The Clash of Civilizations and the Remaking of World Order
Samuel P. Huntington
The Next Decade: Where We’ve Been…and Where We’re Going
If it wasn’t obvious by now, the death of Osama Bin Laden was a market non-event. Headlines on Monday morning, May 2nd, touted the event as the reason stocks were up that day…only to see stocks broadly close slightly lower by session’s end.
Geopolitics is a thorny, tricky issue for investors. It’s virtually always in the news and consistently feels(and can be) hyper-relevant—but actually causes a huge number of investor errors.
The overwhelming majority of geopolitical events—including armed conflict—don’t whack the markets the way folks tend to fear. And that’s the real rub: Geopolitics is mostly a source of investor fear. Change in the order of things causes uncertainty, especially changing the fabric of government and law. But consider: How many geopolitical events have triggered a true, sustained bear market in stocks? You can count them on less than one hand in the modern era—which is profound. It generally takes truly humungous stuff, like world wars. Also consider: When has there been a year in your life where there wasn’t unrest somewhere? Israel, for instance, has been in conflict for all of my life (and that probably won’t change if I live to be 100), yet stocks can, and have, risen despite it.
Even ostensibly “good” changes to the geopolitical landscape cause investor worry. The fall of soviet Russia, for instance, fuelled investor uncertainty. Right now is a case in point: Strife in the Middle East and North Africa is underpinned by the idealistic energy of what we Westerners champion most—liberal democracy. But such a “good” development is right now cause for investor fear because what happens if oil supplies from that region get disrupted?
So, how to view geopolitics as an investor?
Much of investing success is about understanding historical context. Knowing history doesn’t tell you what happens next—it tells you what’s precedented and unprecedented and how people (the substrates of markets) tend to react. To navigate geopolitical strife, you want to give yourself as much context as possible. And among the main, indubitable lessons is: There’s never a dull moment—somewhere in the world there is always something bad geopolitically going on, and most of the time markets march on in spite of it. This works both ways: Geopolitical events have trouble changing the tide of bulls and bears alike.
On that basis, two excellent books:
First, Sam Huntington’s Clash of Civilizations. Originally published in 1998, it’s still ultra-relevant, perhaps more so than ever. Huntington was (and is) part of a fierce debate over the last decades: Is liberal democracy a tide that will sweep over the world, or will cultural differences ultimately preclude it? At the time, Huntington was in opposition to Francis Fukuyama’s End of History. Fukuyama believed that with the fall of Soviet Russia would come an overwhelming tide of democracy across the world. Huntington disagreed, positing that differing cultures across many lands would not readily accept such governance.
Whatever you believe, it doesn’t matter. Put yours and Huntington’s views aside—Clash of Civilizationsis foremost a spry and engaging primer on how geopolitical dynamics work and the basic overlay of cultural conflict and interests in the world today. The first portion of the book analyzes the basic categorizations we tend to take for granted about geopolitics: What exactly is the “West”? And how is it different and/or opposed to the “East” in culture, philosophy, economics, etc.? This discussion alone is fruitful in revealing just how complicated such things are. The second part of the book is a rundown of all the world’s regions, perspectives on their cultures, their salient motivations/goals, and how those tend to clash.
The second book is George Friedman’s The Next Ten Years. I reviewed his book The Next Hundred Years last year. This one is every bit as good as the first. By now, Friedman’s writings have become must-reads for me—his pragmatic approach to geopolitics includes history, geography, and analysis of those in power with a consistently pragmatic, well-balanced view. Simply, I am better informed after reading his work.
The Next Ten Years is essentially a rundown of current geopolitics and probable implications for the next decade. Again, the value is not in the accuracy of what Friedman foresees per se, but in the discussion itself. To read this short book will educate you about current global geopolitics as well as any primer out there.
Taken together, Huntington’s book provides a crash course in geopolitical thought and Friedman adds to it with a cogent analysis of here and now. Pick them up to better equip yourself to deal with such events vis-à-vis your investments.
*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.
Friday’s report that US GDP grew an annualized 3.2% in Q4 is by now common news. Less commonly reported: Real GDP officially past its 2007 peak—the economic “recovery” can now be called an “expansion.” Also, according to Thomson Reuters, 71% of S&P500 companies have beaten 4Q earnings estimates so far, and the one year forward P/E of the market is 13.3.
These facts were overshadowed by Egypt news last week. But we note that January was a fairly turbulent geopolitical month (Jasmine revolution, Chinese President visits US, Egypt, Moscow bombings, Ivory Coast, et al), and yet global markets absorbed those body blows pretty well, not to mention renewed inflation fears in China/Brazil, and a nasty UK GDP report, and the ongoing PIIGS problems.
- Here’s one of the most important articles of the year: Economists’ Grail: Post-Crash Model. Simply, any economist worth their salt knows that the nature of complexity and accelerating change means math as it exists today in no way is able to predict the direction of markets or economies. The world is too big and deep and complex and has been for a very long time. So it becomes a profession of probabilities. These Sisyphus-ian attempts at math blended with psychology are noble, but a losing endeavor for those who must make practical predictions…like investors.
- The euro sovereign debt thing ain’t over. Just don’t expect it to spark a new bear market. One of the oddities about the European situation right now is the disconnect from government finances and their actual economies. Ireland is set to grow +4% in 2011, and much of Europe is firmly in recovery. Germany ’s economy and stock market are up, as is European economic sentiment. Most of the rest of the world looks poised to post modest stock market gains for the year. That’s important because just a few months ago experts were declaring that asset markets were all unprecedentedly highly correlated. Yet, at least on a country basis for equities, there’s going to be some significant dispersion this year. Italy is down almost as much as Spain and Portugal , but Germany , Sweden , and others are doing just fine.
- Germany does a lot of its exporting to other European countries that use the euro. So, expect them to keep talking tough publically about other euro countries in fiscal trouble, but ultimately lending their support. Maybe the only way it breaks down is if Germany itself becomes fiscally endangered, in which case you can bet they probably won’t be willing to go down with the ship. But we’re nowhere near that right now.
- Obama’s proposed two year freeze on federal pay seems fine, but speaks to the overall lack of incentive to produce that comes with working for the government—pay isn’t based on any sort of output that I can see. This is also a clear signal to my view of Obama’s upcoming move to the middle to get reelected in 2012. Watch for a compromise on tax cut extensions to come next.
- The revelation that Russia has moved missiles near NATO territory isn’t going to rankle markets now, but it’s worth noting. With the SMART treaty in jeopardy, this is a sterling example of how frisky Russia could get given their desperate population aging and economic problems—which will only get worse over time. Desperate countries do desperate things and look for last gasps at power on the international stage. Eastern Europe is prime territory for that drama over the next decade.
- The brewing row in Florida over a phosphate mine and environmentalism is a global non-issue. If the US doesn’t do it, countries like Morocco , Tunisia , and China will provide all phosphate the world needs and more—and reap the benefits. Phosphate is used in everything from batteries to fertilizer, and the world will have a big need for it in the decades to come.
- Note that the Wikileaks scandal is a non-issue to markets, and really not that big a deal generally. Why? Most of the stuff in those leaks are all things most well-informed citizens of the world more or less expected to be going on anyway. Rumors have surfaced that next on the Wikileaks hit list are confidential docs from a big commercial bank. Same principle probably applies there too—will be damaging to whoever gets hit, but the global markets will likely mostly shrug it off, if it happens at all.
Maybe you’ve seen Steve Forbes’ latest “Energy Crisis: Over!”. Well, consider this part two:
According to a recent report by the USGS, the US alone has 13 million metric tons of rare earth metals vs an estimated US annual consumption of 10,000 metric tons. So, at current consumption rates, that’s equivalent to 1,300 years of reserves. The deposits are also relatively common in number throughout the US , with significant deposits in 14 different states.
On a global basis it estimated reserves at 99 million metric tons, with 36% of reserves in China and 13% of reserves in the US . The report also says that “during the past 50 years outside of China , there has been little Rare Earth Element exploration and almost no mine development”. Therefore there may be significantly more than currently estimated world wide.
Contrary to media headlines to the contrary of late, rare earth metals aren’t all that rare and any supply squeeze is likely to be short-term.
With the ebullient bond buying going on (near record low yields on Treasuries, record bond issuance for corporations, record low yields for long-terminvestment grade bonds), an interesting story has fallen through the cracks:
What!? Remember, just months ago, the financial world perpetually bemoaned Chinese ownership of US debt? And how, if the Chinese decided to start selling, it would be chaos for said US debt? Yields would spike, prices would plummet! And then the world would implode on itself. Or something.
Well, why isn’t it happening? One , China doesn’t hold as much US debt as you might think. In the neighborhood of 10%, which is big but not ridiculous. Actually the US —its citizens, its institutions—own way more…as in well over a third. Second, the sovereign bond market is one of the largest, deepest global markets in the world. There are many, many forces at work at any given time. Simply, there are other demand factors that are overwhelming Chinese US debt sales.
If China decided to dump all its US securities at once, of course that would bring big disturbance. But in reality, as China diversifies its holdings and works—in baby steps—to open its capital markets and un-restrict its currency, we’re much more likely to see this kind of measured action. It’s so benign it barely hits the popular media’s radar.
As is so often the case, “We worried about it, but nothing happened” never makes a good headline. This is a prime example.
The Bundesbank (in Germany ) raised its estimate for German GDP to 3% for 2010 from 1.9%. Recall that about a week ago, German GDP blew past estimates in Q2, growing 2.2% q/q, which sparked this reassessment.
Many seem to believe this is a tame estimate, and anecdotal forecasts have ranged in the ~3.5% area. I should know better, but I’m still often left stunned and breathless at how fickle so-called economic models are. They quite literally take the recent past and extrapolate it into the near future. Which makes these things darn near worthless to investors, except in one important way: understanding market expectations. With economic models swaying in the wind as they do, they end up approximating what the world is anticipating. And that’s good because trying to understand relative expectations versus reality is what matters for stock market forecasting. So, in a bizarre way, these so-called empirical, math-based economic models function more like sentiment indicators.
Also, recall Germany approved an €80bn austerity package in June to balance their 5.5% budget gap (which Goldman Sachs now estimates will only be 3.4% in 2010). With growth moving so briskly and better than the world believed, one has to wonder how ‘necessary’ all that austerity will feel to politicians, who (particularly the likes of Angela Merkel) must be feeling beat up right now after a summer of PIIGS worries. Right now, the German government is standing pat on austerity, but look for that to change if things continue to improve more than expected.
To wit, the country that put the “S” in “PIIGS” is doing just that. Spain has decided to reinstate €500mn worth of Infrastructure Spending. The funds are purported to be spent in 2011 on a number of projects, the biggest being the development of the A8 motorway linking northern Spain with France . We aren’t even out of the summer of 2010 yet and the worst European debt offenders are already scaling back austerity on the back of stronger economic growth.
True, this is minor in size, but speaks directly to the idea that spending is less easy to cut than simply growing one’s economy in order to rectify budget problems. As ever, the easy answer is to grow the tax base. And by the way, none of these developments are consistent with the theme of a global double-dip recession— Europe ought to be the most prime candidate for it.
|*The content contained in this article represents only the opinions and viewpoints of theFisher Investments editorial staff.|
Some say we aren’t spending enough globally to fight off a renewed recession…or, (gasp) a new depression!
Baloney. Any austerity enacted today pales in comparison to the vast monetary and fiscal stimulus conducted globally over the last ~1.5 years, and much of it continues today. On the fiscal side, a fair amount of the stimulus was probably fake anyway. (Said differently, much of the stimulus took so long to disburse and/or reach the economy it didn’t play much of a role in stabilization or recovery anyway). But monetary policy and liquidity provisions, on the other hand, have been excellent stabilizers and boosts to capital markets and the broader economic recovery. That continues in a very big way and will at least through this year and probably next.
But there’s another tailwind feature for those who worry austerity will strangle us all: Many politicians probably won’t have the gumption to do all the cutting they’re promising. An example: Germany’s Merkel has seen her power weaken significantly since entering the fray of austerity and EMU backstopping. My guess is leaders stationed in relatively highly socialized societies (Zapatero, Sarkozy, etc.) will feel similar heat. Specifically since a lot of these cuts happen over many years. By then, we’ll have a much stronger global economy…in which case the cuts won’t seem so vitally important any longer.
It’s true that raising taxes and cutting certain types of spending (like infrastructure or stuff that gives folks a job) is bad economic policy amidst a budding recovery, but the smaller magnitude of the austerity relative to the larger stimulus of recent years makes this dumb, but not quite dumb enough to derail things significantly.
I’ve never really been able to understand why folks look to the IMF for economic forecasts. Granted, they have access to information most others don’t, and are an organization designed to monitor the global landscape…but they’re generally no more accurate than anyone else. Personally, I’d rather the OECD projections, but both types are imperfect. That’s ok—global economic estimates are a messy business and precision is elusive no matter how good the agency.
I get a great kick out of these things because they’re revised so darn often, and usually after the market and other investors have figured things out anyway. Like a lot of ratings and forecasting agencies, government bureaus, and think tanks—there’s a tendency to be more reactive than proactive. These folks are seldom ahead of the curve. And so, today we get this:
- IMF Raises 2010 U.S. Growth Estimate to 3.1% From 2.7%, Warns About Debt
- IMF Raises 2010 Latin America Economic-Growth Forecast to 4% From 2.9%
The irony is, as the IMF raises its global economic forecast, in the same breath it warned of a ‘New Phase’ in the Crisis. As investors—what are we supposed to do with this kind of talk? Only a group that’s ultimately not responsible for their predictions can say such things—well, it’s gonna be better but actually it could get worse. An investor could never think this way or they’d be constantly paralyzed.
George Friedman’s The Next 100 Years is an ambitious and fascinating glimpse into the future of geopolitics.
That the imagination exists at all is one of the most interesting features of our minds. Conceptualizing and thinking about things outside our immediate perception, or that may not exist at all—to plan for the future and what could be—is not only a spectacular feat, it’s one of the most important differentiators between us and other animals. Forward thinking is the crux of the stock market—not a depiction of the now or the past, but a signaling of the future’s earnings and growth—the crowd’s best guess about what’s next.
Speculating on the future is one of the great pastimes of intellectual life. Years ago I asked science fiction author David Brin what he thought of the genre. He said [paraphrasing], “This isn’t science fiction. It’s speculative fiction. Those who are serious about this genre are endeavoring to make serious and necessary hypotheses about how the future might look.”
So maybe we can call George Friedman’s book, The Next 100 Years, speculative fiction of the most rigorous kind. Dr. Friedman is CEO of Stratfor, a leading geopolitics analysis and information source. He’s done something not many serious geopolitical forecasters would ever dare in public: Forecast how the world might look in 100 years.
Theories about predicting the future have been around forever. Most, in some form or another, use the past to predict what may come. This can be anything from qualitative trend analysis to hardcore statistical arbitrage. Economics, sociology, meteorology, physics, and countless other disciplines (of both the hard and social sciences) aim to know what comes next. In fact, the usefulness of a theory is often defined as its ability to predict.
You’d be hard pressed to find a field with more theories about the future than stock market forecasting. But let’s have no illusions here—thinking 100 years into the future has little or no value for even the longest-term equity investors. At best, market prices are a reflection of a few years from now, but nothing like 20 years, let alone 100.
Nevertheless, this is a useful and provocative book. Friedman’s view of the future includes tremendous insight about the here and now. Everything from how and why geopolitical alliances are formed, to the uses of cutting edge robotic technology, to how today’s global energy turmoil will evolve and rob the Middle East of its current power, and much more.
He’s at his best when explaining why China isn’t necessarily going to be a dominant global power decades from now (as is widely assumed today); at his most interesting and whimsical when speculating on the conquest of space as the next geopolitical frontier (the US will dominate space with “battlestar” war stations by 2060!); and at his weakest when attempting to explain how the year 2080 will look based on current circumstances and decades’ worth of assumptions he’s built up throughout the book (Mexico will vie for dominance of North America!?).
For Friedman, the specifics of the moment or the individuals in power at any given time don’t much matter. Instead, he sees huge, impersonal forces constantly shaping the geopolitical landscape. These forces tend to be cyclical, and tacitly predictable. The details might not be precise, but the outcome over the long run is certain. This isn’t such a far cry from the logic of economics—Adam Smith’s notion of the “Invisible Hand” is just such an inevitable, huge force guiding larger scale free market economies.
That Friedman can make such topics so interesting is a feat in itself. We don’t tend to like reading about the abstract and impersonal—we’d rather our sweeping biographies. Historians, for instance, have a penchant for chronicling decisive events—wars, elections, and so on—but spend comparatively little time on the larger scale, less provocative economic forces that truly shaped the course of history.
In truth, the world’s more random and chaotic than Friedman’s vision, and the true “inevitable” forces that shape things are clearest in hindsight. Friedman himself admits as much. This is a prime reason, for instance, it’s best to only try and forecast stock markets no more than 18 months into the future. Anything longer is treacherous. Think, for example, where your mind was in 2000. Did you see all that would happen these last 10 years—from 9/11, to wars, to housing booms, to recessions, and all the rest?
It’s vital for a society to think forward, and Friedman provides one of the most rational, interesting views of it in some time. But you’re probably best suited keeping your stock market predictions separate from your feelings about battlestars for now.