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📈 The Ponzi Scheme that hooked Warren Buffett

📈 The Ponzi Scheme that hooked Warren Buffett

A collection of our favourite articles from the past week

Equity Mates
May 21, 2023

The billion-dollar Ponzi Scheme that hooked Warren Buffett and the U.S. Treasury

This is a wild story of how a small town mechanic convinced some of the most sophisticated investors in the world that he had achieved a green energy breakthrough. In reality, it was a Ponzi scheme.

Jeff Carpoff invented the Solar Eclipse. Think of it as a giant battery on a trailer covered in solar panels that offered portable, renewable power. Rather than relying on a polluting diesel generator at construction sites, outdoor events or disaster zones, Carpoff was pitching the Solar Eclipse as a clean alternative. In 2011, he made his first major sale - selling 192 generators for $29 million. Over the next 8 years, sales would top more than $2.5 billion and Carpoff bought a baseball team, more than a dozen houses and more than 150 cars.

There was a bit of a complexity to these sales. He was selling the Solar Eclipses to large corporations that wanted the renewable energy tax credits, but had no use for the generators themselves. So as part of the deal, Carpoff was to then lease the generators out to companies that would use them.

Early days, he tried leasing to Hollywood - big users of portable generators and highly conscious of their environmental impact. Movies including Inception (starring Leonardo DiCaprio), Valentine’s Day (Julia Roberts), Bad Words (Jason Bateman) all used them when shooting on location. But at some of these movie sets, problems started to arise. Power would sometimes suddenly cut out—plunging makeup trailers for Disney’s Alexander and the Terrible, Horrible, No Good, Very Bad Day into darkness, and reportedly leaving Pink’s trailer without air-conditioning at an MTV concert.

So Carpoff started faking the leases instead. Money from new sales was used to fake leases on older sales. And the buyers kept coming.

As the Ponzi scheme grew, Carpoff needed to land bigger deals to cover the fake leases on the previous deals. So he went whale hunting. And there is no bigger whale that Warren Buffett. Geico, an insurance company wholly owned by Buffett’s Berkshire Hathaway, bought almost 8,000 generators for nearly $1.2 billion.

But eventually, as all Ponzi schemes do, it all collapsed. Of the more than 17,000 generators sold from 2011 to 2018, only about 6,000 would be found to exist. This article tells the story of the the wild growth and spectacular fall of Jeff Carpoff and his company DC Solar.

The curious incident of the elevated profit margins

In the past decade, US companies have enjoyed abnormally high profit margins. Between 1950 and 2012, the average profit margin for American companies was 6.3%. Between 2012 and today, it has averaged 9.5%.

This paper from Boston-based fund manager GMO tries to explain why companies have enjoyed such high levels of profitability. And in their view a big driver of profits has been the massive increase in deficit spending from the US government.

Such an insight feels timely. As we write this, the White House and Congress are negotiating raising the debt ceiling to avoid a US Government default. Whatever agreement is reached (and lets hope for the global economy’s sake that a deal is reached) there will likely be some reduction in government spending as a result. If government spending and deficits return to their long term average, GMO expect a reversion in corporate profit margins to follow.

GMO, led by Jeremy Grantham, seem to regularly have a bearish outlook and this article is no different. While they think the US market looks expensive, they think Emerging Markets are presenting some opportunity. As James Monitor, the author of this paper writes, “At the other end of the spectrum are the shunned Emerging Markets trading on a Shiller P/E barely in the double digits! These kinds of levels of valuation offer a very wide margin of safety to the investor.”

Have all the beers gone woke? An investigation

While we were travelling in America, one business story seemed to pop up again and again: American beer companies going ‘woke’.

This seems to be another example (in a far too long list) of everything in America being dragged into its all-consuming partisan political contest. From climate change to marriage equality to policing reform, every company is expected to take a position. And every action is then seen through a political lens of woke v non-woke, Democrat v Republican.

As this article from Vox reminds us, “Corporations are not your friends, let alone your political allies.”

This story seems to sum up a lot of where American politics is at the moment. A relatively innocuous act (in this case Bud Light sending free beer to a transgender influencer) is viewed as a political statement. Partisan media (in this case Fox News) then stoke it into a controversy, that controversy turns to outrage as it is amplified through social media, and opportunistic politicians and influencers then capitalise on the story for their two minutes of fame (in this case, Kid Rock filmed a video shooting Bud Light cans and Senator Ted Cruz opening an investigation into Bud Light). All of a sudden, the biggest business news story of the day is about a beer company sending someone free beer.

It is easy for us in Australia to smile wryly, shake our heads and think that’s just America. But we are not immune from this reactionary media. All you need to do is Google “Sky News woke companies” to see that similar headlines exist in Australia. They just don’t quite get the same clicks, shares and reactions here.

_{This article is sponsored by Global X}

Copper Comeback: China’s demand and South America’s supply risk

Copper is one of the metals critical to the world’s green energy transition. On average, there is 6 times more copper required in a renewable energy system than in a traditional energy system. And as this article from Global X explains, the market for copper is currently in a state of flux.

On the demand side, there is a big question around China. As the world’s biggest consumer of copper, it uses more than half the world’s supply. China’s building and construction sector alone accounts for 30% of the world’s copper use. This building and construction sector has been struggling over the past few years as some of the biggest home builders couldn’t repay crippling amounts of debt.

The sector is still shaky, but there are some signs that the worst of China’s property collapse may be behind us. Where China’s construction sector goes, so will total copper demand.

On the supply side, there are also big questions. Chile and Peru supply almost 40% of the world’s copper. And both of these South American countries have faced disruptions lately, which could potentially lead to global shortages. As this article explains, “If Chinese demand keeps rising as it did in February, Goldman Sachs expects the world to run out of visible copper inventory by the third quarter, this year.”

There is a fascinating story playing out here. One of the world’s most critical metals facing big questions on both the supply and the demand side. This article from Global X is a great primer to get up to speed on what’s going on and where the copper market may go from here.

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