Loan to own. A brilliant, frightening, finance technique you need to understand better.
I’ve previously written on how much I learned from two former CIA officers at our 2021 Contrarian Uncon. Today, I want to discuss another, lesser well-known ‘dark art’, and tell you a cautionary tale that might read straight out of a spy novel. There are history, geopolitics, and personal finance lessons to be learned here, so listen up.
In <10 Minutes, We're Going To Dive Into:
History Doesn't Rhyme but It Repeats: Debt Lessons
Dark Arts Tale: How this Structure May Restructure the World?
Why Does This Impact Me?
What We're Doing About it?
🔊 Listen to the audio version of this week's blog!
By way of introduction, let’s set our Wayback Machine to scan and survey some history.
First stop, 1754 BCE and the Code of Hammurabi…yeah, Contrarians, we know history AND finance!
In 1754, the Code of Hammurabi specified the amount of silver loan interest to charge
321 BCE India’s Maurya dynasty wrote some of the first recorded credit letters
400 BCE the Ancient Greeks initiated perhaps the first payday loans in recorded history.
Continuing our debt survey, in the Middle Ages, both Christians and followers of Islam attempted to outlaw lending outright.
Even in the Revolutionary War period, the U.S. was mired in debt and ended up relying on one man’s credit to make it through the leanest war years.
We could also stop and observe the role WWI debt played in sparking WWII.
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Today, though, our Wayback Machine will stop in the year 1955 with what many believe is the first leveraged buyout in U.S. history. Mr. Malcolm McLean sold his trucking company (McLean Trucking) and leveraged the sale, debt, and preferred stock as assets to cover the purchase price of two Steamship companies. Waterman’s cash and assets were then used to ‘retire’ $20 million of the original loan purchase debt. From there American companies follow, with names like KKR acquiring RJR Nabisco in the 1980s in a leveraged buyout deal that saw RJR’s debt to equity ratio increase to 3 to 1. Cerberus, founded in 1992 appropriating the name of the three-headed dog guarding hell’s gates, is famous (infamous?) for its secrecy and for court filings describing debt terms where lendees receive notice to provide solutions to pay their long-term debt, IN FULL, in one month. Or Par Funding, currently under investigation by the SEC for lending terms that run average interest rates of 50%. Whether you pretty it up with fancy words like ‘distressed lending’, ‘confession of judgment’ or ‘merchant cash advance’, business debt and all its many forms has been with us for a very, very long time, maybe as long (maybe longer, dependent on your view) than money itself.
Debt is mentioned in the Bible, the Qu’ran, the Constitution, and thousands of other historical documents. Despite all that history, and all that outlawing and all these cautionary tales, debt seems to do nothing but grow and grow and grow. Here’s an estimate of current general government debt as a percent of GDP by country from the International Monetary Fund.
OK, Codie, we get it. We’ll add you to the list of Dave Ramsey, Suze Ormon, and others alarming us all about the role of debt and we’ll be careful, we promise.
This is not that kind of story….I told you, it's a 'dark arts’ tale.
Debt, in the wrong hands, can be a weapon. Despite this private equity structure that everyone SHOULD know, having made billionaires and toppled corporations, what we’re seeing today from China is a modern, diabolical, brilliant. Use of debt in the modern age by a major world power.
What are we talking about here? The Belt & Road Initiative.
So, what is it? Just like our private equity friends, China is ‘loaning’ other nations funds for critical infrastructure projects, such as airports, mines, oil fields, and rare earth metal deposits. The problem? It includes sections within each deal that favor Chinese companies, promote reliance on Chinese technology, promote coal-fired power plant construction, lock in precious metals oil or land rights, or have terms that are damn near impossible for the country to follow through on. The political leaders of each of these countries, signing on the dotted line, likely thought “Yay, free money”. But nothing is free in this world, least of all with China under Xi. When they couldn’t pay, China brought out their magnifying glasses and everyone (too late!) read the fine print. And THAT’s where it got real.
Imagine your country needs a new airport and they don't have enough tax dollars to pay for it. So they go to China and ask for their help? China says yes but puts in terms that mean the local government won't be able to hit them... and what happens?
Taking over the Entebbe Airport it seems...
Frighteningly, this is not solely for countries like Sri Lanka or Africa. Official membership for the Belt & Road initiative exceeds 139+ countries as of March of 2021. And it’s not limited to mostly construction or maritime projects anymore. Since its inception in 2013 under Chairman XI, China has expanded the Belt and Road’s scope to a Digital Silk Road (DSR), a Health Silk Road (HSR), and a Green Belt and Road. It’s terrifying and it just may change the world as we know it.
Why does this activity, thousands of miles away, impact me?
Why does the Belt & Road, OBOR, Silk Road, BRI… whatever it’s called matter, to me, as I try to build wealth for myself and those I care about? Because you can inhabit a country through invasion or through economic enslavement.
The economic version of enslavement goes something like this: you use economic bombs, cash with strings attached bullets, short-term capitalization nerve agents, and critical infrastructure takeover weapons of mass destruction.
It matters, Contrarians, because you can bankrupt your future with short-term thinking, commit economic suicide becoming indebted to the wrong private equity partner (or nation), lose a fight without ever pulling a trigger, or lose the battle for hearts and minds not by culture but by giving up your bank account and the land you live on. I told you this was a dark tale.
What’s to happen next?
Only time will tell, but as:
The US dollar increasingly gets threatened as the world currency
Biden try’s to use monetary manipulation to restrict Russian encroachment (which will lead Russia further into the Yuan’s arms)
Bitcoin and inflation eat away at the USD as a store of long-term value protection
US continues to not use economic expansion while China does
Supply chains get continually disrupted not just with China but all their partners
There is an argument that although the US is the current superpower the same debt instruments, we arguably created in the West will be used to dethrone.
For you and me, what do we do?
Keep your eyes open
make smart economic decisions
beware of too good to be true
choose good debt vs bad debt
and diversify away from just US holdings perhaps
Oh, and elect better politicians… maybe ones that see the world as it is, not as it was.
Question everything,
Codie
Contrarian Concept of the Week
The average millionaire has 7-12 income streams. You don't need to invent the next Uber or Airbnb to do this, you simply need to find a business that already cashflows, use other people's money to acquire it, and scale. Check out this viral video of the week for what we mean...
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Disclaimer – This is the “Be an adult” section. Everything mentioned above isn’t advice, just a recount of what I did. That said: This article is presented for informational purposes only. The opinions stated here are not intended to recommend any investment or provide tax advice. Neither are they an offer to sell or the solicitation of an offer to purchase an interest in any current or future investment vehicle managed or sponsored by Codie Ventures, LLC or its affiliates. All material presented in this newsletter is not to be regarded as investment advice, but for general informational purposes only. Day trading and investing do involve risk, so caution must always be utilized. We cannot guarantee profits or freedom from loss. You assume the entire cost and risk. You are solely responsible for making your own investment decisions. We recommend consulting with a registered investment advisor, broker-dealer, and/or financial advisor. If you choose to invest with or without seeking advice from such an advisor or entity, then any consequences resulting from your investments are your sole responsibility. By reading/sharing this newsletter or consuming our content on our other channels, you are indicating your consent and agreement to our disclaimer.
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