essay on the Principle of Population,” Malthus warned that the human population would always threaten to outpace agricultural output. No sustained prosperity is possible: humans will inevitably breed themselves into poverty. Malthus was a techno-pessimist who dismissed humanity’s potential for innovation.

All around the world, people are thinking less about how I can get ahead fairly and within the rules and more about how my team and I can get ahead by any means necessary, even if only to compensate us for some grievous wrong perpetrated on us at some point in the past.

Pink Floyd had it right when they sang:

“Money
It’s a crime
Share it fairly, but don’t take a slice of my pie.”

Why is this happening?

With most trends, it eventually boils down to one thing: incentives. The incentives at play are the age-old ones of power and control. In the past, you could grab control by waging a war. Once you won the war, you could exert your control by extracting penalties and taxes. This control further cemented your power. It was a negative sum game; you could only gain something by taking it away from someone else.

Today, exerting power by declaring war is frowned upon by “civil” society, so those who wish to control others have to do so by other means. The preferred means, fear, works just as well, if not better. Cancel culture, climate change, and pandemics are all examples of the use of fear-based policies to control the broad population, all under the assumption of a negative sum game.

How does this work?

1. Emphasise identity politics so that no one can stand out as an individual; you belong to a group.  Groups are easier to control than individuals.
2. Replace nouns with weasel words. Mom and Dad are out, parent and guardian are in. He and she are out, and they/them are in. Take away individual identity and put everyone in their allotted group.
3. Make sure no individual can say or do anything that might cause the group to be offended. Groupthink rules. You know better than to have a contrary opinion. “You didn’t like “Barbie”? What’s wrong with you? Everybody else did!”
4. Tear down historical symbols of individual greatness; symbols of people who made the pie bigger through a combination of their determination, bravery, and entrepreneurial spirit – despite some glaring character flaws – just like the flaws all of us regular people have.

If you thought being “green”, wearing a “mask”, and being “inclusive” were positive actions, you can now see them for what they are: tools used to control the masses. Over time, the consequence of this system is the same as that of medieval wars: the size of the pie remains the same, but more of it moves from the middle and lower classes into the hands of the feudal lords at the top of this negative sum game.

The way to counteract this is to produce a successful and growing economy. Modernism came about after two centuries of rapid economic growth driven by the gains of the energy transition from wood to coal.

To defeat the Malthusians, all we need is efficient and abundant energy. And the ability to exchange and critique ideas. Malthusians realise this, which is why a strong narrative exists against efficient energy sources, such as carbon or nuclear.

This is interesting. Typically, when the gold price hits new highs, gold mining companies – Newmont is the biggest in the world – go on a tear. So here is the chart of Newmont:

That looks like a bear market, unlike what you would have expected. Sure, it’s on a bit of a run right now – but it hit a new 5-year low as recently as the first of March. This sort of divergence makes me prick my ears. What’s happening? Well, this is Newmont’s operating margin:

The higher the gold price goes, the worse it gets for them! The gold price is not increasing fast enough to compensate the miners for cost inflation.

My take: It would be much better to buy a streaming business like Wheaton (one of the top holdings in the MW Worldwide Flexible fund, aka “The Cockroach”), which simply earns a proportion of the revenue of a bunch of mines. It has an Nvidia-like operating margin of 50%, and this margin has been increasing over the past five years along with the gold price.

For me, dissonance in markets is a powerful signalling mechanism. In South Africa, a once dominant general retailer – Pick ‘n Pay – has fallen on hard times. You would think their competition would be grabbing market share and coining it. And yes, Shoprite is doing precisely that. But Spar, the number three in the market, is most definitely not.  Their share price hit a new low last week.

I forget who said it, but the quote “Success is where preparation and opportunity meet” rings true here – for Shoprite.

My take: With making less-than-successful offshore acquisitions, implementing difficult software and having an executive management team out of touch with their franchisees’ needs, Spar was not prepared to meet the opportunity that Pick ‘n Pay presented them with. I don’t own the stock and don’t plan to, either. I would rather spend my time thinking about Shoprite.

The CRB index is an equally weighted index of 19 commodity futures, broken down into four groups: Energy 39%, Agriculture 41%, Precious Metals 7%, and Base/Industrial Metals 13%. Although not quite at a new recent high, it’s close and looking promising.

It hit its all-time high in 2008 before entering an extended 13-year bear market, which seems to have ended in 2021. If the index can surpass its recent high of 352, the past 18 months will prove to have been a correction in a bear market.

My take: The commodity sector is showing signs of life. Oil is at a five-month high, copper is at a 14-week high, silver is at a two-year high and gold is at a record high. If the bull market resumes, this will be good for value stocks, commodity stocks, emerging markets generally, and South Africa specifically. It will also be positive for the ZAR.

In an interview with CNBC, the former US Treasury Secretary said he has spoken to potential co-investors about acquiring TikTok. US lawmakers are pushing for a ban on the app unless its owner, ByteDance Ltd., divests it, driven by concerns over the Chinese government’s influence on the American public.

“It’s a great business,” Mnuchin said of TikTok in an interview with CNBC. “A US business should own it. There’s no way the Chinese would ever let a US company run something like this in China.” He added that the social media app would be remade in the US with homegrown technology.

So we’re talking about a political leader of a country that regards itself as the “leader of the free world,” positioning himself to acquire a business that is being expropriated by the politicians of said country.

We’re talking about the USA here, not Russia or China. Or that other paragon of political virtue, South Africa.

My take: Walls are going up everywhere, some more illegitimate than others. But they’re going up nonetheless. Just like the freeing up of trade and capital flows jumpstarted economic growth towards the end of the last century, these walls will serve as a barrier to growth over the next few decades.

Usually, this isn’t big news, as the market is not paying attention to any company that is not an index heavyweight. But Endeavour only listed (via an IPO!) three years ago for $24 per share. It will now go private at $27,50. Shareholders have earned less than 5% p.a.

This is despite Endeavour owning one of the fastest-growing sporting codes, UFC, which also merged with WWE while Endeavour was listed. In 2022, Disney executives paid UFC the ultimate tribute by citing its pay-per-view pact with UFC as a big mover for subscriptions for one of Disney’s top growth initiatives, the streamer ESPN+

Interestingly, those who sold shares to the public are now behind the take-private.

My take: Once again, insiders take minority shareholders for a ride.

In executive remuneration that is, not the share price. Sorry, shareholders.

From Moneyweb: “The top seven executive directors of the Standard Bank Group received over R400 million in remuneration last year. Total remuneration received by top execs is 45% higher than last year. The biggest driver of this has been the vesting of long-term ‘performance reward plan’ (PRP) awards from 2021.

Firstly, I don’t know if the period since 2021 counts as long-term – maybe for a CEO with no more than 5 to 10 years to grab as much as she can for herself. But not for the shareholders who repeatedly have to foot the bill for this ridiculous outcome generated by remuneration committees whose sole job is to cover their sleeping asses by deferring to compensation consultants.

Secondly, pricing your “long-term” incentives when the share price is at a Covid-induced low is, at best, a sharp practice.

Thirdly, Standard Banks’ share price today is R180 per share, compared to R140 ten years ago. This means shareholders have gained around 2.5% per annum plus dividends over the long term. They would have been better off buying risk-free government bonds and not paying the executives anything at all.

My take: I’m with Charlie Munger, who said: “I would rather throw a pit viper down the front of my shirt than employ a compensation consultant.”

The Kyle Shepherd trio

I didn’t grow up a big jazz fan, but recently, I have been trying bite-size chunks of the more accessible type of jazz – gateway jazz drugs, if you will.

My wife and I enjoy art, and our favourite gallery (and gallerist) is right here in Knysna – Trent Read. Trent’s gallery, Knysna Fine Art, celebrated its 25th anniversary last year. To celebrate the occasion, we co-sponsored an evening of jazz by the Kyle Shepherd trio. This was Trent’s idea and it was was the first time I had heard of Kyle.

That evening’s performance blew me away! Since then, I’ve listened to his music a lot, and it keeps growing on me.

Here is a Spotify playlist featuring Kyle. And here is an Apple Music link to the Kyle Shepherd Trio album, Dream State.

And if you like Kyle’s music, here is a Jazz Piano trio Spotify playlist by Mark Rosin.

Vaclav Smil – zero carbon won’t happen

A few weeks ago, I mentioned that I was reading Vaclav Smil’s book, “How the World Really Works”. It’s a highly engaging but sober look at how the world uses energy, in which politics do not obscure facts. I came across another article by him that tears the “zero carbon” argument to shreds. You can read it here. These are the main points of his argument:

• We have only a single generation (about 25 years) to do it.
• We have not even reached the peak of global consumption of fossil carbon.
• The peak will not be followed by precipitous declines.
• We still have not deployed any zero-carbon large-scale commercial processes to produce essential materials; and
• The electrification has, at the end of 2022, converted only about 2 per cent of passenger vehicles (more than 26 million) to different varieties of battery-powered cars and that decarbonization is yet to affect heavy road transport, shipping, and flying (IEA, 2023c).

My take: Smil cuts through a lot of noise. Ignore him at your peril.

That’s all for this week.

Remember – it always pays to be careful out there!

Piet Viljoen
RECM