A few positives

While we’ve spent considerable time examining the potential negatives of the proposed St. Regis hotel deal it is worthwhile to also examine a few of the positives. 

Should the hotel proceed as planned it will likely add a much needed luxury element and more capacity to Bermuda’s hotel product.  This has long been agreed by many as a needed development for our tourism product.

Also of note, for those unaware Bermuda may well be facing a rather drastic downturn in our construction industry which could place a great many Bermudians out of work at quite a bad time.  Should this project get off the ground in time it will likely offer the positive effect of lessening the downturn in our construction industry by hopefully providing jobs to many Bermudians who otherwise would be going unemployed. 

Finally, we’re at least getting some foreign press about Bermuda that doesn’t involve the Uighurs which is welcome considering the controversy is still making top headlines.

A big gamble?

While few would disagree with the need for a new luxury hotel in Bermuda, quite unfortunately something just doesn’t sit right with the recent announcement of the proposed Starwood/St.Regis hotel.  Again we bear witness to shady acts that only raise questions as to why they’re necessary.  Further we are presented with yet another government plan with ties to questionable credentials on the part of the developers and SDOs used to thwart proper studies that could increase costs later.  Then there is the larger question of where the funding is coming from for surely it is hard to come by lately.  Finally, we can wonder that if this doesn’t all work out as rosy as planned, who ends up holding the short end of the stick?  Let’s hope that it doesn’t end up being the taxpayer, which of late has become the norm.

The announcement of a five-star St. Regis in Hamilton would be tremendously welcome if it weren't marred in the kind of controversy that has become typical of a Brown Premiership.  Questions are circling as to why the Corporation of Hamilton was kept out of the announcement when it has been suggested that they were a crucial factor in the development of this deal.  Further, the timing of this announcement leaves much to desired after the government announced only last week its intent to shut down the Corporations of Hamilton and St. Georges.   Despite claims of a ‘miscommunication’, something seems awry.

Reports that Unified Resorts, the US developer in the deal, “has been mostly a US government defence contractor” is concerning as a lack of experience in hotel developments, especially in a Bermuda construction environment could point to yet another Bermuda project that runs over time and budget.  We can however take at least some comfort that Unified Resorts’ investment partner, Sagewood Investments LLC has an executive or two with at least some resort development experience.  Still questioned however are the eventual impacts of having provided an SDO such that we could end up with problems that end up costing far more after the fact like has happened with cruise ship pier in Dockyard.  Who ends up footing the bill if we have to rework things to repair damage to traffic flow or any other mishap that will be overlooked on the part of the SDO?

Questions of funding may well be what takes the cake however as we can wonder where the equity to fund this project has come from in a time when the world is in an economic crisis.  This as U.S. hotel occupancy rates are at lows not seen since the 70s and Bermuda occupancy rates are equally low while compounded with seasonal downturns.  Who, one could ask, would want to take a gamble in a hotel in a market that has shown mediocre performance in comparison to its rivals?  Starwood seems unlikely to be investing much capital when a Starwood managed hotel in Hawaii has been foreclosed on and a five star St. Regis in Orange Country looks due for the same fate.  While Starwood may still be announcing a new hotel or two they are being downgraded by analysts which makes them less of a candidate to be reaching out with funds.  Thus, who is footing the bill for this project to get it off the ground in these rocky times?

When queried on the backers of the project Unified Resorts President Ted Adams is suggested to have stated that a local bank and international backers are involved.  This sets off alarm bells as we wonder which local bank is tied to this project.  When considering that The Royal Gazette suggests the project will cost at least $200 million we can wonder what local bank would have access to that kind of capital.  Then of course we can recall the Bank of Butterfield preferred shares deal and wonder how deep the rabbit hole goes.

Let us presume for a minute that perhaps the Bank of Butterfield has a hand in this project.  They’ve notably run into difficulties having acquired a guarantee from the Bermuda Government on their preferred shares deal and subsequently had to freeze their Liquid Reserve Fund.  Let us consider for a moment the scenario that perhaps in exchange for the guarantee offered by the Bermuda Government that the Bank of Butterfield would use some of the proceeds to fund a much needed hotel project.  If this were the case, said hotel project could prove to be quite the gamble as if it goes over budget, Bermuda’s economy doesn’t recover quickly enough or any of a raft of other potential mishaps occur, the already troubled bank could find itself even more troubled.  Let us remember, the Bermuda government has guaranteed that in 10 years those Bank of Butterfield preferred shares will be worth that original $200 million along with the extra $200 million paid out in dividends.  Meaning essentially if things go bad, the Bermudian taxpayer needs to come up with the money.  Some food for thought perhaps?

While we desperately are in need of a more luxurious product on the island, this hotel deal still raises far too many questions, especially given its rather questionable introduction.  Yet again we find ourselves presented with a government plan with ties to questionable credentials on the part of the developers and SDOs used to thwart proper studies that could increase costs and risks later.  Then we face the question of where the funding is going to come from and finally wonder, if things don’t pan out according to plan, who is going to end up paying for this?  Let us hope that we the taxpayers have bailed out our last overdue, over budget construction project; though you probably shouldn’t hold your breath.

Disrespectful

The UBP is right when it calls Mr. Tucker's method of departure disrespectful as it isn't just disrespectful to his former party, it is also disrespectful to those who voted for him.  Mr. Tucker should at least make his reasoning be known.  It is bad enough he suggests his admiration for Premier Brown's dictatorial approach.  Sure it might have been done with good intentions, but frankly how would Mr. Tucker feel if Premier Brown kicked him out of his home and gave it to the homeless?  While it may be a 'humanitarian' move, the homeless could certainly be cared for in a more respectful fashion that doesn't require such rediculus actions, such as dedicating tax dollars to the much needed improvements of the homeless shelter rather than jet setting around the world like a rich playboy.

Vote of no confidence

Just wondering, when do we get to have a vote of no confidence in the opposition?

Butterfield performance bond

The announcement that Butterfield Asset Management has frozen its Liquid Reserve Fund is definitely not a good sign.  To put this into context, the 'liquid' fund is one step above Butterfield's money market fund and is considered the kind of place to store your cash when the market is too risky to invest in, but is supposed to be as readily accessable as cash.  The fact that Butterfield has frozen its liquid fund is a rather scary turn of events when you consider that the Bermuda Government has effectively provided Butterfield with a $400 million performance bond (a $200 million guarantee @ 8% annually over 10 years)

Butterfield's liquid fund collapsed because it didn't ensure that what it was investing in followed its objectives.  As we noted back when we condemned the 'bailout', businesses and investors have the obligation of performing their own due dilligence when they invest in something.  Ideally, the Bermuda Government should have setup our own form of Federal Deposit Insurance Company to protect those who simply were saving their money as in a worst case scenario, not provided guarantees for Butterfield.  The consiquences now are that if Butterfield goes bankrupt, not only does the taxpayer get hurt, so do those who kept their savings at Butterfield.  Those who bought the preferred shares win but might severely damage Bermuda's credit rating as a result.

Anyway, reviewing the investment objectives of the Liquid Reserve Fund raises serious questions as to the due dilligence undertaken by Butterfield Asset Management's investment team.

Investment Process

Emphasis is on a portfolio of short dated, high quality fixed and
floating rate note instruments.

High quality fixed and floating rate note instruments?  Let's rereview the Royal Gazette article to find out what they invested in.  

According to a Standard and Poor's ratings report from February 2009, the fund invests mainly in corporate floating and fixed-rate securities, as well as asset-backed securities (ABS), mortgage-backed securities (MBS) and a collateralised debt obligation (CDO).

In all fairness the rating agencies share a considerable portion of the blame as they rated many of these instruments far too highly.  However, the expectation is that an investment manager would perform the due dilligence necessary to figure out the proper value of what they're investing in on behalf of their clients rather than simply taking the rating agency's word for it.  By not having done so, they invested in worthless paper in a fund that should have restricted itself to high quality reliable federal and corporate bonds only.

Overall this news is very disconcerting.  The fact that Butterfield has found it necessary to freeze its liquid fund is a very concerning development.  This suggests people are now unable to access that money and suggests that Butterfield does not have the capital to keep the fund liquid enough for people to redeem what is left of their investments.  One can hope that this is the only element of their portfolio and balance sheet that was in need of extra capital and that the recent preferred share offering will provide the funding to right this situation.  However, it is entirely possible that if Butterfield exposed their lower risk liquid funds to these faulty investment instruments that they also exposed significant portions of the rest of their portfolios.  Eventually time shall tell.  What we can hope however is that the Bermuda Government didn't make the same mistake as the BIU by guaranteeing something that they did not ensure would live up to the obligation.

The bubble bursting

So, as we suspected (see here and here) it looks like we were in a housing bubble which is now bursting.  Bermudians borrowed more than they saved, Banks were too desperate for business and government policy weighed in.  While this may be a good thing for some, it is certainly bad for others. 

Let’s recall the always trusted word of realtors (you know, the ones who are paid to sell homes) from July of last year.   Remember “Now’s a great time to buy a home’?

"... in the case of the coveted single-family dwelling, [prices have] levelled (sic) off. They are not decreasing, but we're not seeing the growth we've seen in the years past.”

"Depending on the property and where it's located, you're probably seeing a growth of 5 per cent a year.”
"For the person looking to buy a house it's a good opportunity for them”

Hmm, it a 30% decline doesn’t sound like things have ‘leveled off’ at all.  Hopefully you don’t make a habit of trusting a fox trying to sell you a hen house.

Anyway, as we noted there are a number of factors contributing to the decline.  Bermudians have been borrowing more than they save.  Banks here got loan happy much like they did in the states and rushed to give out loans to people who couldn’t actually afford them by transitioning from moderate down payments to 5% then 0% and finally interest only.  Finally, government introduced policies like term limits, restrictions on Non-Bermudian married to Bermudian home ownership and a raft of affordable housing projects.

So for those of you in the market for a home and not terrified of the prospect of Premier Brown taking your home because he feels ordained to do so, things are looking brighter.  We couldn’t say now is the time to be buying but we’re getting there.  For those already owning homes, things don’t look so good.  Rapidly falling home prices means if you bought your home in the last few years when housing was peaking, you may well now owe more on your home than it is worth.  Worse, with the downturn rental incomes are also beginning to slide which means if you’re relying on renting out part or all of your property to help cover the mortgage, you may now be covering more than you budgeted for.  Negative equity is never a good thing.

Beyond the tragedies of individual Bermudian’s trials with homeownership we can look at the greater implications for the Bermudian economy.  With the economic downturn many people are finding themselves without jobs and not just those at the lower rungs.  Some of those people could have recently bought 0% down payment or worse interest only loans only to find themselves without the income to pay for it.  Suddenly not only do they have to pay interest, they now can’t pay back the money they owe by selling their home.  This doesn’t lead to good things for our economy.

So the question facing us now is where do we go from here?  Quite unfortunately it has been our view that housing prices can and should come down.  It’s a necessity to begin balancing the cost of living in Bermuda.  This blog still holds the view that the root of the housing problem has been a lack of housing geared towards expats.  Homes won’t be ‘affordable’ until Bermudian families no longer need to compete with house sharing expats, though $5000-$8000 a month one bedroom apartments aren’t what we’re talking about.

While we still encourage price declines there is no reason why the decline needs to be drastic.  Thus, we may be looking at a good time to let market forces take over and ratchet back on the ‘affordable' housing projects.  Beyond that restrictions on Bermudian/non-Bermudian family home ownership can be relaxed such that it is easier for these individuals to buy homes.  If we find the rate of decline in the ex-pat population is simply too fast, we can also look to relax immigration restrictions to abate the decline, though as we’ve mentioned before, infrastructure considerations should be taken into account.

So welcome to life after the housing bubble, it’s been quite the wait.  Hopefully we’re seeing Bermudians save a bit more, banks being less greedy and considerations being given to changes in government policy.  While we can’t say this decline is the best thing for everybody it is likely that over the long term Bermuda and its people will benefit.

Act of god

Defending his actions regarding the Guantanamo Detainees imported to the island Premier Brown is quoted as suggesting:

"I was performing an act of God that might not have been approved by the Queen, but I can assure you it was ordained by a higher power."

An act of God?  This is the same kind of thing terrorists say before blowing up buildings full of innocent people.

Choose your own adventure

You're sitting in your car and an active news bulletin comes up over the radio.  Apparently police are hunting a chain saw murderer that has been seen in your area.  Just then, a friend pulls up next to you in a truck.  He motions to a plaid clad man with a chainsaw sitting in his cab and suggests he was giving him a ride but is now heading in a different direction but had promised the man a ride where he's going.  He asks if you'll take him since you're headed his way.  Do you:

A.  Slam on the gas pedal and drive away as fast as you can

B.  Accept the guy in your car with open arms because your friend tells you he's just a harmless lumberjack and don't ask for anything in return.

C.  Ask your friend for details on how he met this man and evidence of how he knows he's just a regular lumberjack given the recent radio reports and negotiate a deal for how your friend can make it up to you for helping him out.

Remember, this is the same friend you suspect has been spreading rumors to your girl that you're cheating on her in hopes that he can win her over.  She listens to him so you'll need to choose wisely.

An open letter to the Governor

Sir Richard Gozney,

Thank you for taking the time to review my remarks concerning an amicable solution to our Premiers distasteful means of offering refuge to the former detainees of Guantanamo. 

May I suggest a solution to this crisis could be putting the decision of whether these individuals can remain in Bermuda to the people via a referendum?  Further, should the people of Bermuda opt in favor of this referendum it could be on the condition that the Uighurs be granted permanent residency as opposed to status. 

Such acts would adequately reverse our Premier’s rather dictatorial actions, gain favor of the people of Bermuda and ultimately resolve the issue of risks associated with the Uighurs being given status and ultimately rights to UK citizenship. 

In the interests of promoting this idea to as wide an audience as possible I have opted to post a copy of this letter on my website, www.21square.com, as well as having forwarded it on to the local newspapers.

Thank you once again for taking the time to review my remarks.

Sincerely,

Denis Pitcher
www.21square.com

 

Bermuda makes the daily show

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Guantanamo Baywatch - Uighur, Please
www.thedailyshow.com
Daily Show Full Episodes Political Humor Jason Jones in Iran

Anyone note the house the Uighurs are being provided?  It’s excellent to know we can’t afford to help out the Bermudian homeless but the Uighurs get a massive house with a pool.

Pardon?

While some may be busy contriving mass global conspiracy theories on why we ended up with former Guantanamo Bay detainees it seems the blatantly obvious has been far too readily discounted; Premier Brown was already on his way out.  When we really get down to it Brown at best had months to go before a formal challenge of his leadership.  With his recent failures to get support for his bills in the house it was becoming increasingly apparent that the end of his reign may have been nearer still.  Brown knew it as did nearly everyone else, so why would Brown choose this as what could be his last act in office?

Premier Brown may be said to be many things but he is not an idiot when there is something to be gained.  He has proven far too cunning to be caught up in a move of simple ignorance to the potential fallout of a so called ‘humanitarian’ act gone wrong.  Is it really likely that Brown was so corrupt in his self belief in this being a good idea that he would not only disregard the biggest complaint that has ever been lodged against his leadership but also do so in such a grandiose fashion that turned this into an international incident?  This to take such a massive gamble for something to which he negotiated no upside aside from ‘doing the right thing’?  This simply doesn’t fit.

Certainly Brown could have negotiated something for Bermuda, anything really.  A cleanup of the waste at Morgan’s Point is something the United States should be doing anyway but would have been welcome and would have earned him at least some points.  How about resident as opposed to international school fees for Bermudian students?  Some concessions when it comes to this tax haven malarkey?  Surely there are a dozen ideas of what could have been negotiated that would have made this deal more palatable for Bermudians so why would we negotiate no compensation?  It simply doesn’t add up, why would Brown turn down the perfect opportunity to sweeten the deal?  It just doesn’t sound like his style.  That is, unless the deal really was sweetened, we just don’t know how and who will ultimately benefit.

So the question stands why Brown would take the chance of this being his legacy, his last act?  Why would he turn down the opportunity to come out looking like he’d gotten a great deal for Bermudians?  Why would he continue to perform as the one man band when it increasingly gets him booed off stage?  Why would he risk making this act his legacy?  Perhaps one more theory can be garnered through examining Brown’s infatuation with American politics and independence.  Could we wonder if perhaps the last acts accorded a leader of an independent nation served as an inspiration for his own last act?

Gitmo

Not sure how to respond to the news that the Uighur's are being granted status here in Bermuda.  Thus far it isn't looking like a smart move.  Perhaps after some time to digest it I'll post something more substancial.

Back to what we're good at

It is no secret that Bermuda is well known as being the destination for people living in their golden years.  The problem is that we keep making half assed attempts at trying to be something we're not when we really should be getting back to basics by focusing on our core market and the quality of our product.

With that in mind I had an idea for a tv ad that follows more along the lines of the audience we'd actually be targeting.

---

Imagine a setting of 3 or 4 elderly couples sitting around at brunch.  While lifting a tea glass to her lips one of the elderly ladies pauses to remark to the others "you know, next month it'll have been 40 years that we've all known each other".  One of the gentlemen pipes in "40 years?  Has it really been that long? [pause]  Perhaps we should do something to celebrate?".  Another one pipes in "hmm, that sounds like a good idea, should we relive on of the places of our heyday?  [pause] We could go back to Ibiza"

[Cut scene to Ibiza night club with the couples standing in middle of a dancefloor near a stage surrounded by heavily partying youth]

One of the gentlemen turns to the other yelling "I can't hear anything!".  The other responds yelling "What did you say?"  The camera cuts to the stage where a couple buckets of water are thrown on young women on the stage in what could be a wet t-shirt contest, subsequently causing the couples to be splashed by the spray, the men rather shockingly taking it all in.

[quickly cutting back to the brunch to focus on one of the ladies who acts like she's just had a flashback and shivers at the thought while showing a slight expression of disgust on her face]  "No, I don't think ibiza is the right place" she remarks.  "We could try skydiving again" she suggests.

[Cut to the shot of one of the gentlemen freefalling attached to an instructor, terrified, screaming his head off as he falls.  Quickly cut back to that gentleman at the brunch]  "No", he remarks almost too quickly, "we've already done that and it's likely be boring the second time".   "Sure ... boring, that's it" taunts one of the other gentlemen.

Finally, one of the ladies who hadn't yet spoken says "How about we try somewhere new like Bermuda?"

[Show the group contemplating it for a moment]

[cut to scenes of them enjoying Bermuda.

Eg, enjoying themselves riding around on rental bikes,  shots of the gentlemen having a great time golfing, shots of the women being pampered in spas, shots of them relaxing at the beach, shots of them scuba diving wrecks, various stills as if they're vacation photos of them at various landmarks and shots of them enjoying wine cruising on a catamaran with the sunset in the background]

Cut to a Bermuda logo and a Bermudian gentlemen standing next to it saying "Bermuda...  your undiscovered paradise...  we've been waiting for you"

Death by volume

Chatting with a tour operator friend reveals hearsay evidence of what we’ve long suspected and will likely be confirmed by statistics (if they’re released) that volume tourism means more is less.  Our friend tells us that since the new mega ships can cut costs based on volume, cruises have become more accessible for lower classes of tourists.  While indeed everyone deserves a vacation it sounds like a far cry from the type of tourists we used to cater to and a lot less likely that they’ve got the disposable income to blow to sustain our own.

The word on the ground suggests that tourists who hunt for the cheapest vacation are not proving to be big spenders when it comes to leaving the ship.  Dockyard restaurants are described as being as busy for lunch as dinner on a Friday or Saturday night.  Not packed, but reasonably filled.  That may seem reasonable until you realize that two cruise ships means and extra 6000 people and they usually aren’t here on the weekends.

As we’ve covered before, while government may get it’s head tax to slowly pay off the many millions it’s invested in the dockyard piers, are Bermudians really better off?  More volume means a higher expectation for price competition.  More price competition means lower profits for higher people served.  Lower profits for higher people served means lower wages and more stress.  Higher people served means higher frustration and lower quality of service.  Lower wages means more low skilled expats filling jobs Bermudians could have been filling.  More low skilled expats means more packing into homes saving every penny so they can live the good life when they return to their own home countries.  It seems everyone is winning, except Bermudians.

Let’s remember, cruise ship profits are funneled off island.  That means all jobs on the cruise ships are foreign as are most earnings.  We collect no taxes from those workers.  All spending on accommodation, food and entertainment (even casinos) on those cruise ships all goes to the cruise ship companies.  Taking a cursory view here, for all the money we’ve blown on the new piers and all the hassle we’re going through over the “'we’re risking destroying tourism if we don’t approve casinos on cruise ships'” we well could have skipped the middle man, spent the pier money on purchasing and outfitting our own luxury cruise ship and had all spending go to Bermudians and Bermudian businesses.  Just a thought.

Recession relief

Bermudian families may get hit with a stroke of luck as we hit Bermuda’s worst time of year for power consumption at what may prove to be the best time to be hitting it.

Those who recall the last time we looked at the correlation between oil prices and local fuel and power inflation may recognize the similarities with the above chart.  Again, we’re comparing the Fuel and power inflation portion of the Consumer Price Index at a benchmark of approximately 100 for April 2006 (still can’t get that number to match exactly, I get 100.4) with the WTI – Cushing, Oklahoma spot price per barrel of oil.

As we noted last time, due to shipping duration Bermuda actually has to purchase it's oil/fuel more than 2 months before it actually begins being consumed here.  As the Bermuda Sun suggests:

"Experts say that even higher prices are on the way - there is a two-month lag effect before the most recent jump in world oil prices impacts on the island."

Those high prices have now taken their toll as they peaked and fell.  So let’s again adjust the phase of oil prices by 2 months later to get an idea of what we can expect in the coming months.

So here we have a depiction of oil prices delayed by two months.  What is interesting to note is the prolonged top of local fuel and power inflation and the delay in the impact of dropping oil prices.  This certainly raises many questions, though they will have to wait for another article and perhaps some investigation into potential causes.

Of note, should fuel and power inflation follow the trend that has occurred we should hopefully be looking at a summer of gradually lower fuel prices, meaning lower electricity bills corresponding with the exact time of year that people tend to consume the most.  This is good news for those hit hardest by the most recent recession so let’s hope the trend carries through.