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Slate Money
The Natural Beauty Edition
00:51:22
Slate Money on tariffs, Seychelles, and expert networks
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The following podcast contains explicit language.
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Hello, and welcome to the Natural Beauty edition of Slate Money, your guide to the business and finance news of the week. I'm Felix Salmon, joined as ever by Anna Shymansky and Jordan Weissman. Did I say, as ever?
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A
Yeah, yeah.
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B
I don't know how long this team is going to stay together. Are you. Are you quitting on me?
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A
I'm quit. Such a strong word. That's such. Is quitting the word we want to.
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C
We're consciously uncoupling.
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B
In economics, the quit rate is always a good sign of economic health. If people are quitting a lot of jobs, then that means the economy is ticking along nicely. So are you saying that Slate Money is economically healthy?
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A
It's very healthy. I am confident the show is in good hands and I can move on to some other trader.
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C
Yeah.
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A
And I can move on to other potential projects without worrying about the direction that Felix and Ana are going to take it.
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B
We're going to. We're going to. We can. Oh, my God. Without Jordan, what can we do with it? Okay, so, guys, we need two things from you, actually, three things from you. This is a big preamble, I guess, this week.
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A
I don't know what the three things are going to be. I actually, I have no idea what Felix is about to ask you guys for, so this is going to be a surprise to me as much as it is to you.
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B
The first thing we need from you is send in all of your questions for Jordan Weissman, because this is your last and possibly only chance to ask questions of Jordan Weissman. We will put a phone number in the show notes or just email us on slatemoneylate.com longstanding resident millennial will be here to answer all of your questions, which only he can answer. So this is going to be Jordan. Swan Song is going to be something of the Jordan Show. Send in your questions. We'll see if he can answer them. Number two, now that, like, Anna and I are freed of Jordan.
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A
Yep.
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B
We need your advice on where to take this thing and just how wonky we should go and, like, you know, how much time should we spend? Credit defaultswap contango or something like that.
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C
The answer is a lot.
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B
And actually, Dan Schrader can give you the phone number, 929-266-8195. Call that number and leave a voicemail if you want to say goodbye to Jordan Weissman in person. There is a way you can do that on PI Day, because we have just received word from the Public Theater that they have released a new tranche of tickets to the low Road on 314 PI Day. If you use the code money on the Public Theatre website, then you can get tickets for 30 bucks, which is super cheap. And we are all going to be there. And we have booked out a space in the Library bar afterwards. And so once we have all seen the play. You can buy Jordan a drink.
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A
Yeah, yeah. You can buy me all the drinks.
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C
Maybe a Manhattan. Maybe an Old Fashioned.
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A
Yeah. No, if you try to. I'm not drinking a fucking Old Fashioned.
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B
And anyone who wants to buy Jordan an Old Fashioned is welcome to do that on March 14th at the library bar. But, yes, this show is obviously all going to be about the Seychelles because it's the biggest news of the year.
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C
It really is.
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A
Is that how it's pronounced? I've always, in my head, I've always had it as like, say killies, but that's. I've never actually heard it pronounced.
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C
That's very wrong.
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A
That's extremely wrong. I like, say. It sounds like. Say killies sounds like some sort of Greek monster. Like that.
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C
That's.
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I liked. I liked thinking of it as.
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B
It's not Seychelles, it's Seychelles.
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A
Seychelles. Seychelles sounds funny.
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B
We're going to talk about the Seychelles because there's an awesome Seychelles story this week. We are going to talk. We have talked a little bit about Gerson Lehman and expert networks before. We are going to talk about them again because there are my fiddy reasons why they're back. Is that an adjective?
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C
Myfity2.
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B
Myfity2. This will all become clear in part three, but part one obviously has to.
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Be the trade war.
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The trade war. Trade war. Jordan is sort of Trump whisperer as far as this show is concerned. I'm not sure what we're going to be able to do without you, but correct me if I'm wrong. Basically he has Trump has this very kind of photo op meeting with a bunch of steel executives at the White House and then he has like a photo call at the end of it and blurts out in the middle of the photo call, yeah, we're going to have 25% tariffs on steel and 10% on aluminum, as you guys call it. And then all hell breaks loose.
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A
Yeah, I mean, that's a pretty decent summary.
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C
So.
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A
The background to this is just really convoluted and says so much about the current state of the White House and the US government. But, you know, Donald Trump campaigned hard on trade protectionism. You know, he was gonna slap down big border taxes on you know, everybody and their sister to keep foreign made goods from coming into the country and bring back smokestacks in the Midwest and yada, yada, yada. And there's, you know, he, he then entered office and there was sort of this tension right, between the two halves of his administration. You had on the one side the actual trade protectionists that he, you know, brought into his fold. And that included guys like, you know, our old favorite, Wilbur Ross. His fortune off of steel, partly. Also the US Trade representative, Robert Lighthizer, who was a steel lobbyist who was very in favor of tariffs. And then on the other side, and.
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B
Of course, Steve Bannon.
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A
And Steve Bannon, well, who's like kind of off doing God knows what. But yeah, he was there.
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C
Peter Navarro.
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A
Yeah, exactly. And then also Peter Navarro, the, you know, anti China zealot who was his trade advisor, essentially. And then on the other side, you had the free traders, you had the Goldman Sachs guys like Gary Cohn and Steve Mnuchin. And so there's been this jockeying this whole time for between the two sides with one group trying to urge Trump to, yes, slap down tariffs, and then the other group saying, no, no, no, no, no, look how great the stock market is doing. It's doing great. So in February, the Commerce Department, headed by Wilbur Ross, came out with this report saying you should put down a 24% tariff on, on all foreign steel for national security reasons.
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B
And how. Okay, the first obvious question which I need to ask is in what conceivable way, shape or form is this a national security issue?
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A
So the US Uses steel in things like guns, guns, military equipment, and, you know, big infrastructure projects. And theoretically, if our steel capacity were to be completely diminished and disappear and we went to war, we would be in some kind of trouble.
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B
Wait, on the grounds that, like, Canada would stop exploration.
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A
Listen, are we going to war with Canada?
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B
I keep on wondering that we will.
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A
I have not read all 262 pages of this report. It's actually on my to do list. But, like, I mean, like, is it flimsy as fuck? Yeah, it's flimsy as fuck. Like, but this is.
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B
Why are they using this reason?
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There are a few. Basically, it's the biggest opening that they can bureaucratically. It's a pretty easy way to do it. The president has a lot of latitude using this thing called a Section 232 investigation.
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B
But they're not actually saying that they're doing it for national security reasons. They're just saying they're using the national security as a pretext.
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A
But then, but the other part of it, and this comes, and this actually opens up all sorts of huge issues, is that the World Trade Organization rules do allow tariffs and protectionist actions for national security purposes, but no one has really tested what that means. And so it's, Trump is kind of trying to, you know, take this loophole and just, you know, burst it wide open, just drive a truck through it, essentially.
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B
So, I mean, politically it's, yeah, I think, reasonably clear what's going on here. The White House this week is even more chaotic than it normally is with Hope Hicks leaving and Jared Kushner losing his job or the ability to do his job.
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Yeah.
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And some kind of like thermonuclear level war between the President and his own Justice Department. But so with all of that going, with all of that chaos going on, you can kind of see this sort of atavistic desire that Trump has to go back to the campaign trail and rile up his base and say, yeah.
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A
Tariffs, well, yeah, that's definitely part of it. There's, I mean, there's a few other things that were going on too. One is that when you. So the Congress put out this report saying, hey, let's do some tariffs, let's get going with this. And technically, I think the president has like 90 days after that to respond and make the decision. So there was some sort of timeline here at the same. Also, while that was going on, Rob Porter, you know, you remember him as the guy who got in trouble for beating his wife, you know, his ex wife.
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B
Actually, the one good thing about him was he was an anti tariff guy.
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He was sort of running point on this issue. He was sort of controlling the paper flow to Trump when it came to trade, apparently. And so when Rob Porter disappeared, all of a sudden, that gave an opening for the protectionists to swoop in and kind of get Trump to finally act. So they literally organized this, this meeting, this photo op that was set for yesterday and were planning to make the big announcement and didn't tell like half the administration. They didn't tell the free traders who find who found out at the last minute. And so that led to this bizarre rollout where all of a sudden Trump just blurted out what was going to happen and no one's quite sure how it's going to be implemented exactly because they haven't even finished the damn legal review.
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B
And yeah, there is still a chance that it won't happen. This could be the trans ban in the military all over again.
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A
So some People have said that. I've seen a few comments on those lines, and here's why I don't think that's the case is that the trans ban in the military or the military did not really want to implement the trans ban. That's what's become clear is like they saw the tweet and they didn't get an official order and no one was really, you know, raring to go on it, so they just kind of let it die. Whereas in this case, you have the Commerce Department and you have the trade Representative really pushing for tariffs, and the only person they have to convince is Donald Trump to get this done. They just need to get his signatures on the paper. So you don't need to even do a big photo op where everyone hears about it ahead of time. You just need to get him to sign the damn sheet. And there's no one really controlling anything in the White House. So it seems conceivable that they could force this through or likely at this point, given that he has announced it now and it would look bad if he backed off.
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C
Right. But I'm wondering if he announces this and all of a sudden he has so many people from different industries because so many manufacturing industries are going to be negatively affected by this.
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Yeah.
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If he starts to get all of that feedback, he could potentially keep the tariffs, but water them down so much with carve outs that they're essentially meaningless.
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A
He could. So the reason I find that, again, I'm a little skeptical is that all of the point people on trade in the administration are for this. All the people with any trade expertise. I mean, you could argue that some of the career staffers, probably at Commerce, for instance, are probably feeling queasy about all this. But it's not like the US Trade rep is gonna sit down and say, how can we water this down to please Steve Mnuchin or please gm? He's gonna be saying, f you, I want my tariffs.
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B
So let's be clear about the losers and losers here. I mean, there may or may not be a couple. I mean, I can't even name any American steel companies. It seems like such a tiny point.
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Nucor, US Steel. They're big.
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There are a few of them. But the big picture here is that firstly, anybody who makes anything out of metal basically is. Is going to see their prices rise. And that's obviously car manufacturers, soda cans and washing machines.
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A
Aluminum is really the funny part of this. The fact that aluminum is being protected for national security purposes is like, that's.
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C
The one that I'm like, those beer cans for troops.
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A
That's where this really goes from. Just like kind of hair brain to like pure troll. Like, right?
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B
Then the bigger issue, I mean, and that's going to cause prices to rise for consumers, but the bigger issue for me is NAFTA and supply chains, because I. I feel like the White House is living in some kind of 1950s world where manufacturers import a bunch of raw materials and then make stuff out of raw materials. And that's not the world we live in. We live in a world of supply chains where various bits of various different car. You know, if you're building a car, those bits in the car, the various different parts which make up the car, have crossed the border between Mexico and the US or between Canada and the US like 30,000 times before you finally get a car.
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A
Oh, yeah. And I mean, if you stop and think about this for a minute, you can easily see how this would push jobs out of the US Into Mexico and Canada. Oh, you're going to slap. So US has tariffs on steel. Steel's more expensive here. Okay. Make the damn engine in Mexico, make the engine in Canada and then bring it over like you do anyway.
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B
And does it not have tariffs on it if you're building. If you're importing an engine rather than a piece of steel?
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A
Yeah, I mean, once you've made the part that's. That's no longer an issue. Yeah. I mean, that's a way around it. So you're going to. I mean, there are all sorts of things you could do to get around this. And, you know, I mean, he had this tweet this morning. It's like 5am after he got done ranting about Alec Baldwin, where he said, when you're losing billions of dollars, trade wars are easy and easy to win. And good. Right. Like, it was very Twitter slight, actually. This is extremely good. And he's like. Because if you stop trading, if he said, if someone gets cute and stops trading, then it's good for us if we're losing billions of them. And it's just like. Well, no, because that's. Fuck. That just messes with everything. All the. Are the farmers. Yeah. Like your farmers suddenly can't sell their sorghum in China. That's something that they've been trying to hit with tariffs. You know, our supply chains all over the world get scrambled. There are all sorts of losers. It's not. It's not easy.
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B
The fact that the President of the United States has no conception of gains from trade.
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Yeah.
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Or like probably has never even heard of Ricardo. I mean, that's fine if you've not heard of Ricardo, but, like, if you haven't heard of Ricardo, you should at least listen to the people in your administration who have.
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C
Really, what is the upshot? What are they exactly expecting to happen?
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I don't know exactly. I. Because it's hard to separate. It's hard for me to get over the fact that both Ross and Lighthizer are industry guys, and maybe this is just them wanting to help steal. Like, maybe that's just what it comes down to. Or maybe there's some bigger conceptual protectionist agenda going on here and this is just the first step in the war. But it's hard for me to sort of figure out how much of this is kind of crony capitalism and how much of it is a grand plan. But, yeah, I mean, maybe Trump's going. You know, one thing I'm worried about is that Trump really does want a trade war where he gets China or Europe to retaliate, and that gives him excuse to retaliate more. And all of a sudden you see tariffs sort of stacking up on everything. Maybe that's what he wants to do. That's like the worst case scenario, politically speaking. Yeah.
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B
A bunch of Republicans came out quite strongly against this because it violates all manner of free trade orthodoxy. What is. Where does the Democratic Party stand on this?
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A
You know, I have not actually been tracking the Democratic response that closely. I'm sure there are some people who are just gonna like, this is a terrible idea. And there might be a few kind of rust belt state Democrats who.
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C
Sherrod Brown actually did come out in favor of it.
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A
Yeah. I mean, you know, the tricky thing about tariffs, let me say I'm ranting and raving about this particular steel tariff is they're not always a bad idea. There are specific circumstances where if you were trying to combat some sort of unfair trade practice like dumping. Yes, a tariff works. And last, in 2016, Obama slapped a big tariff on Chinese ste deal specifically because he said that they were essentially selling it below cost in the US to deal with their overcapacity issue. And while there has been some tit for tat there, it seems like it worked out pretty well. It doesn't seem like it's brought on catastrophe. What's really worrisome about this is Trump seems to be picking a fight with the entire goddamn world.
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B
And with Canada.
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A
With Canada. And so just to be clear, China.
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B
Is not the biggest source of U.S. steel inputs. Canada is the biggest source of U.S. steel imports. Of all the countries to piss off, why would you choose Canada?
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A
Well, part of the question, part of what the Trump people would say is that, well, we've, we've clamped down on Chinese imports, but really Chinese imports are being laundered through other countries.
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C
Right.
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How true that is. I don't, personally, I haven't tracked that.
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C
But I wouldn't say what is still happening, and we all know this, is that there is still overcapacity in China. It's not just in China. There's overcapacity in other places as well. But that is still depressing the global price of steel.
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A
Yes.
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B
Because, I mean, that's just basic supply and demand. If you have overcapacity, then that means prices go down and maybe you can create this little island of higher prices in the US but it's not clear that that really benefits.
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A
At what cost?
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B
Having cheap inputs is normally a good thing for manufacturing.
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A
Yeah, exactly. And again, to me, it just, it comes back to, is steel worth a fight with all of our trade partners? Right. Is it worth, you know, I mean, the European Union is going to strike back if they are targeted. They did this when Bush did steel tariffs. They basically sat down and said, you know what, if you're going to try and keep Germany from exporting steel, we're going to put tariffs on your orange juice. So it hurts you in your swing state of Florida.
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C
And also they went to the WTO and essentially got us to overturn them.
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A
And that could happen. Yeah, I mean, that could happen again. I mean, there's. We are picking a battle with so many people over this one industry, which is important and has had problems. I mean, like you said, overcapacity has been an issue. But priorities, priorities, man.
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C
Steel versus the entire global economy.
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A
Or trade. Yeah, like all of how trade works.
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B
Okay, enough politics. Anna, pick it up. Take it away. This is my favorite story. This is your favorite story.
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A
It really is.
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B
We are going to love this story so much. Seychelles. What happened?
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C
Okay, so Seychelles, if you don't know, is a archipelago in the Indian Ocean off the coast of East Africa. And they are now setting aside a huge marine territory because their overall territory is like 99 ocean. And 30% of that is now going to be set aside as protected land that cannot be used for commercial fishing, oil exploration, development of any kind. And why are they doing this? Well, because it's part of this debt for nature swap.
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B
Wait, did you just say debt for nature swap? Yes, because, because, I mean, I would. I'm going to go out on a limb here and say that 99% of the people listening to Slate Money have never heard of a debt for nature swap. Debt for nature swaps in my favorite thing in the world, but even I only know one other one. So okay, so what is a debt for nature swap?
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C
So traditionally when we've had debt for nature swaps, it's been the US government will forgive a small portion of debt normally in frankly, Latin America usually. And in exchange for that, the country will set aside a certain amount of land that they won't use for development. So it's essentially exactly what it sounds like. They get a little bit of debt relief and then nature is preserved.
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B
So basically Bolivia borrows a bunch of money from America, Bolivia gets into fiscal problems. America says, you know what, you don't need to pay that money back, but in return for that we want you to carve out a nature reserve.
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C
Yes, and this really is much more about nature than it is about debt. When you're talking about debt for nature swaps, it is almost always a very, very small portion of the debt. And it's free, frankly, usually after there's been some type of a restructuring. It's really about helping to incentivize countries to, to preserve natural environments and also to understand that for a lot of developing countries you have to consider your need to grow and balance that with your need to protect the environment. And this is just helping them do that.
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B
And this is a similar case. This is Seychelles sovereign debt.
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C
Yes. Although I just want to point out Seychelles is not a poor country. It in fact is not even a mid income country is a high income country.
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A
Is it really? But it's like 84,000 people and all they do, and it's all tourism.
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C
They have the highest GDP per capita in all of Africa. This is not what you normally think of when you think of debt for nature swaps.
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A
Interesting.
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B
So tell us, tell us how much debt was involved here and how. And also is this a government? Because I feel like the nature conservatives are.
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C
Yes, I will explain. Actually the mechanism of how this works is in my mind really fascinating and that's actually why this one is interesting because that's different than most debt for nature swaps because this one actually involves social impact capital.
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B
Okay.
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C
It's not just debt forgiveness.
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B
It's not. And it's not just what we, what we debt geeks would call Paris Club debt. It's not countries who lent the money, it's actually the private sector.
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C
Well, a mix, but so, okay, so what's happening here is that Nature Vest, which is part of the Nature Conservancy, was able to raise about close to $22 million in grants and loans from private capital, including Leonardo DiCaprio apparently. And so they took this money and they gave it to a conservation trust that had been created in the Seychelles. Now that trust then loans the money to the government. The government then uses that money to buy back their debt. The some foreign debt that they have outstanding about $30 million in debt because they're buying it at a discount.
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B
Okay.
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C
Now the government has to pay back that, loan that to the trust. But the proceeds that are going back to the trust are used for three things. One, they're used to pay back the people who lent the money. They're used to pay for current conservation efforts, and they're used to capitalize one of your favorite things, an endowment that will be used so that they can protect this land in perpetuity.
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B
And then somewhere along the line in this deal, this, these millions of acres of beautiful pristine ocean are preserved for posterity.
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C
Exactly. So, so Seychelles is basically saying, okay, we're getting a little bit of our debt transformed from a foreign currency denominated debt into a local currency denominated debt, which helps us. And we're getting funds to be able to pay for preservation. And because we're getting that, we're willing to set aside this really large area. I mean, we're talking an area that's roughly the size of Germany.
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A
So my understand. Well, I have a couple questions. First, Seychelles again, it's a beautiful island off of Africa that is a wonderful vacation destination. Sometimes see it pop up on Instagram, feel jealous of all of your friends. Apparently they have a much higher per capita income than I realized. How the hell did they even end up in a situation where they're having all these debt problems, where they had to essentially, you know, protect a big part of their marine environment?
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B
Well, I mean, the point is surely in large part that it was always in their best interest to protect this marine environment anyway, largely because they have such a large tourism industry.
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A
Well, that makes sense to me. But so how, but why did they run it?
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C
I want to say, like, why did they have so much debt to begin with? Because they actually currently have about 400 million in outstanding debt, which for a.
- [24:47]
B
Country of 90,000 people is quite a lot.
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C
Yes, but it's quite a lot less than they used to have. So, okay, they got into a lot of trouble. And why did they get into a lot of trouble? Well, Their government for about 15 years was a socialist one party government then.
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A
Sounds great.
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C
Yeah, exactly. And who, who are known for their fiscal prudence. And so then even once they went to a multi party government system, you still had these kind of populist parties ruling in the Seychelles. So as a consequence of that, they were spending way more money than they had. And they were also giving all these tax breaks to foreign companies to get them to invest, to grow the tourism industry.
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A
Interesting.
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C
Okay, and so what do countries do when they're, they're spending way more money than they have? Well, they have a few options. They could cut back in spending, but they certainly don't want to do that. They could go to a body like the imf, but then they're going to have to make structural changes or they could go to foreign creditors. And if you go to foreign creditors, you're going to have to pay a lot. But they won't make you do anything. They'll be like populist government. You do you just keep paying us our coupon all we want. So that's what they did.
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B
They, they issued this bonded debt.
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C
Oh, they issued a euro bond that I think it was $240 million. It represented almost a third of GDP.
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A
Wow.
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C
And it was a nine and an eighth coupon, which is very high. The structure of the bond was bananas. It was like, it was very short term. It was also a bullet bond. So they had to pay the entire principal back in one year. It was unwise, let's say that. So then in 2008, when obviously many, many places were going through a financial crisis, they went through a serious financial crisis because obviously tourism declined, which have been one of their growing industries. And then on top of that, they, they had a spike in oil prices and there was a spike in oil prices that, so then they couldn't pay for oil. And then on top of that, there was a spike in food prices. And at this time they also had a pegged currency, which means that they are pegging the currency to the dollar. So they have to spend their foreign reserves. The reason this is important is because they had a limited amount of foreign currency, they didn't have enough money to pay for imports like food and service. Their debt they got into. So at the time that they went to the IMF and had to restructure their debt there, they had the second greatest debt burden in the world. As a percentage of gdp, it was more. As a percentage of gdp, it was more than Greece.
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B
Was it more than Japan?
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C
It was not. That was the number one.
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A
That's. It's just amazing how much trouble a small social style in paradise can get into if they're not careful. But.
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C
Exactly.
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A
But so this is sort of a.
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B
So they do the restructuring and then this is like the last shoe dropping.
- [27:37]
C
Right, but can I also. Sorry, not to interrupt. This is, this is why I think this is interesting and it ties back to what we were beginning with of why I think it's interesting that this new debt for nature swap is not just debt relief. It's. They are still paying it back, they're just changing the nature of the debt. Because Seychelles had a tremendous amount of debt relief because they had a lot of debt with Paris Club countries. And then they also had this, this bond and it was literally, I think about 50% of both of those different types of debt was just canceled.
- [28:08]
B
Wow.
- [28:08]
C
And as a, and as a net present value, they basically like 75% of their overall debt burden was just eliminated.
- [28:16]
B
So how many emerging market fund managers got fired for buying that bond?
- [28:20]
C
I mean, I mean in the grand scheme of things, if you think of it as only being a $230 million bond, in the grand scheme of sovereign debt, like that's not that much, but.
- [28:28]
B
I mean it's a one year bond and it gets restructured. Like that's not a bond you want to have.
- [28:32]
C
Oh no, that was, I mean, a disaster. Although it's interesting because part of the reason that they were able to get through this not fantastic deal for creditors is because this bond had collective action clauses, so you couldn't have holdouts anyway.
- [28:44]
B
That's a separate.
- [28:46]
A
That's a little too wonky, but a little less wonky. So I guess coming back to something you said before, Felix, is this just sort of an example of a country sort of using their debt situation to do something they really wanted anyway, since like you mentioned, they, the vast majority of their restructuring was finished, they had sort of taken care of most of the problem it seems. So this is almost like a cherry on top and they get to I guess protect their coastline from future drilling by oil companies or something or what? Yeah, I mean, how. Yeah. So like, was this just this, they're doing this just because this presented an opportunity or.
- [29:21]
C
Yes. And that's why I said at the beginning that debt for nature swaps are usually more about nature than they are about debt. Because right now, even though their debt is still high in terms of percentage of gdp, it's pretty manageable because of how it was restructured. But now the current government, which has actually been engaging in much more prudent policies, knows that they need to do a few things. One, this is a low lying country, which means they are just like at the forefront of dealing with climate change, that they're dealing with rising sea levels, they're dealing with like harsher storms. And so they know that they need to kind of alter their economy a little bit more towards eco tourism and away from fishing, which was kind of degrading the area because things like mangrove forests and coral reefs are really important for actually stopping some of the extreme storms or making or mitigating their effects, which are only going to be getting worse. So this is something that the government I think definitely does want to do. But you're talking about an economy that has been very focused on fishing and now you're taking potentially I think up to 30% of your marine territory and saying you can't fish there.
- [30:34]
A
It's political permission, but it's, I think.
- [30:36]
B
I think the way to look at it is as a commitment device that the current government is not going to be going out and allowing a bunch of people to drill for oil on one of its pristine atolls. But what they want to be able to do is put, put in place a structure which basically constrains future governments as well.
- [30:54]
A
That makes a lot of sense because this is baked in to the contract.
- [30:58]
C
Exactly. And it's interesting too because now you're getting a number of other countries. I think Jamaica and Granada are both looking at this.
- [31:05]
B
Grenada. Yeah. So sovereign debt geeks love Grenada, Dominica, all these tiny little countries. What we are, we are not going to talk about that now. What we are going to do, I have now unilaterally decided. So we're going to have a very quick Slate plus segment about Tierra del Fuego and Goldman Sachs, because that is the greatest debt for nature swap of all time. But you'll have to be a Slate plus subscriber to listen to that one.
- [31:34]
A
I was going to ask you if Argentina had ever done something.
- [31:38]
B
No, no, this is Chile.
- [31:39]
A
Oh, really?
- [31:40]
B
This is Chilean. Tierra del Fuego.
- [31:42]
A
Okay. Okay. Well, we'll talk about it.
- [31:44]
B
Okay, let's talk about expert networks. I feel like we've talked about these before. Cathy o' Neill was not a fan of expert networks.
- [31:53]
A
No, I think we talked about them in the context of Stevie Cohen.
- [31:56]
C
Yes.
- [31:57]
B
And so an expert network is a company like Gerson Lehman which will put hedge fund managers and other investors in touch with experts in their respective fields. And that basically allows the investors to get up to speed very quickly on whatever they need to know about whatever industry they want to invest in. And it's all done over the phone. And sometimes these experts can be paid $1,300 an hour for their time.
- [32:26]
A
And back in the day, the implicit expectation was that the experts might share some inside information that you got venturate.
- [32:34]
B
On that was never allowed, but it was expected.
- [32:37]
C
Yes, yes. And it's important that these expert networks somewhat developed because of regulatory changes that you had in the, I think in 2000, the regulation that companies could not release information selectively. They had to release it to all investors at the same time. And this is happening at the same moment where you're getting, you know, better technology, better access to information. So markets are becoming more efficient. It's harder for firms to really gain an edge. And so that's part of the reason that these developed.
- [33:10]
B
And of course, the big scandal in the world of expert networks, as you say, was with Stephen A. Cohen Capital, where one of his employees was using one of these experts who had advance information about a medical trial and then he traded on that advance information about the medical trail, which was clearly inside information, and then wound up going to jail. The interesting thing is that that episode in the long history of expert networks doesn't seem to have done them very much harm. And they're now making more money than ever.
- [33:51]
C
They, I will say there was definitely a period of time where fewer firms were using them because just of the compliance risk. But now they're seeming to be kind of coming a little bit more into fashion. And we'll talk about this potentially with European firms because of regulatory changes going on.
- [34:09]
A
Well, so this was what caught our attention this week.
- [34:12]
B
This, this is, this is where MiFID comes in to Anna, what is MiFID too?
- [34:18]
C
So this is a new regulatory regime in Europe and there are many, many regulations that are part of this and many changes. But one of the biggest ones that people talk about is that you can no longer bundle research services in with brokerage fees. By which I mean, if you trade with a firm, normally the trading fees you pay allows you to access the research portals. Now you have to actually pay for their research separately.
- [34:44]
B
And the research being what's known in the trade as sell side research. This is the people who work as analysts at banks. And sell side research is not completely worthless. But the fact is that if you are going to be paying for research, you are going to look at your options. You're going to say, well, this bank wants me to pay this much money for their research. And much as I have friendly with those guys, it hasn't really helped me with my investment thesis nearly so much as phoning up an expert, which I can do for the same cost. So maybe I should just phone up an expert instead.
- [35:18]
C
Right, because sell side research, first of all, there is an inordinate amount of it. Part of my job used to be I worked with our head of research and so a lot of the research came to me and I had to go through it and figure out what was important. Every morning I had like 300 emails on my phone. The vast majority of it is garbage and it's just not well targeted. So if you're thinking like, look, I'm going to spend 100, 150, $200,000 on research, am I going to spend it for research, much of which is going to be completely useless, or am I going to spend it for something that's much more targeted?
- [35:48]
A
Is it like garbage because it's a 20 year like 24 year old who doesn't know his ass from his elbow, just like sounding off that company.
- [35:54]
B
Or it's big PDF files which just come streaming in every day and honestly you don't even have time to open them half the time, let alone find out whether there's anything important.
- [36:05]
C
So you start to, you start to get a sense of like which analysts kind of matter. But yeah, most of the other issue is that you always have to be concerned on the buy side of, on the sell side, like how unbiased this information also is. I mean this was also in the late 90s. There are a number of controversies around this. But just in general, sell side research, some of it can be useful, but the vast majority of it just simply is not. So.
- [36:33]
A
If you don't mind me, why is, why do they even have this regulation? Why are they, why do they care about whether you're charging and how. And what was the point of this?
- [36:42]
C
Yeah, it's a good question. Part of it has to do with the idea of trying to really get like the best services for your client because it could be that one person, your company you're trading with, bank you're trading with, is going to be able to have kind of like best execution for your trade. But is that going to be the same bank that's necessarily going to be the best at covering other specific credits or countries that you're looking at? Probably not. So it could be ultimately better for clients if you separate those things, banks.
- [37:15]
B
In other words, if Goldman Sachs will give you the best Research, but Deutsche bank will give you the best execution. What you want to be able to do is get your research from Goldman Sachs and your execution from Deutsche Bank. That didn't really used to be possible when if you were using Deutsche bank for all of the execution, Goldman Sachs would start getting annoyed at you and say, well, hey, if you're using all of our research, then you need to, to give us some of the execution as well.
- [37:42]
C
Although the one thing I will say that I find like slightly odd about this is just that I will tell you, like we had access to every single portal. Like you got research from everyone you traded with it. I mean, all of them, at some point you had probably done a trade with. But most banks were not like shy about giving you access to.
- [38:00]
B
No, no, they give you. No, they give you all of your, all of the, the old model was the banks give out their research for free.
- [38:06]
A
Yeah.
- [38:07]
B
And then every so often they ask you to fill out a survey saying whose research do you value the most? And then whoever gets high marks on that survey, they get more trading dollars.
- [38:21]
A
Oh, okay.
- [38:22]
B
It's called soft dollars.
- [38:23]
A
Okay.
- [38:24]
B
And that was the. And you, you wind up giving those banks extra trading dollars not because they have the best execution, but just because they have the best research.
- [38:32]
A
Interesting. I still, it just, it seems like.
- [38:35]
C
Question how much just because of knowing. Like how when you, when you're deciding who you're going to trade with. I don't know that there's a part of me that doesn't know how that that actually plays out. Exactly like that. In theory, yes.
- [38:47]
A
I guess to me, interestingly, it seems like the EU has this kind of quirky regulation they decided to put down for someone's interest and it's not entirely clear whose. And now that's getting banks to say, yeah, we should start using these expert networks, not the banks. Sorry. That's getting investors to say we should start using these expert networks again. And that can't possibly lead to any problem, could it?
- [39:06]
B
I mean, I mean, I like it. I like the idea that research is actually going to be done on a sort of shoe leather basis, talking to people who know what they're talking about rather than on a weird intermediated basis where you're talking to bankers. Because I mean, much as bankers, I'm sure terribly smart, honestly, like if you, what you want to do is come up with a smart and informed investment thesis, it really helps to know the real world. And if you can know the real world without leaving your desk just by phoning up a Few experts. I kind of, I'm okay with that.
- [39:42]
A
I guess it's not that unlike journalism where you can try to write a story by talking to bank analysts or talking to people in the industry. And your story's probably going to be better if you're not Talking to the 24 year old bank analyst.
- [39:52]
C
Completely agree with you. But my, I find that people were always doing both. Like if you're, if you're looking to invest in a credit, you're not just going to be like, oh, I'm, I'm just reading the sell side research from JPM and maybe I'll call up the analyst. You're going to be doing a lot of your own work and part of that is going to be talking to people in the industry, speaking with management, frankly, often going to the plant, depending on the size of the investment.
- [40:16]
B
But how do you speak with the management? A lot of the time you ask the bank analysts to set up a meeting.
- [40:25]
C
Well, it depends. I mean often it's actually not that hard to get meetings with analysts because they have banking conferences and part of going to banking conferences is because you get one on one meetings with management of the companies that you're investing in.
- [40:38]
B
But exactly. Those conferences are done by the banks. The banks love being the necessary intermediary there.
- [40:44]
A
So I guess what I keep coming back to in my head is that they say compliance standards are so much better now and we have safeguards that you're not going to get. A Stephen Cohen type situation. Why should I believe that? What makes people think that everything is so much more in the up and up?
- [41:01]
B
I don't think that anyone really is saying that. I mean, I think that in the grand scheme of things, insider trading is mostly a victimless crime. We've had this discussion before and that if what we are doing is we're getting better execution for, you know, millions of investors and every so often there's a bad apple who might wind up getting prosecuted. I'm okay with that trade off.
- [41:30]
C
I will also say that compliance is significantly stricter than it used to be. I mean if you're working at a big firm, you know this because you deal with compliance all the time. It's, it's. I think people on the outside think that. Oh you know, people just say that but it doesn't really happen. Oh no.
- [41:48]
A
And so what does that look like on something like this?
- [41:50]
B
All of these phone calls are recorded. You know, there's very strict rules against, you know, the expert, like giving out their private email or phone number. Or something like that, which is what happened at sac. It wasn't the insider information, wasn't transferred over the call. But basically, you know, Matthew Martoma, the guy at sac, wound up getting this guy's private contact information. And then they did a little end run round the back. And it wasn't even through the Expert network. They just like he just bribed him.
- [42:21]
A
Yeah. He befriended.
- [42:22]
C
And it's actually like Sheila Kohatkar's book on this whole is so good and really goes into why, like, how these networks worked. And also something that I will say is a concern of mine still, which is that if you read the Matthew Martoma story, one of the things that's so sad about it is that he essentially befriended this, like, elderly doctor in Michigan.
- [42:42]
A
Yeah.
- [42:43]
C
And that was actually kind of how he got him him to give him this information, groomed him. He really did. And this is something that concerns me because I find that a lot of people who like, are not in finance are very in, sometimes in awe of especially like portfolio managers and people on deal team. And they kind of, you know, they want to be part of that club because it's seen as this like, really exclusive club. And so you can say, oh, well, you know, the Expert knows that there's only so much they can say and they can always hang up on them. But I just wonder because if you have guys who, you know, they're smart, they're slick, they're charming. If we're going to continue to just have these same situations over and over.
- [43:29]
B
Let'S have a numbers round. I'm going to do a number which comes by request from Twitter just so that I can get it out there. 50 million is the number of dollars per year that Georgia receives in sales tax on jet fuel. Jordan is signing.
- [43:59]
C
I think I know where this is going.
- [44:02]
B
Georgia was doing a big tax reform, and as part of the tax reform, it was capitulating to Delta Airlines, which is one of Georgia's largest employers. And Delta was saying, we don't want to pay sales tax on jet fuel. And Georgia was saying, okay, and they were going to stop charging sales tax on jet fuel. But now it seems that poor Delta is going to have to continue to pay its sales tax on jet fuel because the Georgian legislature has stripped out the jet fuel bit of the legislation in retaliation for Delta severing its ties with the National Rifle Association. This is such a stupid story.
- [44:40]
A
I, you know, it's like the right outcome for all the wrong reasons. Right.
- [44:45]
C
Yes. Yes, I agree.
- [44:47]
A
Should, should Georgia have just Been kowtowing to Delta for no. For no good reason. No, absolutely not. Like this tax break probably shouldn't have been in there. Should they be punishing them because they decided to stop giving NRA members discounts on flights? No, they probably shouldn't. Nothing is good about this story except for Outcome.
- [45:06]
C
Yes, exactly.
- [45:07]
A
Completely agree. Yeah, I just. Whatever.
- [45:10]
B
Jordan, you have a less annoying number.
- [45:13]
A
My number is 24.5% which is the fraction of the American workforce that has ever been covered by a non compete agreement. That number comes from a recent survey that was commissioned by Alan Krueger is a very famous labor economist and Eric Posner who is a gadfly and professor, a law professor at UChicago. And that's just kind of a. I mean crazy fucking number. Like I.
- [45:43]
B
Who were they serving and how did they come up with it?
- [45:46]
A
I mean it's people across the education spectrum.
- [45:49]
C
Everyone.
- [45:49]
B
Yeah, I mean but they were serving the employees. They were surveying the employees. Yeah, people, workers.
- [45:54]
A
Yeah.
- [45:55]
B
Americans, the vast majority of Americans who have no idea whether they covered by a non competing agreement or not.
- [46:02]
A
I mean maybe they are aware of it. I mean that's the thing. Like I think this is a sleeper issue that has been slowly but surely gaining traction and partly it's because company like we all remember the famous Jimmy John's incident where it turned out their sandwich like their sandwich artists were covered by non competes that would keep them from going over to Subway or whoever. There has been this, you know, there's been this non compete creep where it's. They are reaching further and further into low skill industries and people are bumping up against them. So especially you know sometimes they don't know about them when they sign up for the job but when they try to leave it comes up. So I just, I, I've said this before. I think last time we had a conversation about it on the show was probably years ago. But I think non compete should just be banned. I think there is no.
- [46:46]
B
They are banned in California.
- [46:47]
A
They are non enforceable in California. They enforceable to various degrees in different states. New York has some limitations on them but a lot of states just give employers free rein on them. The, you know the. There is almost no economic argument for them. It is, they are, they are a nothing but a drain on the economy.
- [47:05]
C
Anti competitive.
- [47:06]
A
They're anti competitive. They hurt innovation, they keep poor people poor it seems or help keep poor people poor. They disempower workers. And it's just this is something that I think more politicians need to seize on. Because it's just, it's, it's there and obviously a lot more people are being affected by it than anyone has had any realization of.
- [47:26]
C
Okay, well My number is $340 billion. This number actually is from an email that one of our listeners sent about EM debt issuance. So that's the amount of em sovereign debt that has been issued between January 2017 and January 2018.
- [47:45]
B
So this is. Okay, so first of all, what does EM mean?
- [47:48]
C
Oh, I'm sorry, emerging markets.
- [47:49]
B
Okay, so and then second of all, what does emerging markets mean?
- [47:53]
C
So emerging markets is. I laugh because what is actually classified as emerging markets is often like, well, what does the index tell us are emerging markets? There's not really a fantastic, especially if you're talking about the difference between like an emerging market or frontier market. So frontier is going to be where you're getting riskier, you're going to have smaller economies.
- [48:13]
B
In this, in this context, the $340 billion is a bunch of debt from countries like Nigeria, Brazil, Russia, Tajikistan. I can't believe Tajikistan has many billions of dollars in new debt issuance, but maybe I'm wrong.
- [48:32]
C
No, they actually had a big, they had a big.
- [48:34]
B
So 300.
- [48:35]
A
The Financial Times had a whole thing about Tajikistan exclusively. They were just like, things are messed up if Tajikistan is able to issue this kind of debt.
- [48:43]
B
So put this in context for us, is, is this much bigger than it has been?
- [48:47]
C
First, this is certainly high and it's also the, the yields that these are being issued at are still relatively high in comparison to what you're getting in most other fixed income instruments. But if you're thinking about, you know, getting a Nigerian bond and only getting, you know, a 7% interest like that doesn't seem to fully compensate you. And I think that's where people are questioning if we're having people moving further and further out on the risk curve in this search for yield. And because also people just have a lot of capital to put to work, they want to buy things. And because there's so much appetite. That's actually part of the story too is that a lot of these debt issuances are being like 10 times oversubscribed, which means that the, the yield that they have to issue at can become lower because there's so much appetite.
- [49:37]
B
So a whole bunch of, if capital is chasing yield and there's a credit bubble or something, what could possibly go wrong? Maybe the entire emerging markets world will end up like the Seychelles and then we will have a natural paradise that's.
- [49:56]
A
Like a really, that's problematic, Felix. That is a problematic take. But we will talk about that another time.
- [50:04]
B
We will let you. Okay. So hang, stick with us if you're a Slate plus member and we will talk about Tierra del Fuego. Otherwise, thank you for listening to us this week. Send in your questions for Jordan Weisman. The email address, as ever, is sleepmanyaslate.com oh, and the phone number is Dan 929-266-8195. Listen to Lexicon Valley, which comes out every other Tuesday. That's John McWhorter, who knows a lot about words. And it really is a fabulous, discursive, wonderful way to get your mind out of the news and into just lovely world, the world, the lovely world of lexicography and words. And don't take my word for it. Apparently some guy called Stephen Colbert likes it too. Many thanks to Dan Schrader, who produced and and many thanks to Jordan Weissman for putting himself in the firing line. Make sure you ask him some tough questions.
- [51:08]
A
Yeah, we'll see what comes with this.
- [51:09]
B
We'll talk to you next week on Sleep Money.