One in a Million
“You’re one in a million, yeah, that’s what you are
You’re one in a million, babe, you’re a shooting star
Maybe someday we’ll see you before you make us cry
You know we tried to reach you but you were much too high”
Axl Rose, One in a Million
The above lyrics, for those who live in hermetic isolation, are from One in a Million of the 1988 Guns n Roses album Lies. This post is about how central bank policies, and some of the ways in which they have messed up capital flows and asset prices since 2008, and particularly how this has affected us at SIFF Capital along with pretty much everybody else who is trying to direct capital toward opportunities in the fisheries space. One in A Million, Lies and the above lyrics are an uncannily good fit for this topic.
Before going into that I will explain something about this post. Today is December 17th, 2019, and it’s crazy how this year, like so many others, has flown by. At the beginning of this year, my New Year’s resolution was to start blogging this year, and here we are Dec. 17th and I’m posting my first blog of the year. This had to be posted in order to meet that pledge. To start blogging is easier said than done, and I definitely have acquired a new level of respect for those who blog regularly. I plan to post at least one more this year and will do so more regularly in 2020. This blogging thing had to begin, because I take so much knowledge from others (most notably Dr. Ben Hunt and Epsilon Theory) that something needs to be given back, lest the universe be thrown off balance (lol) so here it is.
Impact of Central Bank Policies
How do central bank policies impact capital flows from the Great Ivory Tower down to little tiny SIFF Capital and others like us? Well, to truly walk us through that course would require detailed sections on several things that include Zero or Negative Interest Rate Policy, Quantitative Easing, transformation of capital markets into political utilities, the use of private information to generate alpha (market outperformance) and superior risk adjusted returns, stock buybacks and other financialization techniques, etc.. In other words, guaranteed that nobody would actually read this post, so I won’t do that. All of those topics are covered exceptionally well by the Epsilon Theory (ET) blog, including by the maestro himself, Dr. Ben Hunt. I highly recommend a paid subscription to ET – a great gift this holiday season for yourself or someone you love.
If you’re still reading this it probably means you’re interested or at least curious about the fundamental point it contains, so in a nutshell here it is:
Commencing in Oct 2008 and almost incessantly since that time, the world’s major central banks have pumped world markets full of newly printed money and handed investors essentially risk-free returns. At the same time, access to cheap capital, and arguably lax regulations have enabled stock buybacks to be used as tools to drive share price increases and effect a massive wealth transfer from shareholders to corporate executives. The result has been a suppression of free-market principles like risk-reward correlation, a harmful degree of risk-aversion across the board.
“Just a Small-Town White Boy”
Before going into how this has impacted SIFF Capital and capital flows into fisheries/seafood, let’s talk about GnR, “One in a Million”, and its chorus quoted at the top of this post. The song is about “a small-town white boy, just trying to make ends meet”, who is frustrated by the social system that he blames for his personal woes and disappointments. Over the past several years, I’ve had the pleasure of connecting for productive discussions with several others whom, like us at SIFF, are trying to drive the channeling of capital into worthy business initiatives that would improve the prospects of preserving marine ecosystems by combining things like responsible resource management, transparency and accountability, optimal and progressively greater use of technologies, better and more meaningful consumer engagement, etc. I think I’m on safe ground stating that we all feel the same frustration as the “small town white boy” in One in a Million – we know that someone somewhere way high above us that we just can’t seem to reach is just not seeing what we see right in front of us. Personally, having pondered this mystery for several years now and with the help of phenomenal insights from ET and other informed smart people kind enough to share their insights on Twitter and elsewhere, I’ve concluded with very high confidence that central bank policy is to blame for distorting capital flows and asset prices in a manner that trickles all the way down (an ironic allusion) to the fisheries sector. And like the “small town white boy” in the song, there is a very broad chorus of voices from the financial community trying ever so hard to reach the central bankers with a message, but alas, those central bankers are just too high. High in the sense that they’re not listening, or don’t seem to be, and probably high on their own egos that tell them that they are the all-knowing masters of the universe and the rest of us just don’t get it. Perhaps high on the great power that they yield. They are one-in-a-million among the human population, who get to wield the kind of power that they do, and like so many people throughout history who have wielded that kind of power, they seem to have lost touch with reality – they have lost touch with the proverbial small-town white boy represented by all of us mere mortals naively trying to operate as though sound business and investment logic still applies, which it doesn’t.
Appetite for Destruction? Nope.
The GnR album that immediately preceded “Lies” was titled “Appetite for Destruction”. Lies is definitely fitting regarding central bank policies and stock buybacks, as anybody [not in denial] who follows these issues knows well. Appetite for Destruction, particularly its first feature song “Welcome to the Jungle” provides a fitting description for how capital markets existed back when they functioned properly – when it was survival of the fittest as opposed to survival of anybody who shows up. It was a time when investors and businesses had an appetite for disruption and the risks that could accompany it, because of the rewards that would be gained upon success. There was a time, that seems long long ago in a galaxy far away, when risks were worth taking because they generated rewards that were not available to those who didn’t take the risks and that could not be achieved without the forms of competitive edge on which survival of the fittest was determined. In contract, now that central banks routinely print money and pump it into debt and equity markets, ostensibly in order to oversupply liquidity and drive prices ever higher, the jungle has become like more of a petting zoo and botanical garden, where as long as you can pay the admission fee you can harvest all you like. Fit or unfit, doesn’t matter, once you’re inside there is no need to take risks, there is no particular reward for taking risks, and central banks will supply enough money so that everybody can harvest generous returns. In such an environment, why would anybody bother to take risks on things like innovation, that can yield progress or improve real productivity? When corporate executives can borrow cash at dirt cheap prices and use that capital to boost their share prices by buying back their own shares, why on earth would they use it for risky things like better supply chain technology, or science to improve the degree of sustainability applied to resource management? The answer is that they would not, and they do not. Yet markets continue to soar ever higher and executive compensation continually reaches new levels of what certainly appears excessive to your average “small town white boy” “just making a living, baby”, “don’t point your finger at me”.
How About Fisheries and Oceans?
I can feel that this sucky post has already extended too long, but before I lose the last of my readers, I want to make the fundamental point that SIFF Capital wants to make about this. We’ll have more to say about this in 2020, I assure you of that, but in a nutshell, here is what we see.
- The fisheries and oceans spaces are among the very few areas where institutional styled capital did not reach in any meaningful way back in the days before markets turned into zombie like petting zoos. This, and the reality that the sector grew up in isolation from other sectors such as food and beverage, consumer discretionary, IT, etc., meant that it didn’t really keep pace with other sectors in terms of innovation or the type of productive consolidation that back in the day used to come with real strategic repositioning. That yields true competitive strengthening that can be used to outcompete others in a survival-of-the-fittest kind of environment.
- When we (SIFF Capital) first started talking with our friends and contacts about channeling capital into this space (~2014), the process of market zombification had already taken hold and we just didn’t fully realize it at the time. This is a pace that through a lot of persistent effort and with a lot of help from experienced stakeholders we have come to understand exceptionally well. I’m extremely comfortable stating that we have developpe proprietary knowledge and honed a set of strengths that clearly provide us with edge, but these fighting weapons are of no use if you can’t find your way into a good battle where ample spoils are at stake. Such battles don’t exist in the petting zoo.
- There are many others who, like us, have identified opportunities in the fisheries, aquaculture, seafood, and oceans spaces, and are frustrated and confounded by the reality that capital still hasn’t into these opportunities. This is because there is no “Appetite for Destruction”. Because it’s so often the case that because there is no particular reward to investors for taking on risk that drives progress, because investors have become so accustomed to earning mindless easy returns just for showing up, they have come to see that as normal. They have forgotten how to hunt and fish because they’ve become so accustomed to hunting and fishing in a game refuge/petting zoo. They don’t need any edge anymore, and because of that many of them have lost their edge, and they don’t even realize that because central bank policies have shielded them from the natural consequences that they would feel in the absence of constant market intervention.
- In the meantime, adding insult to injury, the printing of money and maintenance of low interest rates has placed unprecedented amounts of capital into the hands of asset managers who a) expect and will only accept risk-free return situations, and, b) feel so much pressure to deploy massive amounts of capital that their investment process has, perhaps out of necessity, become entirely formulaic – not conducive to actual thinking and impossible to outside of the boxes for which their formulas are designed. Unsurprisingly, those boxes don’t include wild-catch fisheries. So when they put fisheries opportunities inside their magical crank machine and pull the lever, the answer it spits out is always NO. Nice meeting you, you seem to be on to something but it’s just not fur us. We wish you luck – End of Discussion.
- Notwithstanding the point above in (4), some capital has spilled into the fisheries sector. This is largely because the totality of QE, ZIRP/NIRP, lax regulations and abundant cheap capital for the C-suite crowd has led to absurdly high asset prices in both public and private markets. Eventually asset prices reach such heights that even the private equity firms with insane AUM levels feel that the prices are too high, and they start to look elsewhere. They still look for what they perceive to be risk-free opportunities for returns, and like all humans they have a tendency to see what they want to see and believe what they want to believe. In order to deploy the capital that they so desperately seek to deploy, they can tweak the magical crank machine to tell them what they want to hear, which is that there are risk-free returns available in the fisheries sector. That involves making assumptions that fisheries and related businesses function just like agriculture, which the magical crank machine can handle, and so they proceed on that basis. The result has been that capital comes in following approaches that all of us who know the sector very well can only shake our heads at and wonder a) how can such valuations be viable, b) how can such strategies hold over the longer term, and c) why aren’t all the great innovative technologies and strategies obtaining support from investors.
- The answer to all of this, in our view, is that sooner or later markets must return to a survival of the fittest type of environment where the proprietary knowledge and edge of SIFF Capital and others is put to good use, weeding away the deadweight mindless capital that drives investment returns without driving any real progress. For us, the longer we watch this absurdity unfold, the more we salivate at the opportunities being teed up as the petting zoo theatre continues. We believe the day will come when the opportunities become so great that we’ll find our way into the petting zoo, weapons in hand, and can walk right up to the zombies and say “Hey, pal, welcome to the jungle, we’ve got fun and games.”
If you stayed with us all the way through this post, thank you, and we hope to see you back here for future posts.
If you stayed with SIFF Capital through our journey to reach this point, we thank you most kindly and respectfully. 2020 is going bring some new fun and games, so stick around.