The World & Beyond

The writings of a global transient.

Month: March 2015

NY Fed Chief William Dudley: Guilty as Charged

Last week I wrote about how you can tell who is correct in an argument simply by the response to an allegation.  Specifically I wrote:

“Any time one side of the debate says: “This proposal  has X effect”, and the response by supporters of the proposal  is to say “What we are trying to do is to Y” you always know invariably that the person alleging X is correct”

You also get a strong sense that someone is in the wrong when they are indignant about their motives being called into question.

I was reminded of this from an article in today’s NY Post.   It is about Carmen Segarra, who recorded over 46 hours of conversations with her fellow regulators which showed how the NY Fed has too cozy of a relationship with the banks it was supposed to regulate.

This quote in the article from NY Fed Chief William Dudley (a former Goldman man, of course) is pure gold:

“I don’t think anyone should question our motives or what we’re trying to accomplish,”

That’s really all you need to know that the accusations are spot-on.

Getting Things Done: The Importance of a System

Most of us suffer at one point or other with procrastination and putting things off.  It is a terrible trap to fall into, as a days worth of hard work allows for a week of mental relaxation while a day of slacking leads to a week of mental anguish.

The proper response to that is to have a system.  You can’t trust your gut.  Pilots and Surgeons use check lists for a good reason, and so should you.

A good place to start with this way of thinking is David Allen’s Getting Things Done:

When it comes to personal hygiene I seriously doubt that many of us have problems, even if we suffer occasional procrastination problems in other areas.

Why? Because we have a system.  We wake up, shower, brush teeth, put on deodorant, brush hair, (in my case apply Rogaine), etc.

We don’t even think about it.

Well here at the surf camp I broke the system.  I arrived at the camp last Saturday afternoon.  Sunday morning I woke up about to start my “system”.  I balked at the shower because I was about to go surfing anyway,and continued with the rest of my system.  As I was in and out of the ocean my whole stay I didn’t actually shower until the night before the 7 hour bus trip back to Panama City.

Playa Venao

As I was in and out of the ocean I don’t think I smelled bad.  To the extent that I did smell bad nobody would notice because everyone was doing the same thing,

Here is what is interesting:

You know when you are procrastinating surfing the web or whatever? You know what you have to do… but it’s just a chore to do it?

Well once I broke my daily hygiene system I suddenly would realize that I didn’t brush my teeth this morning or didn’t apply Rogaine, etc.

Once I realized that I didn’t do something, I went and did it, but it felt like a chore.  It was something I needed to do but I had to think about it and then get up and actually do it, and the whole time it felt like a burden.

Those of you who know me know I don’t have personal hygiene problems.

I don’t even think about it.  I have a system. Normally I wake up, brush teeth, shower, etc.

This idea of a system where you simply do what you need to do every day can also be applied to work.  To be productive you need a method of operating where you do what you have to do without even really thinking about it.

Then it won’t seem like a chore.

On a side note, my skin has never been better. (I occasionally suffer from mild eczema) though that could be a result of the relaxation instead of the multiple days of not showering.

Flaming Howard Marks. Or, why write when you have nothing to say?

NOTE: I wrote this a few months ago but wasnt sure if I wanted to publish it. I decided to today. Yes, I know Howard Marks is one of the great investors of all time. That just makes his meaningless banter even worse.

As someone who enjoys putting my thoughts to paper every now and then I always strive to say something meaningful. Sometimes it is only meaningful to me and not to anybody else, but I try to avoid the temptation of striving to tell the world how smart I am without actually saying anything smart.

And why should I? After all, I am not a hedge fund manager. Around 20 years or so ago when I did work for a hedge fund it became trendy to try to get the quarterly investment letters from hedge fund managers to find out what the real smart guys are actually thinking.

As the internet proliferated and such letters started to be delivered by email it became de rigeur for hedge fund managers to write confidential letters to clients that are clearly targeted to the public as a whole. A case in point is the following letter from Howard Marks of Oaktree. Lets address it line by line:

I want to provide a memo on this topic before I – and hopefully many of my readers – head out for yearend holidays. I’ll be writing not with regard to the right price for oil – about which I certainly have no unique insight

All good investment letters start out with the obligatory humble remark that the author is just another guy with no particular insights.

but rather, as indicated by the title, about what we can learn from recent experience.

Let me guess, sometimes asset prices move in ways that are not largely anticipated?

Despite my protestations that I don’t know any more than others about future macro events – and thus that my opinions on the macro are unlikely to help anyone achieve above average performance – people insist on asking me about the future

Ahh, nice, a second humble remark followed by just how smart everyone thinks he really is and so he will oblige us with his insights.

Over the last eighteen months (since Ben Bernanke’s initial mention that we were likely to see some “tapering” of bond buying), most of the macro questions I’ve gotten have been about whether the Fed would move to increase nterest rates, and particularly when.

You and literally 99.9% of the population loosely involved with finance and/or the stock market.

These are the questions that have been on everyone’s mind.

Yup

Since mid-2013, the near-unanimous consensus (with credit to DoubleLine’s Jeffrey Gundlach for vocally departing from it) has been that rates would rise.

And what was your opinion?

And, of course, the yield on the 10-year Treasury has fallen from roughly 3% at that time to 2.2% today. This year many investing institutions are underperforming the passive benchmarks and attributing part of the shortfall to thefact that their fixed income holdings have been too short in duration to allow them to benefit from the decline of interest rates.

Sometimes everyone is wrong. Who knew?

While this has nothing to do with oil, I mention it to provide a reminder that what “everyone knows” is usually unhelpful at best and wrong at worst.

Thanks.

Not only did the investing herd have the outlook for rates wrong, but it was uniformly inquiring about the wrong thing. In short, while everyone was asking whether the rate rise would begin in December 2014 or April 2015 (or might it be June?)

Yes we got it. The masses were wrong. Were you? What was your prediction?

in response to which I consistently asked why the answer matters and how it might alter investment decisions

So you are the kind of guy who answers questions with questions. Got it. I hate people who do that.

few people I know were talking about whether the price of oil was in for a significant change.

Huh? Ill bet when they were talking about what was going to happen to rates they also werent brining up what they had for dinner the night before also. Did you bring up what could happen to the price of oil when thinking about what would happen to rates? I doubt it.

Back in 2007, in It’s All Good,

Im not going to buy your book.

I provided a brief list of some possibilities for which I thought stock prices weren’t giving enough allowance.

Great, and how did that work out?

>I included “$100 oil” (since a barrel was selling in the $70s at the time)

So you thought what basically every single other person in the market thought.

and ended with “the things I haven’t thought of.”

In addition to the humbling statement in the beginning every single letter like this also has the I am so smart because I anticipate that which cant be anticipated.

I suggested that it’s usually that last category – the things that haven’t been considered – we should worry about most.

Give it a rest. Literally every single book or memo from a guru says this.

Asset prices are often set to allow for the risks people are aware of. It’s the ones they haven’t thought of that can knock the market for a loop.

No shit. Known things are already priced in. Unknown things arent. Thanks for the deep insight.

In my book The Most Important Thing,

Im not going to buy this book either

I mentioned something I call “the failure of imagination.” I defined it as “either being unable to conceive of the full range of possible outcomes or not understanding the consequences of the more extreme occurrences.” Both aspects of the definition apply here.

Yes yes, the standard everyone isnt smart and doesnt think of all the possibilities except you know, me, and every other guru out there who says the exact same thing.

The usual starting point for forecasting something is its current level.

Well of course, what do you propose instead? I cant wait for the deep insight.

Most forecasts extrapolate, perhaps making modest adjustments up or down. In other words, most forecasting is done incrementally, and few predictors contemplate order-of-magnitude changes. Thus I imagine that with Brent crude around $110 six months ago, the bulls were probably predicting $115 or $120 and the bears $105 or $100. Forecasters usually stick too closely to the current level, and on those rare occasions when they call for change, they often underestimate the potential magnitude.

OK, so how would you have analyzed the price of oil 6 months ago without including in that analysis of the information updated every second by participants in the market i.e. the price?

Very few people predicted oil would decline significantly, and fewer still mentioned the possibility that we would see $60 within six months.

I actually did, but I was early. Leaving that aside, what did you think? Christ we are multiple paragraphs into this now and we are still stuck on nobody predicts anything right. I may or may not have, I wont tell you that, but I do know that I think outside the box unlike everyone else!

For several decades, Byron Wien of Blackstone (and formerly of Morgan Stanley, where he authored widely read strategy pieces) has organized summer lunches in the Hamptons for “serious,” prominent investors. At the conclusion of the 2014 series in August, he reported as follows with regard to the consensus of the participants:

Yeah we got it. The serious investors are going to be just as wrong as everyone else.

Most believed that the price of oil would remain around present levels. Several trillion dollars have been invested in drilling over the last few years and yet production is flat because Nigeria, Iraq and Libya are producing less. The U.S. and Europe are reducing consumption, but that is being more than offset by increasing demand from the developing world, particularly China. Five years from now the price of Brent is likely to be closer to $120 because of emerging market demand.

Yup, I was right. Whats the insight here? Oh I got it, everyone is wrong all the time, except for him. Well, me might be wrong, we dont know, but I assure you that after the fact he is capable of pointing out that everyone else was wrong.

I don’t mean to pick on Byron or his luncheon guests.

Then why are you?

In fact, I think the sentiments he reported were highly representative of most investors’ thinking at the time.

Everyone was wrong about oil. We got it. Were you?

As a side note, it’s interesting to observe that growth in China already was widely understood to be slowing, but perhaps that recognition never made its way into the views on oil of those present at Byron’s lunches.

Ah, so, the smart people knew growth in China was slowing AND they used that in their analysis of what might happen to oil? Wow, lets track those people down unlike the serious investors and hedge fund managers as well as all of the buyers and sellers in the oil market who never considered that what happens in China might affect the price of oil.

This is an example of how hard it can be to appropriately factor all of the relevant considerations into complex real-world analysis.

Man, youre right. Taking the leap that what happens to the economy in China might affect oil is just too difficult for most people.

Turning to the second aspect of “the failure of imagination” and going beyond the inability of most people to imagine extreme outcomes, the current situation with oil also illustrates how difficult it is to understand the full range of potential ramifications.

OK great, finally some insight. Please tell us all these things that people who fail to imagine like you do dont understand.

Most people easily grasp the immediate impact of developments, but few understand the “second-order” consequences . . . as well as the third and fourth

OK cool, so you are going to tell us the 5th and 6th order affects that most people dont grasp. Awesome, finally some content.

When these latter factors come to be reflected in asset prices, this is often referred to as “contagion.”

What, you mean banks going under because they loaned money to people who couldnt pay it back is a 5th order consequence? I wonder what consequences 1-4 were.

Everyone knew in 2007 that the sub-prime crisis would affect mortgage-backed securities and homebuilders, but it took until 2008 for them to worry equally about banks and the rest of the economy.

Everyone was smart enough to know the affect on MBS and homebuilders but too stupid to see how it would affect banks? Oh come on. How about the market had no idea just how bad the situation was and just how much the banks were levered against it. Oh, by the way, were YOU smart enough to worry about the banks in 2007?

The following list is designed to illustrate the wide range of possible implications of an oil price decline, both direct consequences and their ramifications:

Great, finally, lets see those 5th and 6th order consequences that we are too stupid to see.

o Lower prices mean reduced revenue for oil-producing nations such as Saudi Arabia, Russia and Brunei, causing GDP to contract and budget deficits to rise.
o There’s a drop in the amounts sent abroad to purchase oil by oil-importing nations like the U.S., China, Japan and the United Kingdom.
o Earnings decline at oil exploration and production companies but rise for airlines whose fuel costs decline.
o Investment in oil drilling declines, causing the earnings of oil services companies to shrink, along with employment in the industry.
o Consumers have more money to spend on things other than energy, benefitting consumer goods companies and retailers.
o Cheaper gasoline causes driving to increase, bringing gains for the lodging and restaurant industries.

With the cost of driving lower, people buy bigger cars – perhaps sooner than they otherwise would have – benefitting the auto companies. They also keep buying gasoline powered cars, slowing the trend toward alternatives, to the benefit of the oil industry.

o Likewise, increased travel stimulates airlines to order more planes – a plus for the aerospace companies – but at the same time the incentives decline to replace older planes with fuel-efficient ones. (This is a good example of the analytical challenge: is the net
impact on airplane orders positive or negative?)
o By causing the demand for oil services to decline, reduced drilling leads the service
companies to bid lower for business. This improves the economics of drilling and thus
helps the oil companies.
o Ultimately, if things get bad enough for oil companies and oil service companies, banks
and other lenders can be affected by their holdings of bad loans.

You have got to be kidding me. The things that EVERYONE has been talking about every day are your insights?

Further, it’s hard for most people to understand the self-correcting aspects of economic events.

Cool, lets learn some things I dont know

o A decline in the price of gasoline induces people to drive more, increasing the demand for oil.
o A decline in the price of oil negatively impacts the economics of drilling, reducing additions to supply.
o A decline in the price of oil causes producers to cut production and leave oil in the ground to be sold later at higher prices.

Is this guy for real?

In all these ways, lower prices either increase the demand for oil or reduce the supply, causing the price of oil to rise (all else being equal). In other words, lower oil prices – in and of themselves – eventually make for higher oil prices. This illustrates the dynamic nature of economics.

Lets sum up the article to this point:

1. I have no special insight on things, I am just a humble guy pressured into sharing my thoughts with you.

2. The crowd is often wrong, including the pros.

3. But, I have special insight into how everyone else is short-sighted.

4. That being said I wont tell you what I thought at the time.

5. But look at these insights I have, which you might have heard 100 times already by anyone else you have spoken to.

Finally, in addition to the logical but often hard-to-anticipate second-order consequences or knock-on effects,

Wait a minute. Earlier you said 1st and 2nd order (even 3rd or 4th) were easy, but that the 5th and beyond were hard. Anyway, is there a single person alive who hasnt extrapolated the fact that when oil prices go down countries which sell oil will receive less money for it?

negative developments often morph in illogical ways.

ok, lets get some fresh insight.

Thus, in response to cascading oil prices, “I’m going to sell out of emerging markets that rely on oil exports” can turn into “I’m going to sell out of all emerging markets,” even oil importers that are aided by cheaper oil.

Assuming anyone has made that argument, if mutual funds hold assets in a wide range of emerging markets than the decision to sell out of emerging markets that rely on oil exports will certainly impact the short term price of all emerging markets as people liquidate their emerging markets ETFs and funds.

In part the emotional reaction to negative developments is the product of surprise and disillusionment. Part of this may stem from investors’ inability to understand the “fault lines” that run through their portfolios. Investors knew changes in oil prices would affect oil companies, oil services companies, airlines and autos. But they may not have anticipated the effects on currencies, emerging markets and below-investment grade credit broadly.

I somehow doubt that considering the past correlations, but again I wonder if he saw all of this coming.

Among other things, they rarely understand that capital withdrawals and the resulting need for liquidity can lead to urgent selling of assets that are completely unrelated to oil.

Perhaps this is true for anyone who entered the market in 2009 and has never bothered to study pre 2009 market history.

People often fail to perceive that these fault lines exist, and that contagion can reach as far as it does. And then when that happens, investors turn out to be unprepared, both intellectually and emotionally.

Perhaps.

A grain of truth underlies most big up and down moves in asset prices

That, and the billions of dollars exchanged in open markets that determine the price.

Not just “oil’s in oversupply” today, but also “the Internet will change the world” and “mortgage debt has historically been safe.” Psychology and herd behavior make prices move too far in response to those underlying grains of truth, causing bubbles and crashes, but also leading to opportunities to make great sales of overpriced assets on the rise and bargain purchases in the subsequent fall.

Sometimes markets get out of control and the wise man sells at the top. Did you?

If you think markets are logical and investors are objective and unemotional, you’re in for a lot of surprises. In tough times, investors often fail to apply discipline and discernment;

People are too bullish at the top and too bearish at the bottom. Got it.

psychology takes over from fundamentals; and “all correlations go to one,” as things that should
be distinguished from each other aren’t.

People panic and run for the exits. OK, got it. However isnt the S&P making new highs?

To give you an idea about how events in one part of the economy can have repercussions in other economic and market segments, I’ll quote from some of the analyses I’ve received this week from Oaktree investment professionals:

Ah, ok. Perhaps you are just a professional blow-hard that relies on your analysts. Great, lets hear some insight:

Energy is a very significant part of the high yield bond market. In fact, it is the largest sector today (having taken over from media/telecom, which has traditionally been the largest). This is the case because the exploration industry is highly capital-intensive, and the high yield bond market has been the easiest place to raise capital.

You have an analyst who knows that the energy industry issues lots of high-yield bonds. Good job with that hire. Youd better give him a raise before a competitor steals him from you.

The knock-on effects of a precipitous fall in bond prices in the biggest sector in the high yield bond market are potentially substantial: outflows of capital, and mutual fund and ETF selling.

Interesting you understand that here, but find it strange when the same thing happens in emerging markets.

>It would be great for opportunistic buyers if the selling gets to sectors that are fundamentally in fine shape . . . because a number of them are. A wise man buys under-priced assets when everyone is panic selling.

Yes. What opportunities do you see?

And, in fact, low oil prices can even make them better.

Like what? Give us some ideas.

An imperfect analogy might be instructive: capital market conditions for energy-related assets today are not unlike what we saw in the telecom sector in 2002. As in telecom, you’ve had the confluence of really cheap financing, innovative technology, and prices for the product that were quite stable for a good while. [To this list of contributing factors, I would add the not-uncommon myth of perpetually escalating demand for a product.

Interesting. Thank you. Finally.

These conditions resulted in the creation of an oversupply of capacity in oil, leading to a downdraft. It’s historically unprecedented for the energy sector to witness this type of market downturn while the rest of the economy is operating normally. Like in 2002, we could see a scenario where the effects of this sector dislocation spread wider in a general “contagion.”

I must have missed the great financial contagion of 2002.

Selling has been reasonably indiscriminate and panicky (much like telecom in 2002) as managers have realized (too late) how overexposed they are to the energy sector. Trading desks do not have sufficient capital to make markets, and thus price swings have been

OK

predictably volatile.

Which you made money off I presume?

The oil selloff has also caused deterioration in emerging market fundamentals and may force spreads to gap out there. This ultimately may create a feedback loop that results in contagion to high yield bonds generally.

So your great insight is that the price of oil will affect emerging markets and the high yield market? Awesome. What do you get, 2 and 20%?

Over the last year or so, while continuing to feel that U.S. economic growth will be slow and unsteady in the next year or two,

OK, finally a prediction

I came to the conclusion that any surprises were most likely to be to the upside. And my best candidate for a favorable development has been the possibility that the U.S. would sharply increase its production of oil and gas. This would make the U.S. oil independent, making it a net exporter of oil and giving it a cost advantage in energy – based on cheap production from fracking and shale – and thus a cost advantage in manufacturing. Now, the availability of cheap oil all around the world threatens those advantages. So much for macro forecasting!

So you thought that a massive increase in the supply of oil and gas would result in a price increase? Didnt you also know that growth was slowing in China?

There’s a great deal to be said about the price change itself. A well-known quote from economist Rudiger Dornbusch goes as follows: “In economics things take longer to happen than you think they will, and then they happen faster than you thought they could.”

Ok whatever.

I don’t know if many people were thinking about whether the price of oil would change,

Well, Byron Weins friends were, as you previously related.

but the decline of 40%- plus must have happened much faster than anyone thought possible.

To be honest, I thought it was, but then again I dont have a clear record to boast of.

“Everyone knows” (now!) that the demand for oil turned soft (due to sluggish economic growth, increased fuel efficiency and the emergence of alternatives) at the same time that the supply was increasing (as new sources came on stream).

Who didnt know that before? Did you have analysts that told you otherwise?

Equally, everyone knows that lower demand and higher supply simply lower prices.

No shit.

Yet it seems few people recognized the ability of these changes to alter the price of oil.

Perhaps

A good part of this probably resulted from belief in the ability of OPEC (meaning largely the Saudis) to support prices by limiting production.

Perhaps. I think it was more that people thought political instability would keep prices high.

A price that’s kept aloft by the operation of a cartel is, by definition, higher than it would be based on supply and demand alone

gee, thanks

Maybe the thing that matters is how far the cartelized price is from the free-market price; the bigger the gap, the shorter the period for which the cartel will be able to maintain control. Initially a cartel or a few of its members may be willing to bear pain to support the price by limiting production even while others produce full-out. But there may come a time when the pain becomes unacceptable and the price supporters quit. The key lesson here may be that cartels and other anti-market mechanisms can’t hold forever.

Yes, this is Econ 101. Thanks

As Herb Stein said, “If something cannot go on forever, it will stop.” Maybe we’ve just proved that this extends to the effectiveness of cartels.

Or maybe the Saudis want to kill the price to hurt the US oil industry, Iran, and Russia.

Anyway, on the base of 93 million barrels a day of world oil use, some softness in consumption combined with an increase in production to cut the price by more than 40% in just a few months.

thanks for the info.

What this proves – about most things – is that to Dornbusch’s quote above we should append the words “. . . and they go much further than you thought they could.”

I would think that a 5th order thinker like yourself could have imagined this.

The extent of the price decline seems much greater than the changes in supply and demand would call for.

You skipped day two of econ 101. Something about pricing at the margin.

Perhaps to understand it you have to factor in (a) Saudi Arabia’s ceasing to balance supply and demand in the oil market by cutting production, after having done so for many years, and (b) a large contribution to the decline on the part of psychology.

Is this your 5th order thinking on display?

(In the “conspiracy theory” department, consider the rumor that Saudi Arabia is allowing or abetting the price drop in order to either punish Iran, Iraq and ISIL; put the U.S. shale oil industry out of business; or discipline the more profligate members of OPEC . . . take your pick.)

It may or may not be true, but it is not a conspiracy to say that the Saudis can affect the price of oil and have been perfectly fine with the decline in prices.

The price of oil thus may have gone from too high (supported by OPEC and by Saudi Arabia in particular) to too low (depressed by negative psychology).

So you are long here?

It seems to me with regard to the latter that the price fell too far for some market participants to maintain their equanimity. I often imagine participants’ internal dialogues. At $110, I picture them saying, “I’ll buy like mad if it ever gets to $100.” Because of the way investor psychology works, at $90 they may say, “If it falls to $70, I’ll give serious thought to buying.” But at $60 the tendency is to say, “It’s a falling knife and there’s no way to know where it’ll stop; I wouldn’t touch it at any price.”

So you are long here?

It feels much better to buy assets while they’re rising. But it’s usually smarter to buy after they’ve fallen for a while. Bottom line, as noted above: there’s little logic in investor psychology

Yeah, we got it.

I said it about gold in All That Glitters (November 2010)

Im not going to buy it, but lets see what you said:

and it’s equally relevant to oil:

This should be good.

it’s hard to analytically put a price on an asset that doesn’t produce income.

Well, you know, you can always see what it is trading for in the open market.

In principle, a nonperishable commodity won’t be priced below the variable production cost of the highest-cost producer whose output is needed to satisfy total demand.

Perhaps the highest cost producer is over-estimating future demand.

But in reality and in the short run, strange things can happen. It’s clear that today’s oil price is well below that standard. It’s hard to say what the right price is for a commodity like oil . . . and thus when the price is too high or too low. Was it too high at $100-plus, an unsustainable blip? History says no:

Well, it did go down 40%

It was there for 43 consecutive months through this past August. And if it wasn’t too high then, isn’t it laughably low today?

Perhaps the oil market 43 months ago is different than today?

The answer is that you just can’t say. Ditto for whether the response of the price of oil to the changes in fundamentals has been appropriate, excessive or insufficient. And if you can’t be confident about what the right price is, then you can’t be definite about financial decisions regarding oil.

So lets sum up the article to this point:

I have no insights whatsoever beyond what everyone else has, but I decided to write this letter because I am so smart and can see 5th order things (despite the fact that I opened this letter pretending that I dont think Im so smart).

In the last few years, as I said in The Role of Confidence (August 2013),

Im not going to buy it

investor sentiment has been riding high.

who knew?

Or, as Doug Kass pointed out this past summer, there’s been “a bull market in complacency.”

I gotta admit, that is wittier than anything you have said so far.

Regardless, it seems that a market that was unconcerned about things like oil and its impact on economies and assets now has lost its composure. Especially given the pervasive role of energy in economic life, uncertainty about oil introduces uncertainty into many aspects of investing.

Yet the S&P is at or near all time highs.

“Value investing” – the form of investing Oaktree practices – is supposed to be about buying based on the present value of assets, rather than conjecture about profit growth in the far-off future.

How can you value an asset without making assumptions about future income streams>

But you can’t assess present value without taking some position on what the future holds, even if it’s only assuming a continuation of present conditions or perhaps – for the sake of conservatism – a considerably lower level.

OK, and?

Recent events cast doubt on the ability to safely take any position.

So you have no idea what to do and cant value anything? And you get paid 2 and 20%?

One of the things that’s central to risk-conscious value investing is ascertaining the presence of a generous cushion in terms of “margin of safety.” This margin comes from conviction that conditions will be stable, financial performance is predictable, and/or an entry price is low relative to the asset’s intrinsic value.

If you cant predict anything, you need to pay a lower price to make sure your margin of safety still exists.

But when something as central as oil is totally up for grabs, as investors seem to think is the case today, it’s hard to know whether you have an adequate margin.

Do you think its up for grabs? can you value it? What do you think?

Referring to investing, Charlie Munger told me, “It’s not supposed to be easy.” The recent events surrounding oil certainly prove that it isn’t.

Thats some great insight right there.

On the other hand – and in investing there’s always another hand – high levels of confidence, complacency and composure on the part of investors have in good measure given way to disarray and doubt, making many markets much more to our liking.

So you are long? what are you long? what are you buying?

For the last few years, interest rates on the safest securities – brought low by central banks – have been coercing investors to move out the risk curve. Sometimes they’ve made that journey without cognizance of the risks they were taking, and without thoroughly understanding the investments they undertook. Now they find themselves questioning many of their actions, and it feels like risk tolerance is being replaced by risk aversion. This paragraph describes a process through which investors are made to feel pain, but also one that makes markets much safer and potentially more bargain-laden.

As the S&P 500 makes new highs?

In particular with regard to the distress cycle, confident and optimistic credit markets permit the unwise extension of credit to borrowers who are undeserving but allowed to become overlevered nevertheless.

We know.

Negative subsequent developments can render providers of capital less confident, making the capital market less accommodative. This cycle of easy issuance followed by defrocking has been behind the three debt crises that delivered the best buying opportunities in our 26 years in distressed debt.

OK great, so you see an opportunity to buy assets on the cheap. Is that what you are doing? What do you like here?

We think it also holds the key to the creation of superior opportunities in the future. We’ve argued for a few years that credit standards were dropping as investors – chasing yield – became less disciplined and less discerning. But we knew great buying opportunities wouldn’t arrive until a negative “igniter” caused the tide to go out, exposing the debt’s weaknesses. The current oil crisis is an example of something with the potential to grow into that role. We’ll see how far it goes.

So you are not long here yet. ok.

For the last 3½ years, Oaktree’s mantra has been “move forward, but with caution.”

You forgot to add and say nothing useful, while telling you all how smart we are.

For the first time in that span, with the arrival of some disarray and heightened risk aversion, events tell us it’s appropriate to drop some of our caution and substitute a degree of aggressiveness.

Wait, so you are long here?

The many conflicts of interest between Continental Resources and Harold Hamm

I’m a bear on the E&P companies as I believe oil prices are likely to stay down for a long time.  However, as long as Hamm is in the picture there is no circumstance in which I would want to be a Continental shareholder regardless of oil prices . A major take-away from reading his divorce triaHarold Hamml documents is that despite Continental having gone public long ago, Hamm still runs it as his personal company and conflicts of interest abound.

An example would be Hamm’s activities with Wheatland Oil.

Hamm and Jeff Hume formed Wheatland Oil in 1987 to pursue various drilling activities. Wheatland was owned 75% by Hamm and 25% by Hume. In March 2012 Hume negotiated the sale of Wheatland’s assets to Continental for $340 million worth of Continental stock. (Wheatland had no debt at this time).

The court records notes:

“Jeff Hume ultimately negotiated the sales price for Wheatland assets with Continental. Harold Hamm minimized his involvement in the negotiations at the time of the sale because the sale was a related party transaction with Continental”.

This is rather amusing. Just who exactly is Jeff Hume? According to Continental’s website Jeff Hume is Continental’s Vice Chairman of Strategic Growth initiatives and

“Previously, Mr. Hume was President from November 2009 and Chief Operating Officer from October 2008. He has also served as Continentals’ Senior Vice President of Operations, Senior Vice President of Resource and Business Development from October 2005, Senior Vice President of Resource Development from July 2002 and Vice President of Drilling Operations from 1996. Prior to joining Continental Resources in May 1983 as Vice President of Engineering and Operations, Jeff held various engineering positions with Sun Oil Company, Monsanto Company and FCD Oil Corporation. “

I’d like someone to find me the person who had the job of negotiating against the financial interests of Mr. Hume and Mr. Hamm at Continental. Somehow I doubt he tried very hard.

Mr. Hamm owns many businesses that enter into relationships with Continental. On the one hand it is perfectly reasonable for an E&P company to not want to be in the real estate, transportation, or pipeline businesses. A complete look of Hamm’s behavior, however, shows that Continental’s philosophy is more about “what benefits Harold Hamm”. A few examples stand out:

In March 2011 Continental fronted Hamm 23 million dollar to buy the building (owned by Hamm) that how houses Continental’s headquarters in Oklahoma City.

The most egregious example, however, has to do with an entity called Highland Partners.

Highland Partners was created in 2004 as a Continental Subsidiary to own pipeline assets. It was spun off in 2005. In 2009 it was taken private by Mr. Hamm. In 2012 Continental and Highland entered into an agreement whereby Continental agreed to pay over 95 million dollars over five years to Highland for the rights to use a proposed new pipeline, weather Continental ever used such rights or not. On the basis of this deal Hamm was ultimately able to raise the financing for the new pipeline. As of just this month, Kinder Morgan has agreed to pay 3 billion for Highland (Hamm clears 2 billion, as 1 billion was assumption of debt).

So, now, when Continental is reeling from oil price declines we see Hamm cashing out 2 billion dollars on a deal which could have and should have been Continental’s, but instead Continental was left in the role of simply propping up Hamm’s investment when needed in the initial stages.

Interestingly enough, the judge valued Highland in the sub-400 million range for the purposes of the divorce. One wonder what the judge will make of Hamm telling the him the asset was worth one thing while attempting to sell it for another.

The argument can and has been made that Continental has an independent board of directors with fiduciary duties which approves these deals, and that therefore they are in the interest of shareholders. We know from the court records, however, that Continental is operating on behalf of Hamm even though it has no real interest in who owns it’s shares theoretically. For example, court documents show that Continental relentlessly fought and stalled on discovery request made by Ms. Arnal for documents she needed to advance her case. The legal fees expended by Continental on this ultimately futile quest in no way benefitted Continental Shareholders.

The employees and directors of a billion dollar company wish to please its majority owner and act in his interests is not something that anyone should take as a surprise.

Given the evidence, I simply would not entrust my money with company that operates in the interest of some shareholders over others.

Musings on Elton John, Zurich, and Hotel California

My daily workout routine is about 45 minutes. I usually watch a VH1 “Behind the Music” on youtube while I work out as they are typically about 45 minutes.

I’ve been through a lot of them. It’s sort of interesting when you realize that in almost every case bands fail because of ego battles and in the end most of the members probably wish they had just gotten along and continued to churn out the bucks.

One exception to that is Sting who is a lot happier and better off now.

Of all the ones I have watched the only band where the major players are both sane and normal people are Hall & Oates, although I am not really a fan of the music with the exception of “You Make My Dreams Come True”

(Both my brother and my friend Andy always complain that I like my songs live. Well, too bad for you guys.)

In any event, like everyone else my age of course I know who Elton John is and I know all his big songs, but I can’t say I ever bought any of his albums except perhaps a greatest hits tape in high school. Like most people I think Rocket Man is a great song. In fact, it’s one of the few songs everyone likes that I have never really gotten sick of as opposed to, for example, Hotel California which was a great song the first three or four thousand times I ever heard it but not any more.

The best version of Hotel California I ever heard was in Zurich at a place called restaurant Sonne. I wasn’t important enough to get a nice corporate apartment so I had a studio apartment (paid for by Kerr Mcgee) right by the red light district. To be fair it was pretty close to city center and I could walk to work, etc.

Zurich (and Switzerland in general) is a great place. The Kerr-McGee HR guy (a German guy, who got fired a few weeks later) told me: “Look, you can do whatever you want here, nobody cares, just don’t steal or hurt anybody and you are good. If you do steal or hurt someone they will lock you up and you don’t have the rights you Americans seem to think you have everywhere you go”.

Don’t hurt anybody and don’t steal. That’s pretty much how it should be instead of the schools to prisons model that is prevalent in the US. In any event I went into this bar called restaurant Sonne one night that was a block or so away from my apartment. There was this very bizarre display of an asian woman in a hot pink skirt, heels, and lipstick backed by a band of asian guys with century 21 style yellow jackets, white shirts, black thin ties, and black pants. They had just started playing Hotel California.

I bought a beer and was shocked when it was like 8 francs. Then I kept getting “hit on” by a variety of women.

I thought “What the F**K is going on here?” This was my first ever (and only) experience in a prostitute bar (Although I suppose every bay in Nairobi is at some level) Meaning, it’s just a bar. It’s not a whore house but the customers are all men and prostitutes.

So I watched this amusing display of Hotel California followed by a just as amusing Achy Breaky heart while various prostitutes came up to me trying to get me to go back to their apartment with them for 100 francs, which of course I never did.

Just writing this now I googled restaurant Sonne and found this video.

YouTube

This is exactly, precisely, the location with the singer and band in same place. The whole thing is utterly absurd. (The video should open at the two minute mark.)

Only, you can tell this one is filmed during the daytime. Imagine it at night with about 30 prostitutes roaming around.

(I just watched it again.. one of those two ladies might actually be the one I singing Hotel California).

Anyway, back to Elton John:

I was a metal guy until around 16-17 at which time I added in Neil Young, Hot Tuna, and Led Zeppelin. So, I was never really a follower of Elton‘s career while it was going on except I remember as a kid the video for “I’m still standing” which is ok.

My image of Elton John was early 70’s subdued stuff like “Rocket Man” and “Daniel”, and then the current slightly obese and mellow Elton John.

I learned form VH1 that in late 70’s and early 80’s he was this wild and crazy flamboyant guy who spent a number of cocaine fueled years churning out wild concerts. I’m sure this isn’t news to any of you but for some reason it is to me.

Anyway, I found this recording of him singing rocket man in a much more “flamboyant” way. There are higher notes in certain parts of the verses and especially the chorus. It is really great. It is sung with a great deal of energy.

It should open at 1:16:19.

To be clear though, his extended rambling after the end of the studio version I am not a fan of.

Musings on Arguments, Global Warming, Aubrey McClendon, and Harold Hamm

Weighing arguments without knowing the underlying facts is a useful skill. I first learned it many years ago when I was on the Greenwich Representative Town Meeting.

Although I was very active in town politics and hand strong opinions on many issues I quickly learned how to judge arguments where I didn’t have a strong grasp of the underlying facts.

Case in point:

Any time one side of the debate says: “This proposal  has X effect”, and the response by supporters of the proposal  is to say “What we are trying to do is to Y” you always know invariably that the person alleging X is correct.

This approach to issues has a strong impact on my views on Global Warming, Climate Change, or whatever it is called these days. There is a public campaign against global warming “skeptics”. Apparently I am one of them.

One way I know that I am one of them is that what exactly it means to be a global warming skeptic is never defined. So, for example, someone who believes the absurd proposition that no warming has occurred at all over the last 100 years is lumped into the same group as a scientist who believes that there has been warming, that, human activity is likely the cause, but that given that the models have been totally wrong for the last 20 years perhaps we don’t fully understand what is going on and should tread carefully with policy proposals.

Thus, we end up in a situation where serious scientists or other academics who question the more alarmist global warming pronouncements are the subject of repeated assaults on their reputation while ego-maniacs like Michael Mann who conspire to hide data, keep his opponents from being published, lie about his credentials, and then later blatantly lie in court filings is feted.

Before anyone writes in to tell me that the vast majority of scientists believe in “Global Warming”: don’t bother. I know. They are probably right. But the tone of the argument and the behavior of the participants on both sides leads me to label myself a “skeptic”.

Oklahoma City’s famous Aubrey McClendon recently gave a strong tell in a public spat that he is having with Chesapeake Energy.

There is an article last week about CHK founder Aubrey McClendon with his new company American Energy Partners being sued by and countersuing Chesapeake.

Here is the article:

http://newsok.com/chesapeake-sues-founder-mcclendon-fires-back/article/5394170

Major point:

Chesapeake says that after McClendon found out he was leaving Chesapeake, McClendon took over 20 terabytes of data including information about the Utica shale that he has since used to grow American Energy Partners.

McClendon countersues on the basis that he has not been provided info on the existing wells that he still has an interest in with Chesapeake.

The two key points, however, are as follows:

1. McClendon is indignant!. From the article:

“It is beyond belief that the company that I co-founded 25 years ago and where I worked tirelessly to build it into one of America’s largest and most successful oil and gas producers has now decided to add insult to injury almost two years to the day after my resignation by wrongly accusing me of misappropriating information,” McClendon said in a statement.”

I’m pretty good at reading people’s responses to accusations. The second I read this I figured McClendon was in the wrong. People who are right about an argument typically point that out rather than complaining about how they are being treated.

McClendon adds “Under my agreements with Chesapeake, I am entitled to possess and use the 20 terabytes of information I own,”

Let’s see: McClendon put up a site where he posts all the relevant documents (he claims) to the case: http://aelpvchklitigation.com.

Let’s look at the separation terms documents:

http://aelpvchklitigation.com/docs/agreed-terms.pdf

“Continued Services: In addition to the continued accounting support provided in 4.7, the company will provide the data, licenses, and services, including administrative, engineering, IT, and software, necessary to facilitate the efficient exchange of land, well, title and other information kept in the Company’s well files, previously provided to Mr. McClendon in written form on a routine basis or requested by Mr McClendon and development of reserve reports in connection with oil and gas interests acquired under the FWPP, or jointly owned by any affiliate of Mr. McClendon’s and the Company.”

It seems that the basis of the disagreement comes down to how exactly this is being interpreted. Let’s look at it two different ways (bold added by me):

It seems Mr. McClendon is reading it this way:

“…the company will provide the data, licenses, and services, including administrative, engineering, IT, and software, necessary to facilitate the efficient exchange of land, well, title and other information kept in the Company’s well files, previously provided to Mr. McClendon in written form on a routine basis or requested by Mr McClendon and development of reserve reports in connection with oil and gas interests acquired under the FWPP, or jointly owned by any affiliate of Mr. McClendon’s and the Company.

While CHK is reading it this way:

“Continued Services: In addition to the continued accounting support provided in 4.7, the company will provide the data, licenses, and services, including administrative, engineering, IT, and software, necessary to facilitate the efficient exchange of land, well, title and other information kept in the Company’s well files, previously provided to Mr. McClendon in written form on a routine basis or requested by Mr McClendon and development of reserve reports in connection with oil and gas interests acquired under the FWPP, or jointly owned by any affiliate of Mr. McClendon’s and the Company.”

I emailed the media contact person at McClendon’s litigation website if that was the basis of the disagreement but so far have received no response.

Perhaps McClendon’s argument is that as long as he was still at CHK on his last day he had a right to the data.

Given McClendon’s long-standing treatment of CHK as his own personal company the main issue is most likely that deep down he was entitled to whatever he wanted from the company that he built.

His outrage to a factual accusation probably means he is wrong.

Either way, this is a good lesson in how expensive lawyers can still botch things up. While it’s easy to make the argument that CHK would never have agreed to give McClendon information in perpetuity, the fact is that this clause in the separation agreement could have easily been more clear by simply starting it with “In connection with oil and gas interests acquired under the FWPP, or jointly owned by any affiliate of Mr. McClendon’s and the Company” instead of ending it with that clause.

I was prompted to write this essay because of this item on seeking alpha: “Russians financed U.S. anti-fracking movement, Continental’s Hamm says”

My friends all know that I am very bearish on the drilling stocks, Continental included. In short, while production and inventories rise, many investors still believe that an oil rebound is near. It could be, nobody can really tell you or I what the price of oil will be one month from now, but there are a lot of reasons to believe oil will stay down for a long time. If so, the leveraged Exploration and Production companies are in big trouble. Already most of them are living on their credit lines, and I don’t believe that those lines are as secure as oil bulls think.

I think these companies are in big trouble. When the CEO of one of the largest starts complaining about the Russians (whether it is true or not) that is a sign of desperation and I am taking it as a sign that I am right.

No reason to assume oil prices will rise any time soon.

The masses of oil bulls continue to value companies such as Oklahoma’s Continental Resources using models that assume $50 dollars per barrel of oil this year, and up to $75 next year.  There is no reason to bet on this.  Not only might oil prices go significantly lower, there is no reason to believe that low prices won’t last for a long time.

What exactly this means for Oklahoma’s oil companies is the subject of another post, but in short it will be a massacre for most, with only Devon emerging in a decent position.

Reason 1:

The first argument against oil prices staying low is that the reduced price will cause rigs to shut down and therefore the supply to decrease. That is true at some level, but:

As pointed out recently by Bloomberg “The CHART OF THE DAY shows how West Texas Intermediate, the U.S. oil benchmark, tumbled 69 percent from $31.82 a barrel in November 1985 to $9.75 in April 1986 when Saudi Arabia, tiring of cutting output to support prices, flooded the market. Prices didn’t claw back the losses until 1990. ”

oil-chart

If the current decline in prices did not result in a quick rebound in 1986, why is everyone so sure it will now?

More importantly, as the price declines oil companies might slow drilling, but they actually have every incentive to pump as much oil as possible in the short-term – and that is exactly what is happening:

As pointed out by The Daily Oklahoman

The U.S. Energy Information Administration this week said domestic production is likely to increase throughout this year and into next, and will approach record production levels in 2016.

Analysts like to point out that the price of oil is below the per-barrel production costs in many areas. However, suggesting that this means there will be a decrease in production ignores basic economics. Sunk costs are not factored into current production. The money spent to drill a well has already been spent. Oil will be pumped until the price falls below marginal production costs, not total production costs. With prices down and balance sheets under pressure, oil companies will make sure that existing wells maximize production rather than minimize it.

This same analysis applies to countries such as Russia and Venezuela which will also pump as much as possible for the time being.

The hope exists that Saudi Arabia will cut production, but there is no reason why the lowest cost producer will cut production before the high cost producers do. This would be like expecting Dell to cut production in order to raise prices: The world just doesn’t work that way.

Production will continue at a high rate for a significant amount of time.

We see this today as production continues to rise

Reason 2:

Those focused on supply and demand tend not to talk about financial players in the oil industry. If you want to have a discussion about why oil prices are going down then at some point you need to have a discussion about why they went up to begin with. The “standard” analysis says that oil prices have gone up as “peak oil” combined with rising demand from China and other developing nations to push oil prices through the roof. However, that is not the entire story.

Once upon a time, for well over 50 years, non-physical participants were subject to position limits in commodities markets. Speculators are needed in commodities markets but the government limited their participation to assure that they didn’t dominate commodity markets. This worked well for a long time. In the 1990’s, however, these limits were done away with in a secret manner. In 1991, J. Aron (owned by Goldman Sachs) wrote a letter to the Commodities Futures Trading Commission asking that it’s speculative hedging be treated as a “physical hedge”, the theory being that just as a farmer is hedging a real risk, so were they hedging a real financial risk. The CFTC agreed, and this was the beginning of the end for position limits. These letters were quietly and without public comment issued to more and more speculators and by 2008 at least 80% of all commodities market activity was being done by neither producers nor suppliers. These letters were issues in secret and it was almost by accident that a congressional staffer overhead an offhand remark about them and then pressured the CFTC for their release.

What did these banks do with their secret letters? They created index speculation among other things. The most prominent of these were the Goldman Sachs Commodity Index (GSCI) and the Dow Jones-AIG commodity Index.

These served the basis of a huge influx of pension and trust money into the long only side of the commodities markets. Simple supply and demand suggests that a massive surge in demand of a commodity is going to increase the price of it. As opposed to the traditional speculator supplying liquidity to the market, the GSCI is essentially hoarding commodities, as it is a long only index.

As reported by Matt Taibbi in Griftopia from 2003 until July 2008, the amount of money invested in commodity indices rose from $13 billion to $317 billion. Not surprisingly the prices of all twenty-five commodities listed on the GSCI rose sharply.

In short, commodity prices in this day and age may, in the long run, depend on the supply and demand of the end suppliers and users, but in the middle Wall Street, with its free money from the Fed, drives price movements.

So, all of those citing the supply and demand are not really saying anything about the short and medium term if they are not accounting for financial flows into the oil business. And just what is going on at the moment?

Due to the Fed’s fear of deflation interest rates have been near zero for some time – this punishes savers, including pension funds. In a never-ending search for yield Special Purpose Vehicles have been created to conduct cash and carry trades in commodities in contango as oil normally is. In the cash and carry trade oil is bought and stored at spot, with the futures sold forward. As the trade nears its end the rise in the price of the spot covers the short futures obligation. If leveraged this trade can provide a nice return that a pension fund otherwise can’t get- and leverage has been easy in these days during the periods of Quantitative Easing. A friend who sees a lot more deal flow than I do tells me:

“Over the past few years oil production has been estimated to have exceeded demand by 2 mil bbls/day. Much of this excess supply was absorbed by governments adding to their strategic reserves and investor buying into these structured c/c trades. The structured c/c trades often involved baskets of commodities (e.g., oil, gold, copper). They were bundled into Special Purpose Vehicles The buyers were anyone looking for a bond-like rate of return notably pension funds or hedge funds who bought these packages for their pension investors.”

Now that the appetite is gone, US oil production has increased and OPEC has decided not to cut production oil prices have declined rapidly.

The really big questions are how were the SPV’s financed? Are they marked to market? Are the susceptible to margin calls? And then there is the question of why the banks wanted to revise Dodd Frank to let them hold on the Collateralized Loan Obligations for a few more years???”

Those are good questions. I don’t claim to know exactly what is going on, but I do know that the oil price collapse happened with the end of QE, suggesting that many of these trades have imploded and their spot oil is being dumped on the market. If one doesn’t understand how many of these deals are out there than one has no business predicting the end of the decline in prices.

Things desperately needed in the U.S.

So as I travel around the world I sometimes encounter things that I have never seen in the U.S.

First, I give you the ability to “recall” a elevator button push by pushing the floor number again.  Ever get into and elevator and some jerk has pushed all the buttons?  Ever accidentally push the wrong button?

At this elevator in my old apartment building in Panama those things aren’t a problem.  Watch:

 

I would be curious to know if there is any reason why elevators in the US don’t have this.  Perhaps there is a fire code reason or some such thing.  I’ll tweet Otis Elevator and ThyssenKrupp and report back if I get an answer.

I suppose this next idea isn’t desperately needed, but when I went to Medellin for thanksgiving the fridge in the apartment that we rented on AirBnb had a built in beer holder:

 

fridge beer holder

I Went to a Panamanian Baseball Game

While American baseball fans get ready for spring training, I had the opportunity to go to a baseball game in Panama two weeks ago. It was the best game I have ever been to.

There are, it seems, 3 leagues in Panama.

Fedebeis runs a “juvenile” league and a Major league. ()

There is also a pro league.

The pro league ended in January. The major league is rumored to start up at the end of the month. However you will notice from the web page that they don’t actually tell you when it starts which is par for the course in these parts.

I went to the semi-finals in the juvenile league. The players didn’t appear to be “juveniles” i.e. little league but are seemingly at least 17 or so. You can read the rules for the league on the website but I sure can’t find what the age limit is.

Arriving at the game is not very difficult. The Stadium is not far outside of the city center, although on a Friday afternoon on the day before Carnvinal starts it took an hour in the taxi to get there as everyone was leaving the city for the holiday. It should normally take 20 minutes.

At the game were a buddy of mine, his taxi driver, and two German tourists we had met a few days before at my restaurant and who and wanted to come as they had never been to a baseball game.

Anyway, onto the game. It was Panama Metro versus Chiriqui Occidente. The game was a good one with Panama Metro winning 2-1. While the stadium itself was not up to american standards

 

What was special was the atmosphere:

First of all, there were no commercial breaks. The game moved along at it’s natural speed. The more important point however was the Panamanian flair brought to the experience.

I have often made the point that baseball is a lot like soccer. Now, before you choke on what you are eating let me explain:

For most of my life growing up and living in the United States although I played soccer as a kid I thought watching it on TV was boring. That all changed for me on my first trip to Africa. I had a 12 hour layover in the airport in Accra. While there Ghana was playing in the World Cup. I was sitting at the bar with another American guy I met and every time Ghana scored the airport basically stopped as everybody celebrated and airport employees ran through the airport jumping up and down and hugging each other. This was the first time I understood how passionate some people were about soccer and I wanted to understand why.

I finished watching the rest of that world cup with friends in Kenya. Later on, while watching matches on TV in restaurants or cafes in Italy, Albania, and now Panama I have come to like and enjoy soccer.

In essence, it’s a cultural thing. It’s something you do with your friends and your family and that you follow and talk about at work, at the bar, etc.

In that sense, baseball is the same thing. Although the nature of the game is totally different than soccer it is by and large something learned culturally that you learned from your father and talked about with your friends.

Just as Americans don’t understand why anyone would watch 90 minutes of Soccer, Europeans don’t understand why anyone would sit through a baseball game.

Both games suffer from long stretches of nothing really interesting happening. Baseball makes up for this with it’s obsession over stats to fill the gap, soccer does it with drinking, crowds singing songs, and the like.

Here’s what’s great about Panamanian baseball:

It’s a baseball game with a soccer crowd, only instead of singing there are bands. Two of them. Each team brings it’s own band – and the bands don’t ever stop playing. In fact, they usually play at the same time.

Here is a video of the Chiriqui Occidente band close-up:

 

 

And here is a video that captures the effect of the two bands playing at the same time and also shows a few pitches:

 

The beers are a dollar, and when the beer guy comes he leaves you the cooler.

 

Here is what happens when the game ends… flying beer:

 

 

And here is the must see post-game celebration out on the concourse. I’ve never seen anything like this at a baseball game in the US:

When all is said and done, it was a great time and it is a reason why baseball fan should consider Panama for their winter vacations, especially when you consider the prices.

 

Ticket: $4 Beer: $1 Hat: $5

Here’s my obligatory selfie wearing my new hat:

 

 

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