Wednesday, 11 February 2009

Sealegs, and the business cycle

The Sealegs company, developing so-called amphibious vehicles, has been talked up by investment advisers for years.  God knows why.  Their leading product is essentially a rubber boat with a retractable undercarriage, an unattractive proposition for which they charge the whopping sum of US$75,000 for their starter model (plus postage and packing).  No wonder they struggle for buyers.

A company that has never made a profit, that’s been backed for years by investment capital that might have gone somewhere that might have grown investors’ capital instead of consuming it, I wasn’t surprised to see the postponement this week of their latest rights issue.  “The Sealegs board considers current economic conditions will not support an expansive business plan,” says Sealegs chief executive David McKee Wright.

Perhaps it’s fairer to say that current economic conditions mean the owners of investment capital are looking more seriously at where they’re throwing their money, and obvious malinvestments like this one are going to feel the heat.

That’s a good thing. 

Readers who want to understand the business cycle, who want to understand where all the money goes when we go into the bust phase of the cycle, should look at so-called “investment” vehicles like this one, since you can see in microcosm what has happened to the whole economy.

"Somebody had blundered," wrote F. Scott Fitzgerald in the collapse at the end the Roaring Twenties, "and the most expensive orgy in history was over."

    It was borrowed time anyhow -- the whole upper tenth of a nation living with the insouciance of grand ducs and the casualness of chorus girls.  Even when you were broke you didn't worry about money, because it was in such profusion around you.

When central banks are pumping out easy credit to create a boom then rhetoric rapidly overtakes reality.  When the whole “upper tenth” is living with the insouciance of grand ducs and the casualness of chorus girls, when money is pumped out with such profusion, then malinvestments like Sealegs and the like look mighty attractive, and real resources are wasted on phony “opportunities” based on little more than hype [see Sealegs’ share price track here].  The result is that the pool of real savings – which represents real capital -- is consumed instead of grown – burned up in the boom that the easy credit made possible, and flushed out in the bust that the easy credit made necessary.

To paraphrase Gresham’s Law, the counterfeit capital created by the central bank consumes the real capital built up by savers.

I’ll leave it as an exercise for you, dear reader, to understand the implications if the days of easy credit are continued, as governments insist they must, and if malinvestments that need to fall over continue to be bailed out – as the owners of those malinvestments plead that they should.

UPDATE:  Tyler Watts writes in the MIses Daily Article today on the importance of letting failures fail.  To quote Warren Buffett, it’s only when the tide goes out you can see who’s been swimming naked. 


  1. Always a bit of a mystery to me how someone like Alan Gibbs - worth a few hundred million - would be investing so much in a toy company like Sealegs. Baffling.

  2. He's also runs Acquacar. Guess he likes marine stuff.



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