North American Pacific

I can barely keep up with the story of Canadian Pacific and Kansas City Southern railways merging to form a transcontinental, Canada to Mexico super railway.

On April 13, Brooke Sutherland in Bloomberg reported on some potential bumps to the CP/KSU merger:

Canadian Pacific Railway Ltd.’s plan for taking over Kansas City Southern in a $29 billion transaction has drawn pushback from the Department of Justice. The Surface Transportation Board is the rail industry’s primary regulator and has the final say, but the DOJ is allowed to express its opinion and this week it asserted a “statutory right to intervene” in major railroad mergers. The DOJ takes primary issue with Canadian Pacific’s plan to close the deal on a financial basis in advance of regulatory approval by putting the acquired Kansas City Southern shares in a voting trust. It rightly points out that companies in other consolidated industries frequently have to wait a year or more to close transactions and they manage just fine without a voting trust that risks compromising the target’s independence and future competitiveness. The DOJ — along with rival railroads and some key shipping groups — also wants the STB to waive Kansas City Southern’s exemption from tougher 2001 merger rules that require major carriers to prove a transaction is in the public interest. While Kansas City Southern remains the smallest major North American railroad, it’s much bigger than it was, in part because of the 2005 acquisition of Mexico’s TFM railroad. Canadian Pacific issued a response to the DOJ, arguing that the pre-2001 rules are rigorous enough for its merger and that a voting trust is essential to make the transaction work. The voting trust is useful in staving off a counterbid from the private equity firms that were circling Kansas City Southern last year, but I’m less convinced of its public interest benefits. If there are any, Canadian Pacific should have to prove that. 

Look I would never tell CP CEO Keith Creel how to do his job, but I worry about CP losing control of the story here. Creel may come off a little too confident in the 2001 merger rules putting him in the right here. This is the Surface Transportation Board’s time to shine, they’re gonna flex their muscles. Creel will need to win them over, not just bowl them over, to make this merger happen. What about a PR campaign? Creel should:

• remind the Surface Transportation Board that although the company may be called Canadian Pacific, he’s from Alabama.
• remind the Surface Transportation Board of where he comes from in a deeper sense. Creel is a protege of great Tennessee railroader Hunter Harrison. Harrison’s goal was simple: more efficient railroading. That’s good for the consumer, it’s good for partners, it’s good for rail customers, it’s good for traffic, it’s good for reducing congestion, it’s good for the environment, it’s good for America.
• sell the glorious, international, free trade vision he’s seeing here. The Canadian Pacific / Kansas City Southern railroad merger would create a true transcontinental railroad, rolling from Canada to Mexico and through Chicago by the way.
• should the new company be called North American Pacific, or even American Pacific? While no one would want to take away from the beautiful history of Canadian Pacific, flattering American regulators and winning over the American people should absolutely be the strategy for now.
• could HQ be moved from Calgary even? Just spitballing!

The beauty of this railroad isn’t a tough sell, people love thinking about this new, enormous railroad once you help them see it. At least I do.

It’s a question of storytelling here. CP needs to tell the story, and not let the DOJ come up with a darker, more unpleasant story.

But then, this morning, a twist! Canadian National, Canada’s other enormous railway, threw their hat in the ring to buy KSU and achieve the continental super railway!

Again, Brooke Sutherland in Bloomberg is on the case. We have to understand the CP/CNI rivalry, it’s over hundred years old:

Century-Old Rail Rivalry Flares Up Over a $30 Billion Prize

as Bloomberg puts it, Kevin Orland reporting:

The very formation of Canadian National made Canadian Pacific “apoplectic” that it now had to compete with a government corporation, and Canadian National’s public backing was a sore spot for decades, Anastakis said. Even when Canadian National was privatized in 1995, it was initially run by Paul Tellier, a former high-ranking government official.

The two firms also reflect regional and political tensions in Canada, with Calgary-based Canadian Pacific representing the western, conservative part of the country, and Montreal-based Canadian National embodying the more liberal, elite character of the east, Moore said — as well as the bilingual nature of Quebec.

I dunno, I might be biased as a CP shareholder, but this CNI bit seems weak to me. Didn’t they argue against any merger with KSU at all? A deal used to mean something in railroading. I’m afraid I have to root even harder for CP now.

Will the Surface Transportation Board see the phony arguments of CNI were just some Canadian pettiness, and be more inclined to allow the merger?

As Brooke Sutherland reports:

no one really knows at this point what the STB will or won’t allow

Note the headline:

Forget Bitcoin. Railroads Are the New Bubble.

Look, I’m just an enthusiast here.

The simulated world

“Investors will not be able to quantify which aspects of growth, earnings and the economy are organic, and which aspects are the result of a simulated world where monetary and fiscal excess artificially create a facade of health and wealth,” he said. “There won’t be real clarity for a couple of years.”

from “Stock Bulls Bet It All on Earnings Guesses With Troubled Record” by Lu Wang in Bloomberg today. Also of note:

Hypothetically speaking, should earnings fail to catch up and the market’s multiple return “back to normal” — the long-term average of 16, the S&P 500 is at danger of losing a third of its value.

Munger and Lee Kuan Yew: Figure Out What Works and Do It

Charlie Munger, age 97, recently held forth at the annual meeting for Daily Journal Company. Blunt and entertaining as ever. “Amateurs talk about Buffett, professionals talk about Munger” as the old saying goes.

Our long fascination with Munger has been a frequent topic on this site, resulting in some wonderful communication and connection with the secret world of Mungerists out there.

Munger was asked a question that got me thinking. It was about the founder of modern Singapore, long time prime minister, Lee Kuan Yew:

Question: Charlie, you have been a long-time admirer of Singapore and Lee Kuan Yew. You once said to study the life and work of Lee Kuan Yew. You are going to be flabbergasted. I would be curious to know how you started your interest in Singapore and Lee Kuan Yew. Have you met Lee Kuan Yew in person? And if there is one thing the world could learn from Singapore, what would that be?

Charlie Munger: Well, Lee Kuan Yew had the best record as a nation builder. If you’re willing to count small nations in the group, he had probably the best record that ever existed in the history of the world. He took over a malarial swamp with no army, no nothing. And, pretty soon, he turned that into this gloriously prosperous place.

His method for doing it was so simple. The mantra he said over and over again is very simple. He said, figure out what works and do it. Now, it sounds like anybody would know that made sense. But you know, most people don’t do that. They don’t work that hard at figuring out what works and what doesn’t. And they don’t just keep everlastingly at it the way he did.

He was a very smart man and he had a lot of good ideas. He absolutely took over a malarial swamp and turned it into modern Singapore—in his own lifetime. It was absolutely incredible.

He was a one party system but he could always be removed by the electorate. He was not a dictator. And he was just so good. He was death on corruption which was a very good idea. There’s hardly anything he touched he didn’t improve.

When I look at the modern Singapore health system, it costs 20% of what the American system costs. And, of course, it works way better than our medical system. That’s entirely due to the practical talent of Lee Kuan Yew. Just time after time, he would choose the right system.

In Singapore, you get a savings account the day you’re born. If you don’t spend the money, you and your heirs get to spend it eventually. In other words, it’s your money. So, to some extent, everybody buying medical services in Singapore is paying for it themselves. Of course, people behave more sensibly when they’re spending their own money.

Just time after time he would do something like that. That recognized reality and worked way better than what other people were doing. There aren’t that many people like Lee Kuan Yew that have ever lived. So, of course, I admire him. I have a bust of Lee Kuan Yew in my house. I admire him that much.

Sometimes Munger’s harsh rationality has an edge that makes me a little uncomfortable. The unabashed admiration of Singagore’s Lee Kuan Yew is an aspect of that. I’ve never visited Singapore. I’d like to, and see these weird tree buildings and eat the street food. In my travels I’ve met several people from Singapore. What discussion we had of Lee Kuan Yew was pretty ginger, because I’m too ignorant to have much of an opinion, because it’s polite to be sensitive when discussing another country’s main founding guy, and because, well, I get the sense in Singapore you don’t really criticize Lee Kuan Yew. Though LKY is dead, his eldest son is still in charge. That sense that we’re dealing with a bit of an authoritarian is what makes me uncomfortable.

Thomas Meaney has a review of Michael Barr’s history of Singapore in the LRB which gives me just the kind of context I need.

Lee Kuan Yew, by contrast, made no such attempt. ‘That’s the end of the British Empire,’ he told one of his classmates at Raffles College when the first blasts were felt over the city. Lee, then in his late teens, not only learned Mandarin and Japanese during the occupation, but worked as a translator of Allied news reports for the main Japanese propaganda bureau in the Cathay Building. A few floors down, Yasujirō Ozu, freshly arrived in Singapore, produced propaganda about the Indian National Army’s fight against the British Empire. ‘The three and a half years of Japanese occupation were the most important of my life,’ Lee wrote in his memoirs. He admired the ruthlessness of the Japanese, and believed it had toughened up his generation. The efficiency of their brothels impressed him. Spotting the head of a Chinese looter hanging from the marquee of a movie theatre, he thought: ‘What a marvellous photograph this would make for Life magazine.’

how about this?:

The key was to make Singapore appealing to US investment by ensuring laws favourable to corporate capital, and prioritising economic prerogatives over political freedom. With no local capitalist class to discipline the workforce, independent Singapore resorted to what Christopher Tremewan calls ‘forced proletarianisation’. The city-state’s notorious public order laws – lashes and prison for spitting, graffiti and public urination; swift execution for drug possession – were part of a breakneck effort to make Singapore’s citizens the most cowed and reliable semi-skilled workforce in Asia. ‘Disneyland with the death penalty’ was the way William Gibson described it. Free hospital care – which scandalised Milton Friedman when he learned of it – was ended. Lee consolidated all the trade unions into a single union under his control. With the Central Provident Fund, he could force workers to save part of their salaries for retirement, adjusting amounts at will, which allowed him to raise and lower wages in co-ordination with the needs of foreign industry. American corporate elites marvelled at such a partner. Lee personally escorted visiting CEOs around the island. The result was a boom of massive proportions, with Singapore leading the region in electronics assembly, ship repair and food processing. Full employment was achieved within a decade.

I don’t want anyone making me cowed, even if I am at best semi-skilled.

Here is Balaji Srinivasan on the Tim Ferriss podcast, articulating why CEO types seem to like LKY so much:

What Lee Kuan Yew did, really, the reason I think he’s so important, is I think he’s a piece of the 21st century that fell into the 20th, to paraphrase. Basically, I think he was the first startup CEO of a country, of a city state. And I think we’ll see a thousand more like him.

So he’s a very important person to study, his life and history, because here’s the thing: he did what he did with minimal coercion. He’s not famous for winning some giant violent conflict. He’s not famous for some activist movement. He stands for delivering results. That’s actually really, really interesting. He’s famous for boosting prosperity and zero-to-one-ing a society. He was really a lion, really a great guy.

But what about the collaborating with the Japanese?

In any case, I am trying to figure out what works in my own life, and do it. Munger’s right, it’s not that easy! Of course, there’s a question of how we’re measuring what works.” Posting thought-provoking stuff here on Helytimes works, that’s for sure, so I’ll keep doing it. Let us know what you think! We’re working to keep the posts “medium length.”