Today’s Profit Watch begins in Malaysia before we fly to Ireland and discuss the nature of the pub business.
Both countries serve a fine example of why government should be abolished. It’s also a handy guide on how to steer your investment strategy.
I’m currently reading one of the most extraordinary books I can recall. It’s called Billion Dollar Whale.
This refers to the mysterious figure of a Malaysian man called Jho Low.
He’s the architect of what’s known as the 1MDB scandal. He’s also the ‘whale’ from the title. His love of gambling made him the biggest player casinos had ever seen.
You may have heard of this. It implicated a sitting Malaysian Prime Minister in a massive corruption scandal. The figures involved here are beyond belief…
Jho Low was a privileged young man with a rich father; he was educated in England and the United States.
He learned quickly that people everywhere respond to status, money and connections. Low set out to cultivate all three straight out of university.
The speed at which he was able to ingratiate himself with powerful figures is quite something.
Somehow – I’m still shocked – he talked the Malaysian Prime Minister at the time into setting up a sovereign wealth fund with Low as the powerbroker.
This was a young man in his twenties with no demonstrable experience handling a business as sophisticated as a milk bar, let alone an investment fund on this kind of scale.
The sovereign wealth fund – known as 1MDB – raised US$1.4 billion by issuing bonds. There was a vague connection to a Saudi Arabian prince and a nominal ‘joint venture’ between the two countries.
Jho Low – with a pair of cojones the size of which the world may never see again – immediately transferred US$700 million dollars of this money into an obscure account out of Seychelles.
Yep – you guessed it – beyond the dummy business name were his personal account details.
Let me repeat this: A twenty-something put $US700 million dollars raised under the banner of the Malaysian government and turned it into his own slush fund.
And he went about spending it all. You know the traditional sovereign wealth fund outlays: alcohol, models, superyachts and private jets.
Even more extraordinary is that for years, he was able to bypass bank compliance departments and the board of governors of the fund.
He threw around millions in casinos and clubs without a penny of real cash flow or any genuine investment happening back on the home front.
Low even got his hands on even more money down the track.
The Malaysian Prime Minister was happy to look the other way because millions of this 1MDB money was showered on his wavering constituents.
He needed this to hold onto the job – plus keeping his wife in jewels and nice houses. Apparently, Malaysian politics is full of dirty deals and kickbacks.
Suffice to say it’s another example of the basic instinct of politicians: power at any cost. What other scams like this occur that we don’t know about it?
Here’s something we can say with certainty. The State is often used to preserve unearned wealth rather than produce it.
That’s why we’re leaving Malaysia now and heading to Ireland to see this further in action – and why you should care.
The tale – and cost – of an Irish pub over an English one
The Economist reported this week that it can cost up to €53,000 to obtain a pub license in Ireland. This is because they are fixed in supply.
To open a pub in Ireland, you must buy an existing license off somebody else.
Naturally, this causes their value to inflate beyond reason. And the existing license holders are all too happy to see it happen.
Not only does it create a perfect barrier to competition entering the market, ‘Northern Irish publicans see it as their retirement kitty.’
This kind of government licensing creates a vested interest in maintaining the status quo.
It shows up in high license valuations and, of course, monopoly rents and prices for the existing pubs. The average drinker probably doesn’t even notice, but he’s being fleeced.
This is a perfect example of how governments distort the real economy. The equivalent license in England or Wales costs a few hundred pounds.
Anyone setting up in these two places doesn’t face this prohibitive cost to get going.
How government distorts the free economy
This is exactly like the cosy monopoly Uber originally smashed when it broke the power and value of taxi medallions – another government licence.
At one point, for example, a New York cab medallion was worth over US$1 million. But drivers did not see higher wages, nor customers better service.
Those come from the competitive pressure of a free market, and government licensing like this means that’s out of the equation.
So we get paper shuffling instead, as the licenses trade between hands instead of improving customer service.
There is no genuine production behind these State grants, but there is value. That’s captured at the expense of the public.
These might seem periphery issues to understanding the economy.
But you do have to see that a lot of value captured in today’s world is not genuine production or innovation, but value captured in government privileges.
And if you follow this trail, it becomes easy to see that the biggest government privilege of all is the right to own property.
The best monopoly rents are found here. And there are many vested interests that will make sure it stays that way.
No better example can be found than the current announcement around Amazon’s second headquarters.
It’s come to light that some Amazon employees may have been getting in on the real estate in New York State where the company is heading…before the announcement was public.
Rents and capital values are likely to skyrocket in the area as it gentrifies.
As above – often the fastest way ahead is getting your hands on those government privileges first.