Raise a glass to Cuban diplomacy, but let the rum wars commence

American Outlook

Havana Club rum, produced in San José de las Lajas, Cuba, cannot be exported to the US because of its trade embargo (ADALBERTO ROQUE/AFP/Getty)

They were dancing in the streets of Havana on Wednesday. They probably dance in the streets quite a lot in Havana, it seems that sort of a place.

The sort of place where the streets are the safest place to dance because the discos and bars are crumbling and dangerously decrepit.

President Barack Obama’s decision to re-open diplomatic ties with Cuba is the right decision, albeit long overdue, but diplomatic ties aren’t enough. The economic embargo of Cuba must end too. It might have served a purpose during the Cold War, but the continued embargo has been nothing more than an act of spite and punishment for the past 25 years.

Unfortunately, President Obama can’t lift the economic embargo by himself, even via an executive order. It would have to be passed by Congress, and given that we’ll have a Republican House and Senate by February, the chances of anything getting through are zero. However, he can legalise certain smaller functions of the embargo, such as the investment in Cuban business by private citizens, without Congressional support. He should do it immediately, and over time the embargo will become increasingly meaningless.

In the States, lifting the embargo would have a minor overall economic impact, despite the forecast of economic activity potentially running into a few billion. Chicken feed in the grand scheme of things, which is probably why the embargo is still in place. Americans can’t buy real Havana Club rum here, only the Puerto Rican version made by Bacardi. Trademark lawyers are certainly going to benefit when Pernod and Bacardi reopen that scrap. Cuban cigars are not difficult to find if you know anyone with a humidor, but they’re contraband too. Just about the only ways for Americans to legally visit Cuba are to be academics or a guards at Guantanamo Bay.

But for Cubans it would be no minor matter. Gross domestic product per capita in Cuba is something like $6,000 per year, making the country one of the poorest in the region. Cubans don’t live in romantic poverty out of their own free will – they live in abject poverty brought about by the intransigence of their own Government and the spite of American politicians, who would rather curry favour and donations from wealthy exiles than do the right thing. They’ve both been wrong, and the ones who have suffered are the Cuban people.

Doubtless many people are concerned that ending the trade embargo will result in Cuba being “ruined”, an absurd notion on many levels. Yes, some of that quaint poverty and decay getting ruined by dastardly Americans. How awful. The truth is that much of the desperately needed investment that would likely follow an end of the embargo would come from Cuban ex-pats, free at last to improve the lives, prospects and prosperity of the families many of them left behind. Havana won’t be the same, yes, but it’s not going to turn into Benidorm either.

There is potential downside to ending the blockade. Republicans in Congress will fight tooth and nail to keep the embargo, and their heads will collectively explode if President Obama uses his power to erode it. Impeachment proceedings would be almost certain. Their hypocrisy knows no bounds – fawning over oppressive regimes such as China and Saudi Arabia while demonising Cuba. It doesn’t take a genius to work out why that happens.

Also, spare a thought for the Dominican Republic, where they probably weren’t dancing in the streets. Their cigar trade, a crucial part of that tiny, impoverished nation’s economy, could be doomed by the end of the embargo, and many other Caribbean nations could suffer as dollars flow to Cuba.

Every silver lining has a cloud, but that doesn’t make it the wrong thing to do.

Herbalife’s tactics give snake oil a bad name

Direct marketing is a much more common and much more respected business model in the United States than it is in the UK – or at least people seem to be far less sceptical about it. Many successful businesses have been built on a model that we Brits know for Amway and not a lot else. No wonder we’re sceptics.

One of the most successful direct marketing models has been built by Herbalife, a dietary supplements company, creating a multibillion dollar business. It’s a successful business in the UK too, somewhat surprisingly, where its skincare, weight loss and other magical remedies sell pretty well.

But maybe for not much longer. Herbalife’s business is under the microscope, in no small part thanks to a chap who runs a hedge fund called Pershing Square, Bill Ackman.

Forget the questionable health benefits and lax regulation of the dietary supplements industry, worth something like $60bn annually in the USA alone. Ackman doesn’t care about that. What he claims is that the business is an illegal pyramid scheme, and he has been making that claim aggressively and publicly for two years. Ackman, one of Wall Street’s most powerful players, is the hedge fund manager who so believed his $1bn short position that he let everyone see his 342-page PowerPoint presentation explaining it.

Initially Ackman got some pretty aggressive pushback from other hedge fund managers, for whom managing other people’s money is apparently a game based on ego size. One rival, Carl Icahn, took out a long position in Herbalife just to prove Ackman wrong, which he did initially. However, since Icahn sits on the board at Herbalife and can’t actually close out his long and wrong position, maybe his future as a hedge fund manager is in need of a supplement.

Anyway, Ackman is the one laughing now – Herbalife has lost more than half of its market capitalisation in the past 12 months and he is now claiming that several senior members of Herbalife staff are turning state’s evidence – in other words, singing like canaries. The video evidence provided by Ackman, in which senior Herbalife sales staff openly talk about using illegal tactics, is so awful it gives snake oil a bad name.

If Ackman is proven right over the next few months and makes a killing, expect to see many more calls for making short selling illegal. That’s ridiculous – shorting is a very important function of markets. It takes a different mindset to be able to do it well and there aren’t many that can.

Spotting bad players in public markets does everyone a favour in the long run, and if a company can’t defend its business model or its accounting practices then it deserves to be put to sleep. Over to you, Herbalife.