Political Intelligence for Hedge Funds
Washington, DC. Dec. 3rd, 2005 ---- At a recent reception I mentioned to a prominent politician that we were working closely with Hedge Fund Managers to develop early warning political intelligence networks to give them early warning of political trends and upheavals.
A little bemused he pointed out that Hedge Funds were for the very rich, and invested in high gain high risk stocks, why would they need political intelligence about boring politicians in Washington. The answer is of course that they really need an independent resource to give them "Heads Up" on upcoming rule changes, legislation and the direction of the political body, especially in international affairs. It is no accident that one of the Hedge Funds participating is in Beijing, China.
The Chinese are finding that what seems good business, such as the proposed purchase of Unocal can be derailed by the lobbyists in Washington, DC. The same with many other international investments, the funds need to know the lay of the political landscape before they lay out money to invest in the project.
Recently we were asked to evaluate a long list of new alternative energy investments, where the predictions were for years of down time for gasoline refineries after Hurricane Katrina. The dire predictions of "Peak Oil" advocates, backed by hundreds of references, expert opinion and enough books to start a library seemed to back their predictions that gasoline would be up to $6 a gallon by Christmas. We listened to all the testimony by Oil Executives, analyzed the refinery data and met with energy insiders from every stage from exploration to distribution. We presented a completely different scenario than they were looking at from their potential clients. We suggested the gasoline price would drop, that there was political maneuvering underway for subsidies, tax breaks and other legislative breaks by the Oil companies, and that the demand for this alternative energy did not warrant the sort of investment being sought for the types of fuel being proposed.
The last few weeks have proved us correct. A couple of the Ph.D.'s from one company were a little upset at the conflicting scenarios. We showed them that in political intelligence you need to use a mix of news, views, and reviews. Most business intelligence programs use historical data, which is all well and good for showing trends that have occurred. They do not take into account the many hidden influences that make Washington politicians act completely differently to the predicted historical trend. Good old bribery is high on the list to make committees, and political bodies change their opinions. No business intelligence software program takes "Campaign Contributions" into account, nor evaluates the Back Channels that makes Washington diplomacy work.
The best phrase to describe Washington political intelligence today is "The Golden Age of Misinformation". The sheer volume and complexity of misinformation, disinformation and perjury is absolutely staggering, and hidden from the public view. The mass media, once Champions of the People Right to Know have signed on to this disturbing trend in return for huge handouts in advertising, especially campaign advertising. Just look at how little editorial and how much advertising is in the Washington Post these days.
So the traditional process of an Investment organization taking a business plan, then looking at traditional sources of information to evaluate it is coming to an end, if it already hasn't died. The list of top companies that have fooled investors is truly amazing. It wasn't that long back when I listened to a glowing report on ENRON by a well known intelligence company. The same glowing praise came from a media source, who are supposed to be experts in energy matters. Truth is that there were major contracts, and major funding given to these two companies, and in return they sang the praises of ENRON, and didn't look too hard in the areas they were "advised" to ignore.
The same happens in telecommunications and to a even greater extent in defense contracts.
These don't have much effect on the Big "Blue Chip" Companies, who can absorb cancelled contracts, and shift their losses to other contracts. But to new start-up companies the political fancy foot work that is taken as "Business as Usual" on Capitol Hill can mean the difference between success and bankruptcy.
Today the investment community is facing the possibility, and in some cases probability of monumental political shifts that will have profound effects on their risk exposure. For example if President Bush doesn't pull something out of the bag before November we could see a swing towards the Democrats, which may end the Republican control of the Congress. How will this affect contracts, and business opportunities. If the swing is significant and there are more revelations of the corruption over Iraq, and the military fails to achieve stability, will we see an angry electorate hell bent on impeaching President Bush. If all of Vice President Cheney's activities become public and he faces imprisonment, how will that effect Oil and companies such as Haliburton.
How many hot companies will go down with the expanding bribery scandals? How many telecommunications and broadcasting companies will make a goldmine, or go out of business with the committee decisions from the FCC and the Congressional committees.
These days the official denials from the Press Secretaries will be carried on the TV News, in the newspapers and on radio. The first most hear about the real situation is when indictments are handed down, and tearful politicians give their resignation speech. That is too late for Wall Street!
Which is why we are expanding our political intelligence operations next year. There are hundreds of billions to be made or lost on a cast of characters who don't know if they will be in Office next week, or awaiting sentencing! We live in interesting times.