When The Money Runs Out

July 23, 2020

This blog has run through a number of prior situations where the money runs out and asset prices take a hit. This morning another small example of the downside risks of staying invested just a little too long came to the fore.

This morning a fund manager based out of South Africa wrote down their holdings in Zimbabwe by 45%. That’s in one day. Now to be fair, Zimbabwe has been nothing but a nightmare for two decades, and investing there is done as part of a portfolio approach. The Zimbabwe government closed their stock exchange on June 28th, so no market prices are available, and the reason is the government disagreed with an exchange rate setting mechanism tied to a single stock. Inflation in Zimbabwe is running over 700% recently.

While it isn’t exactly the same, there are plenty of other places where write downs are now occurring. Oil and gas companies are particularly prone to such write downs now that it is apparent that there reserves are worth a LOT less at $40-50 oil than they were at $70-100 oil. In fact large parts of oil reserves will simply be too expensive to take out of the ground at $40-50 a barrel.

Shell wrote down $22 billion of assets in Q2, BP wrote down $17.5 billion and Exxon held out, only writing down $3 billion of assets (despite an expectation of writing down significantly more of its $31 billion XTO acquisition). Many other companies have done the same because the value is simply not there in some of the assets acquired at the top of the oil and gas market a decade ago.

The effect for shareholders has been that prices over the past few years have been cut in half or worse. Some companies such as the oft mentioned (on this blog), Chesapeake energy have simply gone bankrupt when the value of the assets didn’t pan out. The super majors such as Shell, BP and Exxon haven’t fared quite so badly.

This problem isn’t about one industry. Recently Aurora Cannabis did the same thing, with a $1 billion write down. Requiring this on a company that has been public for just three years, speaks to bad management, market froth and is a clear danger sign that expectations are well outside of capability.

Weekly Chart of Aurora Cannabis share price

There are many companies, still in business, where the money is close to running out. Those saddled with massive debts are now being referred to as Zombie Companies, because every good story today needs a zombie to make it interesting. These zombies though are the opposite of interesting, you should run away.

In fact, the governments of the major economies of the world are now also zombies with debt that is generally way too high to be supported and there is a time when the money will run out somewhere in the ecosystem and a revaluation will happen. Best to be prepared despite the reality that it will be ‘unexpected’ when it happens. Nobody likes a one day, 45% haircut to their assets.

The unexpected events are happening ever more frequently, with COVID-19 being the latest disaster, but the next one could be a hurricane, another virus, a systemically important business that is hit, or even a psychologically important one.

On that note, perhaps the Tesla story should be told next. If the Tesla dreamers are forced to accept reality, that may cause difficulty for the entire market!

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