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Make It Liquid, Please

By Chris at www.CapitalistExploits.at

Most of you know the story of Africa's great jewel.

Zimbabwe, presided over by the charming, charismatic, democratically elected leader Robert Mugabe.

So great is the country that under his leadership it has reached dizzying heights. The highest inflation in Africa, the highest unemployment in Africa, and, of course, the highest rates of poverty, which on the dark continent is really quite something.

Think about it, your neighbouring nations are themselves doing such a sterling job of raping and pillaging the populace and destroying wealth even before its past incubation point that in order to beat them you'd be forced to work so hard you'd probably have to quit drinking on the job.

It was under this backdrop that in late 2009 I, together with a bunch of mining engineers from South Africa and some ex-military gents, sensed opportunity.

You see, Zim had been running a government program which released its white citizens of the cumbersome obligations of ownership of all sorts of assets - things like farms, factories, land, and mines. And THIS was what we were interested in - gold mines to be precise. Many, but not all, of these assets had landed up in the hands of Mugabe's henchmen. Many "whities" with a strongly held desire to keep their heads attached to their shoulders while simultaneously being mad as hell realising that all they'd worked for was to go to some illiterate thug with a panga and an IQ of 70 essentially had two options.

A small number actually took to a scorched earth policy. They sold what they could and destroyed everything they'd worked for as they were unwilling to see it go to thieves.

Others went the legal route of transferring land titles to blacks. In doing so, they got to choose the new land owners and so typically handed the assets over to longtime loyal employees, farm managers, mine managers, and so forth. The assets, now in the hands of black Zimbabweans, were that much safer from roaming thugs targeting white owned assets. The previous owners (those who could) fled to wherever they could. Amazingly, even previously war torn Mozambique received an influx of white talent though many went to Europe or South Africa. Pretty much anywhere looked better. Some had no options (no foreign passports) and either died or still eek out a living in the country today.

What's the Liquidity on an Asset No Sane Person Would Want?

That's the question we asked ourselves... figuring it to be near zero.

As a white non-Zimbabwean citizen (actually white Zim citizens were and are in the same boat) you really didn't want to "own" these assets. You wanted to control them but you sure as hell didn't want to own them.

The black guys who ended up with the assets couldn't quite figure this out, the mindset being that they now had gone from having few assets to owning massive operations which were only a few years prior worth tens or hundreds of millions of dollars. So they just wanted to cash in and sell them.

It's worth mentioning that most of these poor guys had no financial acumen at all, and when we explained to them that we placed the assets in the liability column on the balance sheet (they needed to be maintained, which costs money) we drew blank stares. A balance sheet wasn't something they knew too much about but when it sunk in that we believed the assets to be worthless unless we could go through an extraction of product, they realised that they'd have to go back to work (producing on a revenue share) they weren't overjoyed. Visions of big houses, Land Cruisers, and holidays in Europe seemed further out of reach.

Those assets in Zimbabwe can't be easily bought or sold due to Mugabe and his minions creating all sorts of headaches requiring copious bottles of Klipdrift (a South African brandy) and a certain amount of hard currency changing hands with "officials". That's if they don't just simply take what they want outright. The impact on liquidity of assets is typically like that of a safe being dropped on your guts. Oofff!

Now, this is where it gets interesting.

Liquidity should have been zero. After all, what white guy would want to buy something that could and probably would be stolen from under him within a few years, if not months, and could quite easily involve the removal of his head from his shoulders?

But It Wasn't...

Enter some other gents going by the names of Ivan, Anatoly, and Vsevolod.

These guys descended on Zimbabwe in waves. Perhaps there was a flyer in Moscow. Our own "soldier of fortune" explained to us where these guys came from and even some of their history, which was fascinating to me since he knew so much from just watching them across a table at a restaurant.

Any dope could see they were well dressed thugs who could snap you in two without taking their attention off their lunch but it turns out that tattoos reveal a lot. Apparently when you leave the employ of the KGB or Spetznaz your employment options are somewhat limited. Mercenary work in 3rd world hell holes looks and pays a lot better than licking stamps at the post office and smiling at Babushkas.

Anyway, the Russkies, after enjoying the collapse of the Soviet Union had a template on how to deal with such opportunities. You roll into town, use overwhelming muscle, and secure assets, then strip them and sell them. Hey, it worked in the ex-USSR, so why not Zim?

Indeed, why not?

Ivan and his mates were working for whatever "brains" had employed them, and they actually just went in and paid cash for all sorts of stuff. No need for any limbs to get snapped. This, as it turns out, was an excellent example of a truly terrible idea, and Ivan and most of his buddies have since departed, their tails between their legs. A few still hold onto assets (because nobody will buy them) which they paid waaaay too much for and to which their particular "skillsets" are not well suited.

It became patently clear that these guys firstly had money to burn (presumably "acquired" by conducting other "business")and didn't seem to have a plan as to what to do once they'd bought the new assets. Clearly they wanted to just sell them on, and in the beginning, many "Ivans" approached our group with this in mind. Perhaps not giving thought to why on earth we, for our part, would pay a premium price on an asset which would could just as easily have bought (and indeed passed on) ourselves.

The point here is that even though liquidity of the assets should have been rock bottom it wasn't... yet.

There is a solution here to all of this which we found, though it still had liquidity issues. How do you go about creating value in such a setup? The ultimate answer I think lies in code. Yup, computer code.

Now, keep that story in mind because later this week, I'll explain to you another weird thing that happened in Mugabe's paradise. Both of these are important due to an entirely new technology that you've probably heard about but perhaps haven't given much thought to.

- Chris

"Focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets." — Stanley Druckenmiller

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