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The New Space ECONOMY

Space Race 1.0

On October 5th, 1957, Soviet Union launched world’s first satellite to space, the “Sputnik”. Never before humans launched an object out of Earth’s atmosphere with such speed that it became part of the cosmic realm. At the time, the United States was the most technologically advanced nation, and naturally had been expected to achieve this first milestone ahead of the Soviets. The news thus came as a shock to Americans, reaching them via radio and TV waves and newspaper ink. Space Race 1.0, which is said to have started just two years before, in 1955, had now become a serious popular and political obsession, carving in an important portion of each countries' budgets and cold war rhetoric for decades to follow.

But it was in 1962 when the frustration felt by Americans throughout was met with a powerful speech by president JFK, known as the "Moon Speech". The thrilling sequence of words delivered by the president at the heights of the cold war really set space exploration - and American exceptionalism - as a budgetary priority. The chief milestone, setting human foot on the moon, was to be achieved within that decade, through NASA's Apollo program. The promise was fulfilled in July 1969.

The Apollo 11 patch, NASA

The Blooming Commercial Space

Although the initial focus of space exploration was one of national security and research, fueled by bi-national competition, it laid the foundations for several commercial applications that would later bloom.

GPS is a common example. Initially operated by and for the US Air Force, GPS technology was supported by a dozen satellites orbiting the earth, allowing the US military to determine the location of its troops with astonishing accuracy.

In 1983, a Korean Air passenger plane accidentally wandered into Soviet airspace and was shot down by a fighter jet, killing 269 innocents on board. Ronald Reagan reacted boldly by offering civilian airliners the use of GPS technology to avoid future deadly navigation errors.

By 1989, the first consumer GPS receiver was on the market. The military intentionally degraded the accuracy of the civilian system to prevent abuse by criminals or terrorists. Yet the usefulness of the service was becoming clear as pilots around the world adopted satellite navigation to replace older, radar-based techniques.

Alongside the fast adoption of GPS, Telecommunications became an important segment of the satellite market, starting with television broadcasting, and later spreading to satellite radio and telephone.

The mass adoption of GPS and satellite-based communications, coming on top of national space programs, meant that there would be a growing abundance of lucrative cargo to be launched into space.

The manufacturing of the large satellites, their launch into space, and all involving apparatus needed in space and earth alike, caused a boom in private investments in the sector. Space had ceased to be a competition field between two powerful nations, becoming an important segment in the economy, with applications for regular people, and flows of private capital to support it.

The "Commercial Space Race" was led by the United States, launching 202 satellites in the 1990-2017 period, compared to 169 from Europe and 162 from Russia.

Meanwhile, NASA's budget as a percentage of national expenditures fell sharply since the moon landing, never returning close to where it was during those times.

Source: Tauri Group, CB Insights, The Guardian

Delivery into Orbit: Space Vendors and Cost

As americans led the race to space, the top players in the industry were Lockheed Martin, Boeing, and a Joint Venture formed in 2006 by the two companies to launch rockets into space: the United Launch Alliance (ULA). ULA held a monopoly on military launches for more than a decade until, after much pressure, the US Air Force awarded a contract to SpaceX in 2016 (to launch a GPS satellite).

In the 2000’s, a new disruptive wave started when private initiatives led by Elon Musk (SpaceX), Jeff Bezos (Blue Origin), Richard Branson (Virgin Galactic and Orbit) and others entered the scene focused on reinventing the sector, and consequently bringing the cost of satellite launch down.

Having already been able to deliver satellites to space cheaper than ULA, in 2015 SpaceX delivered a particularly impressive breakthrough: it made the first stage of its rocket reusable, with a potential reduction in price initially estimated by its president, Gwynne Shotwell, to be 30%, and potentially more.

To give an idea, before SpaceX entered the market, ULA’s rockets were estimated at $400 million per launch, compared to SpaceX $100 million. With reusability of rockets and other improvements, launch costs in 2018 were made possible at $50 million for private customers (the military has more demands, making launches more expensive). Previously a monopoly, ULA is now reinventing itself to become competitive again. In 2014 it announced a partnership with Bezos' Blue Origin to develop a cheaper engine than the ones being imported from Russia (not by coincidence: the announcement came a few months after the invasion of Crimea by Russia, followed by US sanctions on Russia).

Source: Govini report: Space Platforms & Hypersonic Technologies Taxonomy

Satellites get smaller. New access to space.

The overall space economy is estimated to be around $350B in size today. Based on Bank of America and Morgan Stanley calculations, it will reach $1.1-$2.7T in 20 years, depending whose forecast one picks.

Since 2009, when private investments into the space economy were seen to surge, satellite and launch services have gotten the most attention. Technological improvements reduced the size of satellites used in a wide range of applications such as imaging, low-data telecommunications, in-orbit inspection, research and others.

Source: Space Angels: Space Investment Quarterly Q1 2018

Delivering small satellites into space is still expensive because launches are infrequent and led by larger satellite demands, via “rideshares”. Rideshares mean that calendar and technical decisions are led by the main payload, causing delays and sub-optimal results for secondary payloads (small satellites). They are also extremely expensive, due to cost sharing of a large rocket + launch. If it wasn't enough, it may take years to finally get a ride.

But a new landscape is forming. Of the $14.8B invested in Space between 2009-2018 (see chart above), about half went into launch-related technologies. On demand, low cost rocket launches is now seen as a fast growing trend. Industry participants agree that in the next 5-years, more new satellites will be launched to orbit than entire prior 50 years.

Source: Govini report: Space Platforms & Hypersonic Technologies Taxonomy

The high demand for delivery to space is no new news, and several companies have been founded to participate in this market. To mention some who are focusing on the small satellite sub-sector, Vector Launch (2016) Rocket Lab (2006), Relativity Space (2015), Firefly (2017) are all racing to get a piece of the pie. And it looks like it will be a big enough pie. Frost and Sullivan predicts that, by 2030, there will be an estimated 11,631 small satellite launch demands for new constellation installations and replacement missions, which could take this market past the $62 billion mark. Its upside scenario sees the small-satellite launch demand as large as $119 billion.

Lastly, and not less important, is the regulatory burden historically imposed by Governments when it comes to space access. And not without a reason. Jim Cantrell of Vector recently said on an interview: "The rocket reliability rate is 95%. If aircraft had a reliability rating of 95%, we'd probably would have already had 3 accidents today."

Nevertheless the process can and will be simplified. The U.S. Government has been vocal about removing regulatory bottlenecks to boost commercial access to space. On May 2018, President Trump signed an executive order demanding the simplification of the launch process overseen by FAA. The Administration gave orders to plan a “one-stop shop” for commercial space flights to get all bureaucracy done, which in the past required months of works and interaction of different bureaus and agencies.

The democratization of Space is happening, and it is one we are paying attention to.

Lapa Capital LLC


Fernholz, Tim. Rocket Billionaires: Elon Musk, Jeff Bezos, and the New Space Race. Houghton Mifflin Harcourt. Kindle Edition.

Kurson, Robert. Rocket Men: The Daring Odyssey of Apollo 8 and the Astronauts Who Made Man's First Journey to the Moon (p. 13). Random House Publishing Group. Kindle Edition.

Govini Report: Space Platforms & Hypersonic Technologies

Space Angels: Space Investment Quarterly (Q1 2018)

Disclaimer: This document is a piece of economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or investments. While every effort has been made to ensure that the data quoted and used for the research behind this document is reliable, there is no guarantee that it is correct, and Lapa Capital LLC can accept no liability whatsoever in respect of any errors or omissions.


Sent to clients of Lapa Capital on January 22nd 2018. The views and opinions expressed in this article are those of the author. Please read the full disclaimer at the bottom of the page

Brazil Outlook 2018-19

Brazil follies. Brazil and China play.

On March 3, 2011 the Financial Times reported that Brazil had taken the position of the world's fifth-largest economy, overtaking Britain and France, measured by nominal GDP. The claim was made by Brazil’s then-Finance Minister Guido Mantega, and while it was factually inaccurate (Brazil was actually in sixth position at the time) it captured the sense of exuberance shared by many at the time; the Brazilian "sleeping giant" had, at long last, finally awoken.

Within a few short years after Mantega’s boast, the Brazilian economy had tumbled to ninth position. The March 2011 FT article should have provided the perfect signal to begin shorting the Bovespa index, which would subsequently embark on an historic decline of 43% or 73% in US dollar terms.

Between 2009 and 2011, while most of the developed world was dealing with the consequences of the great 2008 financial crisis, Brazil was benefiting from a massive economic stimulus program in China, which was driving unprecedented demand for Brazilian commodity exports like soy, iron, sugar, petroleum and poultry. At the same time, the Brazilian government and central bank (whose independence had weakened under Dilma) took their own steps to ensure the samba didn’t stop. The Central Bank doubled down on lax and heterodox monetary policies, while the government cut taxes on consumer products (cars, refrigerators…) and boosted spending on social housing programs. Meanwhile, public banks including the Brazilian National Development Bank (BNDES) were pressured to increase lending and keep the party going. To many commentators at the time, Brazil had “decoupled;” Brazilian expats were returning home in droves to pursue opportunities that had vanished in the financial markets of New York and London.

In China, the stimulus program worked well initially but led to serious capital misallocation problems and levels of overall debt (including "shadow banking") which, by some calculations, exceeded those seen in the US just prior to the 2008 financial crisis. Institutional investor sentiment began to sour on Chinese stimulus while prominent hedge funds began positioning themselves to benefit from what they believed was an imminent and spectacular burst in Chinese valuations. “China property will end up like Dubai times 1,000” (Jim Chanos, Kynikos, 2010) and China was the “mother of all bubbles” (Peter Chiappinelli, GMO, 2011).

However, despite some notable bumps along the way, the epic Chinese bubble burst never materialized. The Chinese government took steps to address the largest and most publicized excesses; successfully engineering an unprecedented "soft landing." Annual GDP growth decelerated from 10.6% in 2010 to 7.7% in 2012, before stabilizing at around 6.5-7.0% from 2013 onward. Granted, the story may not be over, but it is out of the front pages for now and the immediate, foreseeable future.

Of course, the effects of the Chinese tightening had consequences in Brazil, but those were not as fun to report on as the political knife fights in Brasilia and eye-watering corruption scandals. The volume of Brazilian exports to China, which had been growing at 47.5% year-over-year in 2010, registered a paltry 1.8% annual growth rate in 2012, and a 17% decline in 2015. This was compounded by a collapse of commodities prices (surely not unrelated to the Chinese "soft landing.")

In Brazil, rising inflation was the first sign of the internal mismanagement of the economy. Direct consumption stimulus, associated with horrible infrastructure bottlenecks and stagnated productivity, led to a prompt increase in general prices. Average annual CPI went from 4.7% between 2006 to 2010, to 7.1% between 2011 and 2015 and culminated in an alarming peak of 10.6% in 2015, a level not seen in 15 years or so.

Figure 1 - China-Brazil Trade (China Daily)

The post-2011 period created a ‘perfect storm’ for Brazil, as declining exports combined with a ballooning credit overhang, rising inflation and the unrelenting political drama, which resulted in the impeachment of President Dilma in 2016. Personal and corporate credit delinquencies peaked and available credit shrank. GDP contracted for 8 consecutive quarters in 2015 and 2016, slashing nearly one trillion dollars of economic total output. Unemployment rose sharply, reaching almost 14% in 2017, a dramatic shift from the 4.8% full employment days of 2014 (a presidential campaign year no less.)

To make matters worse, the Brazilian Treasury and the central bank had little room to intervene, with both inflation and an unwieldy fiscal deficit threatening to spin out of control. In September 2015, Standard & Poor's downgraded Brazil to below ‘investment grade’ and Fitch followed soon after.

Recovery for patient people.

Eighteen months after the impeachment of Dilma Rousseff, the current picture of Brazil is a sweet-and-sour one. Although the Bovespa recovered strongly and reached an all-time high, the current president, Dilma’s ex-VP, Michel Temer, has been scraping the bottom of the barrel of public approval with a 5% positive rating (Datafolha, Dec ‘17).

A number of embarrassing scandals involving Temer and his associates made it clear to the public that the government that succeeded Mrs Rousseff's was no more honest. However, the new administration did act to address the streak of “by-the-book” mistakes of the previous government.

Immediately upon assuming office, Temer appointed a highly capable and respected economic team, both at Treasury and the central bank, and handed back independence to the latter. The new administration took several steps to unlock hidden value in the stagnated economy by making it less dependent on subsidies and direct intervention by the state. Of course, when considering how this was actually done, the words of Otto von Bismarck come to mind: “laws are like sausages – it’s better not to see them being made.”

Despite the historically low approval ratings, Temer’s government managed to pass a ceiling on public spending, reform labor laws, and appoint professional managers at the national development bank (BNDES), Petrobras, and Banco do Brasil. His administration also stopped fooling around with credit underwriting at public banks, and announced a series of privatizations of plainly inefficient public companies.

The new economic team acted to control government spending, without major compromises to social programs. The more independent central bank guided annual inflation down from over 10% in 2016 to 2.9% at the end of 2017, initially keeping interest rates high at 14.25% and then slashing them to an all-time low of 7%. At the end of 2017, for the first time ever, the central bank had to write a letter, explaining why inflation had gone below the lower end of its 3% - 6% target band. Further rates cuts are expected.

For those willing to look beyond the current headlines of political intrigue and corruption here were a few events to notice in the past year:

Brazil 2017 GDP growth is expected to come in at 1%; its first economic expansion since 2014 and compared with a 3.6% contraction in 2016!Industrial production ended a period of more than 3 years of accumulated contraction, growing at 2.2% in the 12 months ending in November 2017The unemployment rate, while still high at 12%, has recorded declines for the last two consecutive quarters; this follows 10 consecutive quarters of growing unemploymentNew listings on the Bovespa in 2017 raised BRL 21 bln ($6.5 bln), an amount equivalent to more than the three previous years combined, and the most since 2004Brazil recorded a 2017 trade surplus of $67 bln, a record since 1989 (the beginning of the series). Imports, which had been shrinking during the recession, grew 10.5%Export volumes of commodities such as iron ore, oil and soybeans grew a hefty 30%, due to a combination of both stronger prices and volumesPetrobras, once facing global concerns of a complete collapse, achieved record oil production in 2017. New management is delivering on its promise to de-leverage while the company has reached important settlements on corruption charges of the previous management. Already, the company is raising debt at "normal" price levels again. Petrobras’ NYSE-traded ADR is heavily traded and up almost 300% over the past 2 years - by comparison, Exxon Mobil has managed a far more modest rally of 136% over the same time frame, amidst the recent recovery in energy prices.

We could go on, but our point here is that Brazilian "recovery" does not come from wishful thinking and is actually well underway. From the date Dilma’s impeachment was accepted by Congress on April 17, 2016 (formal removal from office happened later in August of that year) the Bovespa index has gained more than 50% and has reached an all-time high of 80,000 points (64% was the return for a USD investor, EWZ etf used as proxy).

Figure 2 - iBov and EWZ since April 2016

Concerted global growth and higher commodities prices are helping, which we will talk about next.

Once more, Brazil is not alone.

We began this text by noting that the 2015 -2016 economic depression in Brazil was the result of the removal of an external supporting force (China stimulus) and collapse of poorly conceived fiscal and monetary policies over the preceding years. Our view is that the same dynamics, only applied in reverse, are gathering momentum now.

As Brazilian society continues its painful learning process and prepares its nerves for elections later in 2018, the economic Brazilian tide is rising on the back of a powerful global recovery, with the full participation of China, Brazil's largest trading partner. The US, Brazil’s second-largest trading partner, shows no signs of slowing, and Argentina, Brazil's third, firms up its own recovery (already posting five consecutive quarters of growth). Last but not least, Europe seems finally fine and growing.

Remember, Brazil is the first, second or third largest exporter of: iron ore, bauxite, oranges, coffee, sugar, meat, chicken, turkey, soybeans, tobacco, beer (yes!), and corn. Brazil is the 5th largest global exporter of airplanes (thanks Embraer), and 10th largest exporter of cars. On the energy front, Brazil is a top 10 global petroleum producer, even as 70% of its domestic energy production comes from renewable sources. We do not disregard the impact that strong global growth has on a resource-rich country with a relatively strong domestic consumer market like Brazil.

True, low internal productivity and slow innovation make the country more dependent on an export driven global expansion. But this too is an opportunity. Gains in productivity and accelerated adoption of technology, such as the ones already seen in the strong agricultural sector, commonly happen after a period of crisis. This could potentially result in slower recovery of employment relative to other indicators, especially if intrinsically labor-intensive activities such as construction (infra and housing) take longer to pick up.

Pension and Fiscal Fixation.

We believe that the political risks and the fear of a fiscal meltdown associated with potential failure to pass a pension reform, will subside. And we are not alone.

Markets have watched the credit downgrade and domestic political struggle to adopt pension reform with relative complacency. In fact, some commentators believe the S&P downgrade could actually help the government pressure dissenting lawmakers into approving the pension reform to avoid further damage.

Two weeks into the New Year and about a week after Standard and Poor’s downgraded Brazil further into junk territory, the local index is up 6% and the currency another 3.3%. A week after the recent downgrade, Brazil’s issuance of $1.5 bln of 30-year bonds was oversubscribed four times, and came at a 5.6% yield, lower than the 5.8% fetched when Brazil held the investment grade in 2009, and lower than 5.8% in a 2016 issuance, in similar 30-year issuances.

Specifically on the pension reform, even if it does not get passed under this government, the Temer administration has managed to achieve a markedly broad understanding of its urgency. Never before was the topic so openly and broadly discussed as a national imperative, in the face of a ballooning fiscal deficit. Ongoing negotiations are still resulting in changes to the legislation’s draft (remember the sausage factory), but now it is more likely than ever that 'some type' of pension reform will pass under this or next presidency. We believe this will inject greater credibility to the ongoing recovery. And this is why, in our opinion, markets generally shrugged at the recent downgrade.

While speaking to Brazilian investors at the end of 2017 and beginning of 2018, many urged caution. Analysts in São Paulo and New York largely predict a deferral of investment by Brazilian businesses due to uncertainty surrounding pension reform efforts and the upcoming presidential election. Tellingly, participation of foreign investors in onshore equity trading in Brazil accounted for half of the trading volume at the end 2017, compared with 30% in 2010. Local pension fund allocations to Brazilian equities fell from 33% in 2010 to just 17% in 2017, and retail investors account for just 5% local trading volume, compared with 9% in 2010. We believe there will be a huge upside when they return to chase the gains of previous quarters, and look to diversify portfolios away from now low-yielding fixed income.

And if you think the current recovery in Brazilian equity markets is being driven by overly optimistic foreign players, consider the evolution of Brazilian assets held by 'global emerging market funds', as a percentage of total holdings (courtesy of BofA Merrill Lynch):

Figure 3 - Global allocation to Brazil at half peak
(Source: BofA Merrill Lynch Global Research, EPFR Global)

Consider also the potential that a simple 'return to mean' of such allocations would cause to local equity prices, when the Brazilian recovery gains broader credibility.


We believe that the combination of global growth and better domestic management of the economy will act to continue to propel the ongoing economic recovery in Brazil.

The Brazilian economy will, once more, benefit from a broad global expansion, akin to the 2003-2007 period, and the less "rational" 2009-2011 period. Gains in productivity would come as a bonus.

Brazil’s lag relative to the rest of world’s expansion, and currently low price levels relative to global markets, will continue to attract capital to the country's vast opportunities. Record low interest rates, lower deposit rates, low asset prices (e.g. real estate) will channel that capital to risky assets.

The animal spirits of global investors are already visible in Brazilian private equity, M&A, and IPO markets, and should soon spread to credit markets. When that happens, the recovery will accelerate and the Brazilian real should strengthen to somewhere at or below the BRL 3 per USD level. Further asset price appreciation will surprise and engage investors currently sitting on the sidelines.

Our brief thought on the 2018 elections is that the Brazilian electorate - and frankly a majority elected officials - will not be eager to disrupt the current recovery. We think this will guide election results and the next presidency alike (even in a scenario where Lula is elected). We accept that this is the hardest element to predict, and would have to adapt our views to an unforseen outcome (president and/or policy).

We end this report with another bullish chart (but don't skip the Risk part after that):

Figure 4 - Flow to Brazil funds
(Source: BofA Merrill Lynch Global Research, Economática)


Risks are the best publicized and known parts of the Brazilian recovery; hence we chose to emphasize opportunities and positive trends. Of course, discussions around pension reform may take a bad turn and could affect market sentiment. The presidential campaign will also probably get quite ugly, and may create some market volatility. A president hostile to the current economic policies could be elected, against our expectation. China can always blow up in the next 10 years (they hope it's in the next 100). A strong dollar could affect our view on the BRL, but this would boost exports even more, and further fuel a recovery. A correction in the valuation-rich S&P would have its effects (amplified by Brazilian equities' high beta). Finally, an unexpected drop in commodities' prices, for whatever reasons, would play against our thesis.

All in all, we are confident that Brazil’s recovery will continue, even if volatility remains high. For those with patience, it will pay off.

Eduardo Karpat
Managing Director
Lapa Capital LLC

Disclaimer: This document is a piece of economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or investments. While every effort has been made to ensure that the data quoted and used for the research behind this document is reliable, there is no guarantee that it is correct, and Lapa Capital LLC can accept no liability whatsoever in respect of any errors or omissions.