Posts Tagged ‘geopolitics’

Fisher Investments Analyst Book Review: Getting Acquainted with Geopolitics

May 6, 2011 Leave a comment

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
George Friedman

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.

Now, it’s an Expansion

January 31, 2011 Leave a comment

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.

Tuesday’s Quick Takes

December 1, 2010 Leave a comment
  • 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.


Rare Earths: Not So Rare

November 23, 2010 Leave a comment

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.


China is Selling US Debt, and Yields are Going…Lower!?

August 24, 2010 Leave a comment

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:

China Doubles Korea Bond Holdings as U.S. Debt Sold


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.

Trend Continuation is the Economic Model’s Bread and Butter

August 20, 2010 Leave a comment

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.

Fisher Investments Analyst’s Book Review: The Rational Optimist

July 1, 2010 Leave a comment
I was in Austin, Texas recently and met with a client who is a retired French literature professor. After a lively afternoon discussing markets, economics, and geopolitics, the conversation turned to French modernism and Albert Camus. I quipped that Camus was a master author, but his philosophical writing is better than his fiction. Her eyes lit up, she sat up, and spoke through a wide smile, “Yes! Yes. The Myth of Sisyphus. Brilliant! Excellent! Oh!”That’s a lot of enthusiasm for a book about suicide! Well, that’s not fully true. The point of Sisyphus (a longstanding work of the modernist pantheon) is to start with the apparent meaninglessness and absurdity of life, but actually conclude with hope as the only rational response. Indeed, it’s in our nature to hope—to see a way forward, even be overconfident in our ability to achieve a brighter future. And it has been! Humanity’s traversed an accelerating upward trajectory for a long time, albeit with bumps along the way.

But we tend to be hopeful about ourselves, not the world at large. We worry about the world and its future. That’s probably for many reasons but this effect’s been pronounced over the last decade, as it was in the ‘70s. Optimism is the four-letter word of our time. The perfect antidote? Matt Ridley’s new book, The Rational Optimist. This is the best investing book of the last several years—bar none. A sweeping account of human history through evolutionary and economic lenses, this book is a devastating, fact-driven, often empirical, cogent argument against today’s de facto media dourness. Ridley uses economics and evolutionary psychology to chart the upward trajectory of human civilization with astonishing acuity and insight.

Yet, this book rarely mentions investing at all. I went on Amazon recently and noticed it ranked #2 in the category of Early Civilization and Civilization & Culture books, and #1 in Technology and Futurology, but wasn’t listed in the economics or investing categories that I could see. This is status quo, to my view. The best investing books and ideas are rarely explicitly about those topics. Economics and investing are too narrow—married to their metaphors of equilibrium, market efficiency, supply and demand, bizarre calculations, and so on. Their practitioners cannot usually see these are useful—but limited—metaphors for describing the world. Mistaking these things for real observations about the world, they regard equilibrium, for instance, not as an abstract Platonic ideal, but a real thing. Thus, many spend their time seeking precision and depth in a field founded upon abstraction, as if economics were a physical science. I’ve never been a big Paul Krugman fan (the Nobel laureate and New York Times columnist), but he’s dead right when he says economic theory is best used as a “scaffolding” for positing a point of view that can eventually be stripped away to baser elements of an argument.

Additionally, intellectuals writing economics books—as a group—don’t tend to be optimists. It isn’t becoming of them to be cheery (the rare times they are, look out…a bear market’s likely afoot). If they didn’t have warnings to the populace about stuff, why listen at all? (The recent popularity of Nouriel Roubini’s persona “Dr. Doom” is case in point.) Tiresias never had good news; seers generally have foreboding tidings. Yet, to view history broadly (especially market history) warrants a good dose of optimism.

As a staunch optimist, yes, Mr. Ridley is very biased. He’s a freewheeling, no-apologies capitalist. He believes capitalism is as natural as natural selection. He thinks humans’ natural overconfidence in themselves and capitalism are intertwined and symbiotic because capitalism is all about the pursuit of individual goals and not those of the elite. And while his rhetoric is highly compelling (in the opening chapters he bludgeons us with statistic after statistic of positive things in the world), one could easily argue he’s being myopically optimistic just as pessimists will be myopically pessimistic. It’s not until the end of the book that he balances his argument and acknowledges—almost in an obligatory way—much of the world is still a heinous place with big challenges ahead of it.

But at the very least, I encourage everyone to balance today’s thrum of pessimism and get a dose of optimism with this book. The part I have trouble with is that it doesn’t give pessimism its due. Worry, fear, and the preparation and adaptation they spur in us is a very necessary thing for the progress of mankind. Personally, I want folks overreacting to bird flu, the ozone layer, potential terrorism, etc. It makes us prepare and anticipate—often negating problems before they happen or expand. It’s just not a good baseline perspective for long-term investing.

Economics as Historical Lens

One of the main shortcomings of history is its lack of economic perspective. We have books aplenty about wars and revolutions, and scads of biographies about famous leaders, but little of real quality about the economic forces that truly shaped much of history. That’s mostly because we like narratives about people, not abstract, impersonal forces. (Though, Jarred Diamond’s attempt with Guns, Germs, and Steel is an often flawed but noble attempt to highlight those faceless forces.)

In a way, this book is a recapitulation of Adam Smith—both his Wealth of Nations and the less touted but equally tremendous The Theory of Moral Sentiments—with updated scientific language. Ridley’s crucial point: Economists and pundits who preach doom tend to ignore the most salient feature of life—adaptation. Which is also a baseline ingredient of capitalism. The human race is a collective problem solving machine. As individuals and as a society, we tend to figure stuff out and move forward. Which is a big reason why Malthusian arguments about food supply and energy constraints have never held. Sages and economists through the ages agree that the only thing that’s constant is change and dynamism. It’s therefore insane to extrapolate today’s situations and potential problems into the far future—the world will adapt and change. This is where Ridley is most convincing, and a point that, admittedly, requires some faith in order to be optimistic. There’s no explicit guarantee we’ll adapt through time, but I’d bet on it.

Ridley makes some excellent economic observations about adaptation and progress through history. For instance, birth rates tend to go down with developed, highly productive nations, helping solve future population problems. He provocatively explains energy development and the Industrial Revolution’s onslaught of efficiency effectively eradicated slavery through much of the globe—making slavery unprofitable and unneeded relative to steam engines, etc. But instead of going the route, as many do, of then worrying about how we’ll fight over fossil fuels in the future, he observes that the most likely outcome is we’ll figure out even better ways to harness and access energy, and as that happens our potential for even more prosperity also increases.

Ideas, Mating

Through all this, Ridley offers an interesting critique of science and the nature of innovation. He sees science as an appendage to the intellectual community where the real innovation and invention come from the mixing of ideas and technologies in the world at large. Ridley believes in trial and error as more powerful than hypothesis and testing. He predicates this on the observation that new discoveries tend to come from the private sector and via immediate needs, not the Academy or government. (Ask any major pharmaceutical company how they create new life-saving drugs, and you’ll quickly realize just how haphazardly new discoveries are often made.)

The basis for this view of progress is technology. Ridley describes technology as a “mash up” of existing things (piggybacking off of Brian Arthur’s excellent book, The Nature of Technology). Technologies are what create productivity, and therefore wealth. This is facilitated by idea exchange and self-interest (here’s where Adam Smith pops in), and by the economic “technology” of exchange for mutual benefit and division of labor (trade)—what human communities and their mechanisms of exchange (like markets) are designed to do. Which, to Ridley’s view, is the reason cities will naturally overtake rural areas—they bring us in to closer proximity and thus facilitate more exchange. In other words, the freer and more capitalistic the society and the more we’re interconnected, the more innovation we can have. Thus prosperity and higher standards of living ensue in a positive feedback loop. This feature can and has accelerated through time.

This is a form of evolution—but out of the biological realm and into human civilization/culture (Marvin Minsky observed this with his idea of “memes” decades ago). Ideas, just as much as machines, are a form of technology and are dependent on reciprocity, exchange, and community to create wealth. Interconnection is the key. Without trade, innovation can’t happen because there’s no incentive for it.

These are not new arguments, but remain provocative because synergy doesn’t come naturally to us—we tend to be very skeptical of it even though we behave in accord with it daily. We tend to be more comfortable with the idea of life as zero sum—dividing up a finite pie instead of making a bigger one. People think of trade and capitalism as selfishness because it’s not natural think in terms of mutual benefit—most of life on earth has been about the struggle for scarce resources. This is especially true since capitalism rewards value creation as a core value versus egalitarianism. But nothing’s been more effective at wealth creation through time.

The Nature of Hope

James Hillman, perhaps the greatest living thinker in the field of depth psychology, is harshly critical of hope. He views it an illusion. He says hope creates expectation, which can only lead to disappointment. We should live without the future and stay in the present.

That isn’t possible. We humans think forward, we expect, we build, we accomplish, and we transfer those ideals to the next generation. And with those innate drives, we hope. Hope isn’t an illusion, it’s the motivator—and it is undying. The will to survive and thrive, to move forward, this is a big part of what it means to be a person. It’s inherent and irreducible and even if it subsides for awhile (as it has communally these last years, at least in economic terms) it won’t go away.

And that reason alone is why—above all the economist-speak about incentive, laissez faire, self-interest, profit; above all the hyperbolic political talk about fairness, independence, and freedom; above all the psychology clap-trap of loss aversion, biases, and behavior—beyond all those things, hope propels the world and its economies onward, especially where capitalism allows it to flourish. Today is no different.

Long-term investors simply must on some level believe in that. To stake your future on investment in any form (that is, on the future prosperity of the world), but particularly equities, you must on some level believe that the world will grow, that wealth will continue to be created, that higher standards of living will prevail. To be otherwise is against our nature. As Camus says, “The struggle itself…is enough to fill a man’s heart.”

*The content contained in this article represents only the opinions and viewpoints of theFisher Investments editorial staff.

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