Running Money, page 15
I think he just admitted that he is losing lots of money as are all of his competitors.
“Either we do this important market, or it will be in Korea or worse, in Taiwan. It is our imperative to invest, as you say, in LCDs.”
“And a billion-dollar annual investment is what it takes?” I asked.
“Well, Mr. Kessler, probably more like two.”
“But isn’t some return expected, from, you know, from the stock market?”
“That’s not of issue. Someone else can figure that out. We as a corporation and a nation have priorities.” He gave me a smile that I will not forget, for a lot of reasons.
Yamamoto-san and I were then escorted to a large but austere office and introduced to Haruo Tsuji, the president of Sharp.
“What do you think of my company?” Mr. Tsuji asked.
“It it’s quite impressive,” I stammered out. I thought I was going to be asking the questions. “You are clearly a leader in LCDs.”
“Yes, this is our most important product strategy. Every American will soon carry a notebook computer with one of our color displays.”
“It is an expensive strategy, yes?”
“Of course. But we have the resources and financial strategy to dominate.”
“Can you elaborate?”
He must not have heard me. “Thank you for coming,” he said as he handed me a small wrapped gift.
“A financial strategy?” I thought. “Aren’t you supposed to just make money and eventually show a profit?”
We next got a tour of the company museum next to the lobby. On display were the first mechanical pencil, some old TVs and giant VCRs from the late ’70s, and some new projection TVs. At the end of the tour, they had a 17-inch LCD TV playing video of some Japanese golfers and, I think, a Pocari Sweat commercial. It looked pretty good. I had never seen video on an LCD, but something was wrong. It was too slow between frames. It’s hard to describe, but my eyes started to hurt because some of the previous images were still there as the video played—the golfer’s club was still in midair as the ball was hit. Very weird.
Three women with clipboards accosted me as I was leaving.
“What do you think?”
“Very nice,” I replied. “It’s a beautiful museum.”
“You like the TV?”
“Yes, the TVs were great. I think I have a Sharp TV at home,” I lied as I tried to get away.
“And what about the last one?”
“The last what?”
“The last TV, that one.” One woman pointed to the LCD TV.
“Very nice,” I said.
They all scribbled something on their clipboards.
“You like?”
“Yes.”
“No, no. What you like?”
“I liked the commercial.”
“Good TV?”
I figured I would never get out of there at this pace. “Well, if you really want to know, the screen is a little small. I have a 27-inch TV at home.”
I heard a few “tsk, tsk’s” and more clipboard scribbling.
“And,” I continued, “it’s a little slow between frames, bad hysteresis, I think.” I forgot what hysteresis meant, something from college physics about lags in fields. It sounded good, and I figured that would throw them for a while to get me out of there.
I got to the lobby, and we waited for a taxi back to the train station. I picked up an English version of Sharp Electronics’ annual report and noted that the company was making money and had made increasing amounts of money for the last 10 years.
Our next stop was Nintendo. This meant a bullet train to god knows where and then a couple of slower trains to Kyoto.
Nintendo was in a white nondescript one-story building next to some railroad tracks. It could have easily been a warehouse on the South Side of Chicago. Management rarely met with investors, but we were able to meet with a few hardware designers in a conference room near the lobby.
Nintendo was fascinating. It was the most valuable company in Japan, maybe even the world. Why? Because it was the most profitable company in the world. They were selling tens of millions of Super NES platforms, which at $99 was probably at a loss. But they sold hundreds of millions of game cartridges at $40, which cost them $6. Nice business if you can get it, and they had twitchy fingers around the globe addicted. It struck me that this was the first Japanese company I had spoken to that actually sold software; the rest were just manufacturers with huge factories.
The hardware designers gave me a 12-page document with a big red symbol with Japanese kanji characters inside it stamped on the front page. I skimmed through it; it looked like the design and specifications of their next game platform. I got excited. Maybe this was some giant scoop, and I could go back to investors in the U.S. and point to some part or another in the next Nintendo game machine.
In the taxi back to the train station, I asked Yamamoto-san, “So, what does this mean?”
“The meeting?”
“No, this red symbol and Japanese words inside of it.”
“Oh, that means ‘top secret, do not distribute outside the company.’”
“Really. Wow. Can you help me translate the rest of the document?”
“I could, but it’s not worth the bother.”
“Why not? This is hot stuff,” I screamed, barely able to bottle up my excitement.
“Kessler-san, do you really think they would just hand you secret documents? They have been trying to figure out for the last 18 months what their next platform will be and have been bouncing ideas off everybody. They just want feedback.”
“Why give it to me?” I asked.
“Because maybe you can get it in the press in the U.S. and competitors will pick it apart, and then Nintendo learns valuable things. I would just throw it out if I were you. Not everything is what it seems in Japan.”
I was learning that more each day.
We finally headed back to Tokyo and my flight to New York from Narita. I scanned the headlines of the only English-language paper I could get my hands on. One article that caught my eye, but just barely, was about the Japanese Fair Trade Commission, whatever the hell that was, signing a consent decree with Nomura Securities, Daiwa, Nikko and Yamaichi, who promised never to compensate their clients for stock market losses again.
“Again?” I thought. “Protection against stock market losses? Who gets that? What’s this all about?”
The JFTC reminded these firms, the article continued, that if they were caught committing similar offenses again, it would lead to criminal charges.
I asked Yamamoto-san, who had once worked for Nomura Securities, what this was all about. He shrugged. The Nikkei had peaked at 40,000 a year before and was now 23,000. He said most people figured it was a wrist slap—a little housecleaning is good—and the Nikkei would be back.
A few years later, with the Nikkei at 15,000 and dropping, Yamamoto-san came to the Morgan Stanley offices in New York. He looked like he had been through a monsoon.
“You OK?”
“Things very tough.”
“What do you mean?”
“Lots of money disappear. You remember our visit to Sharp?”
Who could forget? There were already a few sequels to the Land Before Time animation.
“Yeah, sure. How are they doing?” I asked.
“Big problems. They had $2 billion, about a third of their cash at a nonbank bank.”
“A what?”
“Nonbank bank. It’s really just an investment fund. They were speculating with Sharp’s cash, in the stock market and in real estate. They used lots of debt.”
“Go on.”
“Well, with Nikkei down and real estate down, the nonbank bank failed. That $2 billion is gone.”
It hit me right then and there. This is what Sharp Tooth was telling me, but I didn’t know what he was saying. It seemed to me that not only did Sharp lose $2 billion, but they lost all their earnings. Nomura potentially rigging the Nikkei by paying clients back for losses meant every company could count on a rising stock market. Speculating was a one-way street, and paper profits could be washed through their income statement as earnings. No wonder Sharp was profitable.
LCDs were losing money, but the company was profitable because they were showing speculative stock market and real estate gains as if they were the company’s profits from operations. But the profits were bogus, a sleight of hand. Sharp didn’t make money at all. Ouch. If that’s true, the entire Japanese electronics business was, well, a profitless pit. Turns out it was worse than that.
The Yen-Scary Trade
NEW YORK CITY—OCTOBER 1998
It takes what seems like 20 escalators to get to the ballroom and meeting rooms at the Grand Hyatt on 42nd Street—Goldman Sachs holds their annual Communicopia Conference here every year—an almost forced synergy of technology, media and telecom companies. It was a little awkward for me—I used to compete against these guys in my days at Morgan Stanley. But I had gotten sick of going to tech conferences only in San Francisco, so I decided to make the trip and get a little East Coast sensibility. I was in for a shock.
As I entered the waiting area outside the ballrooms a little after eight in the morning, I was met with a loud roar. There was a packed crowd around the Bloomberg terminals and lots of yelling and shouting and another set of people on the outside of the scrum, screaming into their cell phones. Michael Dell’s keynote address at the conference could wait. This looked a lot more interesting.
I strolled over to the commotion. Some guy leaned over and said to me, “Serves them right.”
“What’s going on?” I asked.
“Oh, you haven’t heard? The yen-carry just barfed,” he told me.
I just nodded my head.
“The BOJ and the Fed just fucked Tiger,” he added.
“Cool.”
“Serves them right, man. It was too easy.”
I looked around for Nick Moore to explain the “yen-scary trade,” but I doubted he’d made the trip. This wasn’t the first time I had walked into a room of investors and had no clue what was going on. But I was a quick student.
“Tiger’s got to unwind $10 billion,” another person told me as I strolled through the chaos.
“Jeez,” I said.
“That yen-carry trade was for suckers anyway—it was always going to blow up someday,” I overheard.
“Pretty obvious. Rates in Japan are what, 50 basis points? Five basis points? They’re giving money away over there, begging people to borrow. So Julian Robertson took the bait,” someone volunteered.
OK, it was starting to make sense. Julian Robertson runs Tiger Management, a hedge fund with something like $20 billion in assets. He was buddies with Barton Biggs at Morgan Stanley, so I had met him a few times. I even sat next to him at a black tie event for Bob Dole, where he flirted with a young analyst from London sitting on the other side of him and didn’t say boo to me.
“Uh-huh,” I said.
“Tiger borrowed yen up the wazoo at these cheap interest rates and just put it into U.S. Treasuries paying, what 6%, 8%, whatever,” my new international currency expert friend continued.
“But doesn’t the yen go up?” I asked.
“Sure, but as long as it goes up less than 6%, the yen-carry trade is free money. See, if the yen goes down, you have less to pay back. The only real risk is if the yen goes up by more than 6 or 8%, then you’ve got a broken arb.”
“Is that what happened?” I asked.
“Yeah. Remember, the dollar has been going up versus the yen for the last three something years. With all the screwy stuff going on with Soros in Russia and Long Term Capital and god knows what they’ve been doing, the dollar has been getting hit.”
Ah, Tie-guh and Sew-Rose getting beat up. The Texan from the Institute of Pry-Vat Investors meeting in Providence must be getting killed.
“I think the BOJ said enough is enough to the yen slide. It’s up 8% just last night. Here, read this quote from Japan’s finance minister: ‘With regard to foreign exchange, we are of the view that the excessively undervalued yen will do no good, not only to the Japanese economy but to the world economy as a whole.’ Shit, that’s all it takes,” he told me.
It was, what, six weeks since Russia went under. George Soros, who had already broken the Bank of England back in 1992, had been making noise in Russia. He started mouthing off on August 13, when everybody was on vacation. He was long and wrong on Russian debt and began calling for the devaluation of the ruble. It seemed to many to be a calculated gamble to get the International Monetary Fund to step in, pour money into Russia and bail out foreign investors like Soros. Robert Rubin, Clinton’s treasury secretary, had done it before in Mexico back in 1995 with Brady bonds. Surely Russia was as important.
Apparently not. On August 17, Russia defaulted on its sovereign debt. Oops. Ten days later, Soros claimed to have dropped $2 billion. The dominoes kept falling.
“Ouch. But why do they care?” I wanted to know.
“Because they’re trying to reflate Japan. If they lend billions to some hedge fund, it’s money that’s not going into the stumbling Japanese economy.”
“Oh.”
“Tiger has been living off this trade. It’s probably 120% of their performance over the last few years. The rest of their investments suck donkey pucks.”
I’m not sure what a donkey puck is, but I didn’t know this guy until two minutes ago, so I let it slide.
“I heard he’s got $10 billion to unwind,” someone leaned into our conversation and stated.
“Really, good luck reversing that,” my friend responded. “I’ll bet the dollar gets hit big time. I wonder who else has this trade on. You don’t want to be in the way of this freight train.” And then he walked off.
I went to a bunch of interesting presentations that day. Almost everybody talked about building out broadband networks to deliver their programming or to sell stuff. This validated Fred’s and my view that a huge spending cycle was taking place; I was just hoping for more details. But listening to Michael Eisner, the Disney CEO, explain his Internet plans was a lot like listening to me explaining my own plans to produce a blockbuster film: nice concept, short on details.
But the crowds were gone, the rooms mostly empty. Every time I went out into the hall I’d see folks from Goldman Sachs shaking their heads and talking in hushed tones.
I heard one of them say, “Shit, every goddamn hedge fund in New York had that yen-carry trade on. So much for doing any more trades with those guys for the rest of the year.” Yeah, poor Goldman Sachs.
But I was confused. Here we were scrambling around looking under rocks for great long-term investments, and every other hedge fund, or so it seemed, was doing some funny hedge of cheap yen money and T-bills. That’s investing?
The dollar quickly fell to 25-year lows against the yen as all these hedge funds unwound, selling dollars to buy yen to pay back their yen-carry loans. It was ugly out there. Some say Tiger lost close to $3 billion reversing their yen-carry trade.
I Want Out
PALO ALTO, CALIFORNIA—OCTOBER 1998
Despite all the scratching and clawing and begging over the last year and a half, we had a measly $43 million in capital at this point. But we were still feeling our way toward finding decent investments. It wasn’t easy. We had found our groove during the year, or so we thought, until a loose White House intern and so-called geniuses running monster-size hedge funds back east made the waters treacherous. We had been up 80% for the year at one point last month, but with the market in panic mode, we were now breakeven for the year and sinking like a rock.
The dominoes landed with a thud in Greenwich, Connecticut. Soros, then Tiger, then the Nobel laureates at Long Term Capital went down ugly. The 100-year flood hit, and the hedge fund business was reeling. If you remember, Long Term Capital was a bunch of very bright guys, even a few Nobel Prize winners, who modeled everything and convinced themselves that they could find investments with guaranteed returns—sure things. So convinced of their perfection that they used their $2 billion in capital to borrow $125 billion in various securities. Then they added leverage to their leverage and controlled $1.2 trillion in various derivatives, each supposed to return tiny amounts. Those tiny amounts would look good as a return on their $2.2 billion. The joke was on them. When the dollar unexpectedly dropped, they were hosed.
Their stupidity messed up my world too. Maybe it was the best thing that happened to us. For one thing, we got that block of stock from the sweating guy at Ssangyong. Maybe that would turn into something interesting. That meeting was eye-opening. If the Koreans are dumping shares to pay back loans, who else is puking things up? Is this another time to be out there with a catcher’s mitt?
In the middle of all this craziness, the phone rang.
“I want out.” It was our most annoying investor—let me call him James Duck. He’d been in since day one, and we couldn’t toss him out, although I often wanted to. He called every time the market dipped to complain about our performance, our methods and that the world was going to hell in a hedge basket.
I put my hand over the phone and yelled over to Fred. “Fred, it’s James Duck. He wants out again. You deal with him, he’s your friend.”
“I can’t talk to him again, you gotta talk to him.”
“Start buying. When this guy always calls to redeem, it must be at bottom.”
“What do you mean you want out?” I said to James Duck.
“This market makes me nervous. Something is wrong.”
“It sounds to us like Long Term Capital was a bunch of overeducated dopes who used too much leverage.”
“Yeah, but this market scares me.”
