Global Value Hunter

The folly of cheap money,
and a modern day Angkor Wat

Abandoned Laguna Quays Resort

Recently I came across an old piece I wrote, about four years ago, which today seems more apt than ever. It’s about the long-term consequences of near-zero interest rates, and the resulting malinvestment they cause.

When I wrote this piece originally, I had just spent nearly two weeks back in Queensland, near where I grew up, on the central Queensland coast near Yeppoon, where my mother still lives.

Twenty minutes from her house are (or rather, were) two magnificent championship golf courses. They form part of a giant integrated resort project built by the Iwasaki Sangyo company of Japan, beginning in the early 1980s, when Japan’s bubble-economy ruled the world. 

But this was far from the only resort the Japanese built in Queensland during their heyday. Some 500 kilometres north of there, near Proserpine, lies another such project, Laguna Quays, built in the late 1980s, by Japanese trucking conglomerate Kumagai Gumi at a cost of some $250 million.

What both developments have in common is that they were never really viable businesses. The cheap money the Japanese were able to use to fund them artificially lowered their cost of capital to levels where the marginal returns that such grandiose projects could expect to earn in sparsely populated regional Queensland appeared (erroneously) to stack up. 

Initially, they were both sparkling, world-class developments. I have fond memories of playing golf at both venues, on all three championship courses, as a teenager. 

At Iwasaki, I once shot a round of 2-over par 74 from the back tees, playing with my grandfather. And, at Laguna Quays, I once went around two under par for the back nine, playing with my father, with my mother driving me around in the cart. 

Alas, like my golf game, the heyday of these resort developments fuelled by cheap money is long gone. Today, the once grand and luxurious country club lodge at Laguna Quays is an overgrown ruin, reclaimed by the native vegetation.

To see for yourself this modern day Angkor Wat, check out this video.

At the Iwasaki Capricorn Resort, it’s almost as dire. In the four years since I first wrote this piece, it has followed Laguna Quays into a similar state of disrepair.

During my 2016 visit, I had heard that one of the two championship golf courses was about to be closed, and the whole resort was to be shut and renovated. It was shut. But it was never renovated. You can see drone footage here.

The losses Iwasaki Sangyo has suffered over the last 30 years on this project run to the hundreds of millions of dollars. And that does not include all the capital they sank into the project over the years, which must surely amount to hundreds of millions, or even billions more, that they will never recover. 

While these projects were clearly never really viable, they were magnificent, and their facilities provided many years of enjoyment to many people. Interestingly, it took much, much longer than anyone expected for things to deteriorate so badly that the resorts and golf courses had to be shut. 

I have to conclude that the availability of cheap money does produce tangible, real world results in the short-to-medium term. It even conjures up the veneer of great prosperity – often for much longer than we can imagine. 

But beneath the surface, all is not well. Investments that don’t stack up at 10% interest rates might give off the illusion of stacking up at 1% interest rates. But they are fragile, and vulnerable. Eventually the chickens come home to roost. 

I think much of the developed world faces a reckoning over the next 10 years, similar to what Japan, and Japanese companies’ grandiose foreign investment projects from the 1980s faced over the past 20 years.

And it’s not going to be pretty.

Japan, Europe, USA, even China, Taiwan, Hong Kong and Singapore are all at, or approaching the zero interest rate bound. All have rapidly ageing demographics. All have shrinking labour forces and worsening dependency ratios. More elderly people need to be taken care of by a shrinking working age population.

This movie does not end well.

But there are other places in the world to invest. This site is designed to bring you those ideas. 

Until next time,

Good Investing,

Tim Staermose
Global Value Hunter

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