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Slate Money
The You Guys PIK Edition
00:46:42
Slate Money on Blackrock, super PIK bonds, and Nigerian debt
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- [00:00]
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The following podcast contains explicit language.
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Hello, welcome to the you guys pick edition of Slate Money, your guide to the business and finance news of the week. I'm Felix Salmon of Fusion, as ever, joined by Anna Shymansky and Jordan Weissman. Hello, people.
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A
Hey everyone.
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B
It's a fun show this week. We have a sleepless segment about Kerillian, which is English company which did some weird things and kind of wound up belly up. We have one of the weirdest charitable donations that we have seen in a while, which is the Gates Foundation, a large charitable organization giving tens of millions of dollars to that very worthy recipient, the Japanese government. We're going to work out what on earth is going on there. And weirdly, I kind of love it. I think it's awesome. There is the Super Pick Bonds. That's nothing to do with gum health. That's another one piece of amazing financial engineering which we will get into because when you reach Super Pick bonds, you know that the markets are frothy. Hello, Dow 26,000. But let's start. Since we're almost in Davos now, we have to do the. We have to start talking about the grand corporate responsibility, you know, CEOs trying to make the world a better place thing. And that means we need to talk about Larry Fink.
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A
Yep, yep.
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B
Jordan, who is Larry Fink and why should anyone pay attention to him?
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A
Larry Fink is the grand puba of blackrock, which is just like the world's, the world's biggest fund manager.
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B
The world's biggest. But $6.2 trillion on the map. I'm old enough to remember when like 1 trillion was a lot.
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A
It's 6.2. So that's more than the Norwegian sovereign wealth fund even. Yeah, so it's, I mean, but they're mostly passive. That's the key thing. They own a lot of fricking ETFs.
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B
They bought after the financial crisis. When Barclays bank imploded, Barclays had to sell off one of its crown jewels, which was this thing called iShares, which was a big ETF provider and they sold it to BlackRock. And then overnight BlackRock just became this monster.
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A
Ye. You know, they're big and they're mostly boring. But Larry Fink is also has, you know, political impulses, let's put it that way. He's, he has sort. He sees himself as a crusader of sorts for both corporate social responsibility and this idea of long term corporate planning which dovetails kind of well with his, with his business.
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B
Well, okay.
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A
And so that brings us to this letter he sent out.
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B
So it, does it dovetail? I mean, so yeah, this is true. He, as a very long term investor, you know, his $6.2 trillion of assets under management is only ever going to really go up rather than down. When people give him their money, they generally give it to him for very long periods of time. And so he has a long time horizon. And what he wants to do is encourage the companies that he's investing in to similarly keep, you know, keep their eyes on the long term rather than the short term. This is, you know, one of the standard tropes of modern capitalism. Everyone's like, we have to move past quarterly earnings and think about the long term. The question is, how on earth do you do that? Especially when you're a passive investor. Because when you're a passive investor, by definition you have no real control over what you're buying. All you do is you just buy the index and sit back and do nothing.
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A
And that brings us to this letter he sent out, which Andrew Sorkin wrote a long sort of Florida article about in the New York Times, basically saying it was going to cause a firestorm. Corporate boardrooms. And it's, it's a, you know, Larry says a lot of things in this letter, but really it boils down to, hey, going forward, I want you guys to have a very explicit long term investment strategy that you spell out for all of your shareholders. And I think that companies need to have a better sense of mission, like social mission in this world, and they have to do some good as well. And we are going to somehow try to use whatever heft we have between the 1.6 something trillion in active managed funds that we control and our big passive shares. We're going to try and push you in that direction.
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C
Yeah, and Larry Fink did something very similar in 2015, and he talked about how companies needed to invest more, they needed to spend less money on dividends and share buybacks, and lo and behold, they spent more money on dividends and share buybacks. So it suggests that his heft is quite limited.
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B
So, so, okay, so Anna, there is a school of thought which you can recently attribute to Andrew Rossorkin and others which says that if you have $6 trillion, you know, under management, then that makes you incredibly influential and important. And then there's another school of thought which is more sort of me and Jonah, Sarah and people like that saying, if you have almost no control over where that $6 trillion is invested, then really your might is overstated. Where do you fall between these two.
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C
Camps far more the latter because again, if you own index funds, how exactly are you going to be affecting how companies act? I mean, yes, in terms of proxy votes, which he's done a little bit.
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B
So there are two ways that you can affect how companies act if you're a passive investor. So there's the first way, which is what always used to happen in the iShares days and still does happen, I think to a large extent with Vanguard. And that's. You just don't you say, look, I'm a passive investor by definition. I am having no control over anything. I'm just investing in these things and I'm not going to talk to the companies and I'm not going to care what they do because it's only. Because it's not actually my job to know what they do. It's just my job to buy their shares and hold on to them. One step beyond that is to say I am a shareholder and shareholders have certain responsibilities in terms of voting, especially during proxy fights. And so if and when there's some big activist hedge fund who starts waging a proxy fight, I, I have a lot of votes and I should look at what the company is saying and look at what the activist shareholder is saying and try and work out which one I think is making the more sense and vote with the one which I think is making the most sense. And BlackRock has increasingly started doing that over the past few years.
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C
Yeah, and we've seen that. I think Exxon is one of the most notable examples.
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A
Yeah, I mean in that case they managed to get Exxon to what they basically were able to get them to be a little bit more transparent about climate issues. Right. Like release the effect of climate change.
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C
On the long term viability of the company, I guess.
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B
And generally they get. And what you wind up with in these proxy votes is a certain amount of control over the board. And especially like if there's, if board members are coming up for election, then you can vote for them or you can vote against them. And if you're BlackRock, your shares really do matter because you have a lot of them.
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A
So I guess the problem for a company like BlackRock that does want to exert some control is that in the end these proxy battles tend to be fairly low stakes. Boards tend to not exert that much influence over what companies actually do. Usually obviously there are exceptions and the proxy votes or, you know, resolutions, things like the climate change issue tend to be sort of issues around the margins of the company. It's not the Kind of core of what they do, right?
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B
Yeah, yeah. And then the, and then, so what they're doing now with this new letter, if they're moving away from the low stakes world of proxy fights and moving into the even lower stakes world of conversations and having, you know, having meetings with CEOs and board members.
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C
And this doesn't surprise me at all because I think this is what we've seen in a lot of the talk around environmental, social and governance investing and socially responsible investing is it involves a lot of policies, a lot of memos, a lot of meetings and very little action.
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B
So, and, and it's true that it's very, very hard to see individual companies really changing their ways because of pressure from shareholders to be more socially responsible, that kind of thing. That said, I feel like there's a tiny little bit of moving in the right direction here, which is, and it's twofold. As Larry Fink says in his letter, when you get involved in proxy fights, it's kind of too late. And you're getting involved in the governance of a tiny handful of companies that you're invested in, as opposed to the vast majority of companies you're invested in, which you are not getting involved in proxy fights. So what he's doing with this letter is he's saying to all of the companies that he's invested in, hey, we actually care about you. We're not only going to perk up our ears and pay attention to you during a proxy fight, we're going to listen to you and talk to you as a matter of course, every single year. And so what he's doing is he's actually engaging with these companies in a way that passive investors have historically never engaged with the full range of companies that they're invested in. And the simple act of engaging with those companies and having conversations with those companies about long term strategy and corporate governance and that kind of thing is not going to have any obvious visible effects in any given company. But if you do that with thousands of different companies year in and year out, and you and they have to take that meeting because you're BlackRock, then in aggregate, somewhere along the line, I think the world is going to change and it's not going to change for the worse, hopefully.
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C
My only concern is that it provides cover for not actually doing anything.
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B
There's nothing they can do.
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C
Right. But, but companies certainly can do things. And if they can appear to be better corporate citizens because they're taking these meetings with BlackRock, their BlackRock will come to them and say, we have these concerns and they'll write them a memo and say, well you shouldn't have these concerns because we're doing X, Y and Z and blackrock will file the memo and everyone will pat themselves on the back for being a great corporate citizen and nothing changes.
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B
So how so? I feel like that's the base case and I absolutely agree that 99 times out of 100 that's exactly what's going to happen. But I just feel like one time out of 100, if BlackRock asks a pointed question and then someone at the company goes oh, we should have a memo about this and then they write the memo and then possibly one time out of 100 someone in the company actually reads the memo and says oh well now we've promised to do this and then they do it and then something has actually happened as a result. And you never know exactly when or where it's going to happen as a result. I guess my only point is that in the world of passive investing, if you want those passive investors to act a bit more like owners, then this is one of the few ways they can actually do that.
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Also, it is important to remember that BlackRock does have 1.7 trillion in active management as well.
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That's not nothing, 1.2 trillion. Anyway, it has a lot of money in active management. And that is the other reason why this will have effect because they actually do have analysts covering pretty much every single company in America. And so when the company sits down with BlackRock, they are actually going to be sitting down with someone who understands what that company does. It's not just going to be a bunch of people ticking off the same question about long term strategy that they ask everybody else.
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A
I kind of want to talk about a political dimension here too just because I think it's interesting and it's another way to understand what Fink's up to, which is you have to remember he is a, you know, he is a again deeply political like figure. He, there was talk at one point about him possibly getting a tap for treasury secretary under Clinton administration. Although you know, that kind of faded at one point when it became obvious that you know, Democrats would have a fit about a financier in that position. But you know, he, his talk about, I think a lot of ways when he's talking about this corporate social responsibility, this issue or long termism, he's trying to carve out space in the political world for an idea of friendly productive capitalism. Right. Something that is kind of, you know, that there is still a way markets can function and work and that Wall street can do good. And you saw like that 2015 letter you mentioned, right. It mirrored a lot of Hillary Clinton's campaign platform. People forget this, but she had a whole thing about corporate long termism. Right. That was her, her big idea was to kind of change the way cap gains were taxed to try and make more long term investors. And so regardless of what his rhetoric was achieving in corporate America, he was getting some positive feedback from the politicians he was dealing with. It seemed like he was making an impact on the Democratic Party. And now we've reached this point where the Democrats have taken a harder anti Wall street turn, it seems like, or I think that's the feeling thus far. And most people expect the next 2020 election to look that way. And part of me senses that Fink is still trying to kind of like still grasping here, just still trying to kind of keep Wall Street's place in one of the major political parties in this country, keep it from being pushed out entirely. And this is part of that. I think it's hard to, I think if you don't understand it partly in that context, I think it's, you're missing something about it.
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B
So, so I guess my question is.
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Yeah.
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What do you mean by Wall Street? Because I never really consider the buy side to be part of Wall street and. Yeah, but, but I don't really understand what he's afraid of. If you get an anti Wall Street Democratic president in power, what could they.
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Do which would damage in Washington? No one gives a shit about the buy side versus sell side distinction. You know, that's the bottom line.
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But it's like what's he afraid of?
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It's like literally that you're going to have Elizabeth Warren figure just saying, okay, I'm going to have zero people in finance in my administration that you are going to be, if you're buy side, sell side, whatever, I'm keeping you out of my Treasury Department that you are just not going to have a say that you are going to have, you are not going to have access to power anymore. And all these people care about some degree of access to power. So I think he is still trying to create, he is still trying to put forth the idea that you can have socially responsible capitalism and that I can be the representative of that. And so that if someone like Cory Booker for instance somehow manages to grab the nomination, look, I'm working with friendly capitalists, that's like his best case scenario. That's, that's, that is how I personally would partly interpret what he's doing with this letter.
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C
And I think if this led to good social policy, that was both understanding that you need to work with the investment community in some ways, but you also need to hold them accountable. I think that would ultimately be a good thing. And I think one of the best possible outcomes of a letter like this.
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B
And he makes it very explicit in the letter that one of the reasons he's writing the letter is because he feels that the US Government in particular and governments in general have kind of fallen down on their job of making the world a better place, and that it is now increasingly falling to companies in general and very large companies in particular to sort of fill that vacuum. And so I do agree that this is a political letter, but, yeah, I also agree that it's not going to have any visible effect on the Trump administration.
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A
Well, no, no, absolutely not. What does.
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Okay, Anna. Anna is grinning from ear to ear because she gets to talk about super picks.
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Super picks.
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Superpicks are not Waterpix. Waterpix look after your gums. Superpix look after your balance sheet.
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What's a Waterpik?
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A Waterpik is a wonderful thing which squirts water at your gums and improves your periodontic health.
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A
I'm sorry I asked. Okay. Anna. Anna. What? What the. This story is so weird. What the hell is there?
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C
So there was this Irish company that announced that they were going to be issuing a super pic. So, okay, so a PIC is a type of bond.
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B
What does PIC stand for?
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C
Payment in kind. So normally when you own a bond, you receive interest in cash. When you have a pic, you receive interest in additional debt. So then when the bond matures, your principal is higher.
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So basically, I borrow. I borrow $100 from you, and then I have to pay you back $10 a year. But instead of paying you back $10 a year, I just pay you in more borrowing.
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C
Yes.
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It's amazing, right?
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C
And the reason that this is also quite risky is that usually the companies that are issuing picks are highly levered companies or companies in distress. That's part of the reason they're issuing this because they could potentially have some cash flow problems.
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And often what you have is something known as the pick toggle, which is more common than a pure pick.
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Yes.
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And a pick toggle means, you know what? Most of the time I am going to pay you a coupon in cash, but in the event that I run into serious cash flow problems, I'll have the option of paying you in more debt.
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C
Right. You can also have bonds that especially in restructurings that they'll say, okay, we're issuing a new instrument. Part of the coupon will be paid in cash and part will be paid in pick.
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A
So this company, this Irish company, Ardbeg is as Aardbeg is a whiskey or no? Yes, but. Okay, sorry, I have no idea how.
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To pronounce the name of this.
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It's our something. Lots of they make they bottle stuff. They bottle.
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C
It's a glass bottle.
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They don't bottle anything. They just make the bottles.
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A
Oh, they only make the bottles. Okay. So.
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C
Right. Which is actually part of the risk because that's a highly commoditized product. So it's a very competitive industry. That not the type of industry where you want.
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B
Anyway.
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The Irish bottling maker has not. It's not a pick and it's not a toggle pick. It's a super.
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C
This is where I want to actually.
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A
So what the hell is a super pick?
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C
Okay. Because this is where it gets really cool or not cool, depending on. Depending on where you're coming from. So the other reason that picks tend to be very risky is that they're highly subordinated debt. So we've talked in the past about capital structure. So in a company, if you own senior secured debt, you have the the highest claim on that company's assets. If there's a restructuring, if there's a default, a bankruptcy, you're going to get paid out first, equity's lowest, mezzanine debts in the middle. So picks are often a type of mezzanine debt. So you're only going to get paid out if there's money left over after you paid those that secured debt. Also, there's no collateral backing your instrument. Now there's another type of pick that's called a hold co pick. This is where not only are you subordinated to the senior secured and unsecured debt at the operating company, you're. You're junior to all of the debt and you only get paid out because you're at the holding company. If all of those liabilities from the operating company are paid out and money still left over. Now the super pick, this is, this.
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Is the most dangerous pick of all.
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Yes.
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This is a holding company of a holding company of an operating company, which means you are subordinated to the debt of the operating company. This pick toggle at the interim holding company. And if all of those people get paid out, then you get paid, which means you're not getting paid.
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B
So yeah, basically what this is, it's a Margin loan against the equity in the company. The equity in the company, the company is 92% owned by this one guy Colson. And so what he's essentially doing is he's putting up a whole bunch of his personal stock in the company. He's borrowing against that personal stock, but he's doing it in the form of this glorious super pick structure which you know, he's paying, what is it, 350 basis points, three and a half percentage points higher than even the Holdco debt to be able to raise this cash. But he is an expert in two things, as someone on Twitter told me. He is an expert in buying up bottling companies on the cheap or rather bottle making companies on the cheap. And he's also an expert in junk rated financial engineering. And he seems to be.
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C
This is a great, this is like.
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An aesthetic achievement for him.
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C
This is his masterpiece.
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This is everything just come to fruit. It's all coming together for him in this moment.
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B
But the reason why we're talking about this I think quite aside from like the aesthetics, there are two reasons. One is this interesting fact about capital structure, which is that intuitively a lot of people think that you want to be at the holding company level, that the ultimate owner, the higher up you get in the sort of holding company chain is the safest place to be. Whereas in fact when it comes to the debt markets, it's the most dangerous place to be. And if you're lending money to a company, you want to lend it as far down the capital structure as you can, you want to be at the operating level, you don't want to be lending money at the holding company levels. This is one of the counterintuitive facts about the debt market, which I kind of love because all debt is kind of weirdly counterintuitive. But the other main reason why we're talking about this is that it is indicative of complete craziness in the debt market that you can sell absolutely anything to absolutely anyone. And this thing was mass two and a half times oversubscribed.
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A
As long as you have yield like as that, that's like the key. Just people are desperate for yield.
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C
Two things. Yeah, I mostly this was it, it was originally priced, was going to be priced at 10% and because it was so oversubscribed and went down to eight and three quarters which is shows you how much appetite there was for this. The other thing besides yield that it's giving you is that this company does have a tendency to generate free cash flow. So because they have a history of doing that. That gives you a little bit of not protection, but makes you feel better about investing in this instrument with this company.
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B
And the other thing you get is you're not secured by any actual assets, but you are secured by a bunch of shares in the company. So in the event that the company does become insolvent, there is a reasonably good chance that you wind up taking over a bunch of bottling plants or bottle manufacturers. And maybe if you're a certain type of hedge fund, and I believe that Anna might have even worked one of these hedge funds in the past, you kind of. You feel like your downside in that sense is protected because, like, the worst case scenario is you wind up opening. You wind up owning a business which is actually quite profitable and quite a good business to earn.
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C
Unless the equity is totally wiped out.
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B
Yeah, yeah.
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And then you're just staring down the bottom of an empty bottle.
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C
This is part of the problem with picks often is that they essentially are almost equivalent to equity. And so you actually have very little protection, just like normally in cap structure.
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B
And then, although this is again, like, the other thing which you can say about this is there is so little equity in this company. There's only 8% of the company is traded. The other 92% is privately held. And so if you do want to buy equity in the company, maybe this is one way of doing it.
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C
Perhaps it's also a. The. They're doing this partly to pay a dividend to the original owners.
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B
There's so much financial.
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A
Right.
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C
Which is. Which is. It's only important again to talk about how risky this potentially is, because that's a really bad use of debt.
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A
I want to follow up on this company. I want to just, like, track them like, like two years from now, just like, come back, see how did this work out for.
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B
We're not. We're not. We. We considered and rejected the idea of talking about Apple this week. Apple, of course, more than any other company in the history of the world, has borrowed money to pay dividends to its shareholders. And it did that for tax reasons. And those tax reasons are now moot. And this is, I guess, the reason I'm bringing this up is because Apple is one of the biggest lenders in the world. It has hundreds of billions of dollars of investments in bonds which it's lending to corporate entities. And other companies in the world are being able to borrow money quite cheaply from Apple. And now that Apple's tax situation has kind of finally been resolved, thanks to the Trump tax bill, there's a very good chance that Apple will stop being such a big lender.
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A
I didn't fully understand that argument. I saw it, like, floating around the Internet because I think it was on financial. It was on Alphaville, right? Like, because Apple still has this giant cash hoard that it needs, but it.
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B
Also has debt, and it can now pay down its own debt instead of having to be drifted by the people's debt.
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A
Even so, they're still, you know, all that money they're, quote, bringing home is just being transferred to a different account somewhere in Nevada. Like, they still need to store their cash somewhere. They need to put it in some.
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B
Sort of instrument if you're investing your cash. You know how the classic piece of personal finance advice is never have a savings account and credit card debt at the same time? Because that's really stupid. That's basically where Apple is. They have credit card debt in the form of $100 billion of loans outstanding. They have a savings account in the form of like, $200 billion of cash. The sensible thing to do if you don't have tax issues and you don't have tax issues anymore is to use your assets to pay off your debts.
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A
I. It can be depending on what the rate you're getting, what you borrowed at, and what you're getting in returns on your assets. I guess it may make sense also, I guess, but what you're saying in the end is that they're going to be lending less.
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B
Apple is not at heart a bank, right? It is not Apple.
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C
Not yet.
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A
I mean, people have suggested.
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B
No, but it is not Apple's job and nor would its shareholders want it to be a company which borrows money on the capital markets in order to lend it out to other companies. That's what banks do. That's not what Apple does. I mean, it's effectively what Apple has been forced to do by tax law, but now that it's no longer forced to do that by tax law, I don't see why they should want to continue doing that.
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A
Well, we did, you know, rather continue this. We said we weren't going to talk about Apple. It's. Yeah, I mean, I still think in the end it's there. I still see it. They have to do something with their money. Like, they're not going to keep it in cash. And maybe that means less borrowing in terms of corporate bonds and putting more of it into Treasuries, I don't know. But it's. They, they are, in the end, even if they pay off all of their Outstanding debts, still going to be sitting on a lot of money that they aren't going to directly return to shareholders. They do like having a big, you know, pile of gold to, you know, that is one of Steve Jobs legacies.
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B
Okay.
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A
We said we weren't going to talk about Apple. This could become a very long conversation. We're not going to talk about Apple.
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B
All right, so let's talk about polio if we're not talking about Apple. Jordan.
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A
Yeah.
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B
You sent us all an email this week. Yeah, I was attached. And you said, basically, why is. Why is the Gates foundation paying off Nigeria's debts to Japan?
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A
Yes. Which is what I mean. So Nigeria had a $76 million loan, I believe, from Japan, which was meant to help them eradicate polio. And then the Gates foundation was paying off that loan. And I was just sort of like, why is this an arrangement? What was the. I was like, where did this come from? Why is this the setup? How did they. This seems kind of like a Rube Goldberg device for eradicating infectious disease. And then Felix went and looked into it, and it seems like there actually is a really good reason for why you arrange this.
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B
On. On its face, it is a crazily stupid thing to do because this is a sunk cost. Right. Nigeria has already spent this money, like fighting polio. It already owes this money to Japan. If you, as the Gates foundation, come in and just make a payment on behalf of Nigeria to the Japanese government, that has no effect on fighting polio. It just has an effect on the Nigerian government's fiscal situation. And there's no particular reason to believe that improving the Nigerian government's fiscal situation to the tune of $76 million is going to help fight polio. So if what you really care about is fighting polio, which is what the Gates foundation really cares about, they should spend that money on fighting polio and not on paying off sovereign debts. What wasn't obvious from the article, but which actually explains everything, was that this wasn't done just out of the goodness of the Gates Foundation's heart. You know, a week ago, this was the culmination of a deal which they entered into back in 2014. And in 2014, the Gates foundation promised to repay this debt if Nigeria met certain criteria in terms of vaccinating its population against polio.
- [31:11]
A
Yeah. And so the idea here seems to be that you wrote about this, but is that if you give a country money to deal with a public health crisis, the ministers there may or may not use it for its intended purposes. The you know, whoever runs public health in Nigeria may pocket the cash, may spend it on, you know, God knows what vanity project. It just. It's hard to tell how your money's actually going to get used and you deal with all those corruption issues that we've discussed many times on this show. But if you make it a loan and then promise on the. To, if promise that you will, you know, then forgive that debt or pay that debt off, you know, that the debt will be erased. Should you accomplish it, then you're going to actually maybe see some results. So it seems like a clever instrument for doing this. I guess I'm kind of curious why it has to involve, like sovereign nations and Japan. You know, why that's.
- [32:02]
B
That's the thing which I love about this. That's the financial engineering bit of this, which I really love.
- [32:07]
A
Yeah. So the financial engineering still confuses me. I get like the basic mechanism for why this might be a better way to do development grants. Then it kind of gives you this added layer of protection and added layer of incentive. That's very cool. But yeah, I guess. Why is Japan's treasury in any way involved in this?
- [32:24]
B
And the answer to that is if the Gates foundation goes up to the Nigerians and says, we're going, we're not going to give you $75 million to fight polio, we're going to lend you $75 million to fight polio you have fought polio, then we will forgive you the loan. At that point, it becomes almost impossible for the Gates foundation not to forgive the loan. And it also becomes almost impossible for the Nigerian government to ever pay that loan back. So no matter what the Nigerian government does or doesn't do in terms of fighting polio at the end of four years, is there any chance that they're just going to turn around and give the money back to the Gates Foundation? And the answer is no, not really. The Gates foundation is not going to start taking them to court to get their money back. That would be a really bad look for all concerned. And so it's basically an unenforceable debt which would never get paid. So it's not really a debt.
- [33:23]
A
However, if Japan lends the money, then it's a sovereign debt or it's not.
- [33:28]
B
Well, yeah, it is. It's the Paris Club debt. It's overseas Development Assistance. It's a loan from government which is very important to Nigeria at concessionary rates. And those loans generally always get paid back. And if Nigeria defaults on that loan, then that completely destroys Nigeria's relationship not only with Japan, but with all other bilateral lenders.
- [33:56]
C
Right. And Nigeria has been taking on more foreign debt recently, so that's important.
- [34:01]
B
So Nigeria really, really wants to keep on the good side of its bilateral lenders, including Japan. And that means that it is going to make that payment. If the Gates foundation doesn't come in and make the payment for it, Nigeria will make that payment.
- [34:16]
A
So since you have a very large, very wealthy country that's willing to enter into these sort of financial arrangements, I guess in partnership with big foundations, do you think we might see more development funding done this way? Because it does seem like a cle way of, you know, dealing with some of the inherent problems with global health and with, you know, and the answer.
- [34:44]
B
And the answer to that question is not only will we see it, we have seen it. And there was one deal which preceded it with Pakistan, which was slightly smaller, not much smaller. And there's another deal outstanding also with Pakistan, which is. They all basically have the same structure. And there are now that Nigeria looks like it's pretty much eradicated polio. There were two cases in 2016 and zero cases in 2017. There are only two countries in the world now which have polio. That's Pakistan and Afghanistan. Between them, they only had 17 cases in 2017. So we're very, very close to this long, long dream of finally eradicating the disease entirely.
- [35:30]
C
And this is a nice model because there are certain government can do that. It would be very difficult for a nonprofit to do. When you're talking about polio in Nigeria. Part of the problem had been the, you know, Boko Haram insurgency so that they couldn't get into certain areas of the country. So it made it harder for them to inoculate. Now if you just had a nonprofit coming in, they can't do anything about that. You know, you're not gonna have the Gates foundation fighting Boko Haram, but if they're helping to incentivize the government, the government is going to prioritize polio eradication and they are able to do certain things.
- [36:07]
B
Again, it is, it is no coincidence that the last countries in the world with polio are war torn countries. And it's, you know, Pakistan, Afghanistan and it's northern Nigeria and, and a little bit of, there's a couple of others, but like, it's the places where it's the hardest to do mass vaccination. They're obviously going to be the places where you're going to, which are war Torn. And then on top of that, even if you ignore the whole war bit and the fact that only governments can really enter into these kind of mass vaccination campaigns anyway, in general, I'm a strong believer that the people doing public health in any given country should be the health ministry and should not be. Be foreign NGOs parachuting in and doing it all themselves because like they reckon they're better at it than the local government. What you really do want that those skills and those abilities to be built up within the government and the ministries and civil society rather than having to rely on foreigners.
- [37:12]
C
Because often when you're talking about problems with foreign aid, it's because countries are becoming too dependent either on NGOs or too dependent on foreign aid in general to fund their. Their. To their funded their entire budgets. So historically foreign aid to battle health crises has been very effective. But foreign aid in general in other ways sometimes has not because it hasn't been as targeted, because it hasn't been tied to outcomes like this was.
- [37:43]
B
So what we have, it seems. Jordan, have we answered your question? Have we finally found some. Some financial Eng engineering which is good.
- [37:52]
A
Yeah. I'm no longer befuddled at the Gates Foundation's use of its philanthrodollars.
- [38:00]
B
I mean I hasten to add that not all aid related financial engineering is a good thing. And I'm sure that Anna and I can start reminiscing about bonds which were issued by Colombia and were linked to World bank debt and all manner of weird stuff which really didn't work out well at all. So when these things work, it's by no means preordained, but it's always a happy day. Numbers round. Let's have a numbers round. Yes. Jordan, do you have a number?
- [38:34]
A
Yeah. Mine's simple and stupid. It's fun. But we're going to talk about it. It's 20. You know what it is. Everyone listening knows what it is. It's the number of companies on the short. The number of cities on Amazon's HQ. Two short list, three of which are in the D.C. metro area. So I'm just like, you know, really excited for the DMV to have to like become Amazon Central now. Like just.
- [38:55]
B
I just like the Department of Motor Vehicle.
- [38:57]
A
Yeah, that's the. It's also the dc. The DC Maryland, Virginia area.
- [39:03]
B
So is the, the DMV that what DMV stands for?
- [39:06]
A
Yes, exactly. So it just like people are joking about just like how, you know, I mean he's. It's pretty Clear. Jeff Bezos looks like he's going to build a headquarters next to his giant server farm in Northern Virginia and his mansion in D.C. right. Like, that's. That just. That's what's happening at this point, based.
- [39:23]
C
On Bezos commuting time.
- [39:24]
A
But this is so. I forget who I was talking to, but someone was bringing up how, like, apparently this is the way a lot of executives make their decisions for headquarters in the end, like, they talk about access to workers and skills and, you know, agglomeration and all that crap, but really it's just, like, personal stuff and nostalgia or whatever the hell they want to go back somewhere.
- [39:43]
B
I don't know. I just can't imagine that, given the choice, Bezos would want to spend more time in D.C. but maybe. I mean, he's. He's not a normal human being. Maybe he would.
- [39:54]
A
He's got a nice house there. He already. He's got a newspaper there that he seems to really like. I think it makes perfect sense.
- [40:02]
B
My number is $12.99. Since Kathy's not here, I don't need to say that it's 12.99, and that's a number of dollars. I can just say that it's $12.99, which is the latest annual to monthly conversion ratio data point. One of the things that you often find when you have a subscription product of any description is they'll say, like, it's $100 a year or $10 a month. And you think to yourself, yeah, that makes sense. You know, I save a little bit of money If I pay $100 a year, but if I don't pay $100 a year, then I'll pay $120 a year monthly. So there's a little bit extra for paying monthly. If you look at Amazon prime, it wasn't $100 a year or $10 a month. It was $100 a year or $11 a month. And Amazon prime really was pushing you to do this annual thing, and they made it very uneconomic to do the monthly thing. But now they've switched it, so now it's $100 a year or $13 a month, which is crazy. They're basically saying it's $100 a year if you pay annually or $156 a year if you pay monthly, which is more than 50% extra. And that's basically, at this point, them just saying, if you can't afford $99 a year upfront, we don't even want you as a Prime customer, although they.
- [41:35]
A
Are, I don't think they're doing it for low income because hadn't there, wasn't.
- [41:40]
C
There something else previously that they did to.
- [41:41]
A
They had a discount for people who receive food stamps, for instance, who are on means tested benefits. So I think that this only applies to granted, it still applies to middle class people. And that's, you know, I mean like.
- [41:53]
B
Why, why else would you do it? Why else would you make such a huge delta there? I mean, yeah, the only other reason is that there was gaming going on that people would sign up for Amazon prime for the holidays and then cancel it. Oh, and then like the next time they needed to send out a bunch of things with free shipping, they would sign up again and then they would cancel.
- [42:15]
A
That still might be a good, like a good deal though, for like two months. It still might work. I guess this just ups what they'll make for those people from those people who are gaming it. And there are, if there are enough of them, that extra buck might make a difference somewhere.
- [42:30]
C
So My number is 145 years. There was this really cool economic paper by the National Bureau of Economic Research that looked at average asset returns for different asset classes from 1870 to 2015. And it, it was really interesting in terms of what they found because they found that, you know, real estate actually ended up having slightly higher returns than equity. They found that lower bond returns were not actually necessarily correlated with lower economic growth. They also found kind of to give more credence to tomorrow Piketty's ideas that the average rate of return on capital is significantly more than the average growth rate of these economies because it was over 16 advanced economies. Whereas where this information was coming from, and it's just a tremendous amount of fascinating data that I really like because I, I'm much more of a fan of economic history and what has actually happened as opposed to economic theory and what people think should happen.
- [43:35]
B
So tell me about the real estate thing. That's the thing which jumps out at me. What does that mean? Does that mean like commercial real estate?
- [43:42]
C
So it often has to do with rental incomes. Yeah, real estate. Real estate as an asset class. So includes commercial real estate. Correct. It's not just primary homes, but it just.
- [43:51]
B
But the problem with investing in real estate is always like this is not an asset class where you can easily reinvest your dividends. It does pay literally rents. Like if you own a place and rent it out, you're getting rents. And those rents are lovely things. But it's very, very hard to buy a little marginal chunk of real estate with your monthly rent check.
- [44:14]
A
But you can eventually buy more houses or apartments and just become a landlord, slumlord, rentier, whatever. People do this.
- [44:23]
B
Entirely possible. But I'm just saying, in terms of calculating returns, the. One of the, One of the advantages of having something which is securitized in a bond or a stock is that the minute you get that payment, you can reinvest it back into that asset class in real estate, that is your time horizon becomes much, much longer and it can take you a few years before you finally, like, put together enough money to buy a new property.
- [44:50]
A
I've been meaning to read this paper, but I also have a suspicion, and maybe I'll come back and report on whether I'm right about this, that weirdly, some of its findings about returns may fuck with some of Piketty's data because of the way he calculates the wealth gap or not. He. Some of his associates who've calculated the wealth gap and he's adopted their numbers. So I think it could have some kind of. It could be a mixed bag for that group. I don't know. I have to go look at it and see.
- [45:15]
C
But it does show that R is.
- [45:17]
A
Bigger than G. Yeah, R is a fuckload bigger than G.
- [45:21]
B
Okay, so I think that's it. We still are going to talk about Corillion, which is coming up in Slate plus if you are a Slate plus subscriber. But if you are not, that is it for us this week. Thank you for listening to Slate Money. Keep on emailing us on slatemoneylate.com especially if you are a cocktailologist who sends a massive essay to us saying why Jordan is wrong about old fashions. Thank you very, very much for that. That was awesome. Do listen to the Culture Gabfest, which comes out on Wednesday mornings with Julia Turner, the amazing editor of all things Slate, and also Stephen Metcalf and Dana Stevens talking about basically everything in the week in culture, whether it's film or television or music or podcasts. They talk about the whole thing. Thanks to Dan Schrader for producing this podcast and we will talk to you next week on Sleep Money.