President Obama to the Motherland

President Obama made a powerful speech on governance in Ghana that he directed at all or most of Africa. While we would quibble with the idea that Africa and its people can be meaningfully addressed as a single pseudo nation-state, some of the observations he offered are applicable to all human societies. According to the Associated Press:

Speaking to the Ghanaian Parliament, he called upon African societies to seize opportunities for peace, democracy and prosperity.

“…Development depends upon good governance. That is the ingredient which has been missing in far too many places, for far too long.”

The son of a white woman from Kansas and a black goat herder-turned-academic from Kenya, Obama delivered an unsentimental account of squandered opportunities in postcolonial Africa…

In his speech to Parliament, America’s first black president spoke with a bluntness that perhaps could only come from a member of Africa’s extended family.

“No country is going to create wealth if its leaders exploit the economy to enrich themselves, or if police can be bought off by drug traffickers,” he said.

“No business wants to invest in a place where the government skims 20 percent off the top, or the head of the Port Authority is corrupt. No person wants to live in a society where the rule of law gives way to the rule of brutality and bribery.

“That is not democracy, that is tyranny, even if occasionally you sprinkle an election in there,” he said, “and now is the time for that style of governance to end.”

He added: “Africa doesn’t need strongmen, it needs strong institutions.”

Some reflections…

First, the President’s remarks are things that need to be said, and discussed more openly and frequently. Too often we subsume ethics and good governance to economic calculations, convenience, or fear. But the real costs of poor governance are staggering when you start trying to add them up.

Second, what a great moment for the people of Africa (our quibble above duly noted) to host (briefly) the most powerful leader in the world, who happens to be the son of an African man, and whose identity was forged in part by time spent as a young man in Kenya. The AP reporter is almost certainly right in saying that only a member of “Africa’s extended family” could speak so openly about Africa’s historic travails and paths forward. That he didn’t focus his implications on northern hemisphere powers for their historic contributions to poor governance in parts of the continent will surely disappoint some – but perhaps his relative silence on that aspect is intended to point out that, for the first time in centuries, the way forward may have more to do with African countries’ internal resources and governance than with external powers. Still, we suspect that Yao Opare-Asamoa, the skeptical Ghanaian editorialist whom we cite below, will not be alone in taking a more cynical view of the President’s visit and speech.

Third, we’d point out to the President that, although probably far less damaging, tyranny is still quite possible even under the strongest of political institutions. And though not as bad as some right wing pundits are likely to declare in the coming days, there are shades of irony in his comments, given his incredibly ambitious agenda and the costs that it will (or would) eventually force onto some within the American electorate. While the President decries tyranny of the individual and their clan – the rule of strongmen – he leaves out the concept of tyranny of the majority, a problem and concern that has been around as long as democracies themselves. We don’t disagree that there are some pressing issues that the Obama agenda is designed to address (or that ‘tyranny of the majority’ is sometimes invoked as convenient cover for private sector tyrants). But strongman rule is also designed to address pressing issues – most often experiences and/or expectations of a fixed or falling level of resources relative to population – and so its practitioners probably believe that they too are fighting the good fight, however it might look to those on the outside. But if any leader, whether strongman or duly elected, goes too far in exploiting a country’s resources in order to enact an agenda – be it clan centered or focused far more broadly on social well-being – then those resources are likely to come up short in the long run. In the case of the U.S., if the party now in power goes too far in exacting tribute from the financially successful – and/or the broad economy – then the level of success, and the number of successful people, are likely to decline, leaving society worse off overall. It’s never clear exactly where that line lies, and surely the President understands that it exists – but some in his party demonstrate a clear willingness to trample it, either blissfully unaware of the unintended consequences, or willing to accept them as trade offs against other consequences that are presumed to be more dire (e.g., climate change). Thus, while we no longer face endemic “wars over land” in the U.S., we can’t deny that our political system has been girding for a “[war] over resources” for some time. However, that observation does support the thrust of President Obama’s speech – that with well developed political institutions, those inevitable “wars” inflict far less damage on people than they otherwise would.

Fourth, the myth of ‘one Africa’ really is a curious one. While it can be a balm or a rallying cry when thinking about the damaging legacies of slavery and other forms of exploitation, it’s not very practical for addressing the diverse realities on the ground that are faced by people living there. And it seems to betray a simpler level of understanding of Africa in the northern and western hemispheres than of, say, Asia, where few would ever consider addressing, for example, China, Korea, Japan, Hong Kong, India, Indonesia, Pakistan, Singapore, Taiwan, Thailand, and Vietnam as a single entity (though if there’s a parallel in that list to Africa, it might be our tendency to look at China as a homogenous population and country). For those who are interested in learning more about the diversity, nuances, traditions, and futures of Africa and its people, the internet is a great place to begin. For starters, we happened across this wide ranging essay from Koranteng Ofosu-Amaah, whose diverse cultural and business experience – and apparently deep intellectual curiosity – allow him to spin some fascinating anthropology-in-reverse riffs, and develop a ‘Low End Theory of Technology’ that, while aimed at technology investments in poorer countries, seems to have broader applications to investment and development. Businesses that want to invest wisely in frontier markets should probably pay close attention to voices like his.

Fifth, governance and prosperity are very much a chicken and egg riddle. It’s not entirely clear whether one precedes the other (and which one, if so) or if they progress haltingly, roughly in tandem, or whether other key ingredients are necessary, be they aspects of political economy or happenstance factors and endowments. For example, one skeptical editorialist in Ghana offered an anecdote about a lost foreign direct investment (FDI) opportunity that revealed the critical role of business education and practices, infrastructure, and security:

Now that everybody is singing our praises, let’s take advantage of the situation and push for Foreign Direct Investments (FDIs). Let’s seek technical assistance to build up our Polytechnics and other vocational institutions. It is often said that ‘investments’ desire peace and stability; we do have a case good to present on this front. This is where we come in. We need to adequately prepare and provide the atmosphere for the FDIs. A few years ago, it was reported that Korle-Bu Teaching Hospital lost a big opportunity for major technical and financial assistance because the management was just not ready and couldn’t draw up a simple proposal to show how the Hospital would utilize the funds. The government should have a clear-cut vision of what it wants to do. It should have plans and proposals at the ready. We should be able to guarantee year-round uninterrupted power and water supply. Safety and security of peoples and goods should be ensured. Only after these and more should we present our case and pursue it with all the ‘clout’ that we seem to have gained.

So I would join my brothers and sisters to wish President Obama and his family well. I pray that his would be ‘change we can believe in’ even in Ghana and the rest of Africa.

The writer’s emphasis on FDI also exposes (implicitly) the need for continued development of a financial system capable of matching domestic income and savings – rather than just export dollars and repatriated earnings from abroad – with increasingly diverse domestic investment opportunities (the Ghanaian economy is still heavily dependent upon agriculture and mineral extraction). I’ve had the pleasure of meeting financial professionals from Ghana, and have little doubt that the country will continue to make progress on those counts. But it has some catching up to do in those areas with, for example, Botswana, which has a per capita GDP ten times higher, pristine public finances, and a relatively well developed commercial finance sector. On the other hand, Ghana compares favorably on things like recent domestic investment as a % of GDP and income distribution. And both countries, like much of the developing world, have relatively young populations compared to industrialized countries – while HIV/AIDS might be a contributing factor, this is still a promising endowment for future progress – as long as institutional settings permit the productive use of their time, energy, and talents, as the President pointed out.

Sixth, the Obamas also visited the powerfully symbolic Cape Coast Castle off the coast of Senegal, which was a major jumping off point for the transAtlantic slave trade. Known for its ‘Door of No Return’, an inscription there reads:

IN EVERLASTING MEMORY

OF THE ANGUISH OF OUR ANCESTORS.

MAY THOSE WHO DIED REST IN PEACE.

MAY THOSE WHO RETURN FIND THEIR ROOTS.

MAY HUMANITY NEVER AGAIN PERPETRATE

SUCH INJUSTICE AGAINST HUMANITY

WE, THE LIVING, VOW TO UPHOLD THIS.

Though he follows two immediate predecessors there, Obama’s presidential visit is made all the more poignant by the fact that First Lady Michelle had ancestors who travelled through similar ‘points of no return’, if not the Castle itself. Symbolic acts matter, and presidential visits to sites memorializing the transAtlantic slave trade and other human holocausts seem like a good idea to us.

Finally, we have to ask, does this guy – our President – plug himself into a wall outlet at night?! Travel, diplomacy, political strategy, executive leadership, negotiation, etc, are all demanding on one’s energy and resources. And a marathon presidential campaign has to be one of the most exhausting experiences there is. But Obama is like the Energizer Bunny…he keeps working…and working…and working…however, studies of health, stress, even anthropology teach us that bodies are not immune to the laws of biology (the analogue in economics is that there’s no free lunch), and even small but chronic deficits will take a toll, much as small but chronic caloric surpluses will allow us to pack on many pounds in adulthood. The U.S. Presidency seems to impose more than a small deficit on its successors, and Obama continues to go after the job with gusto. Apparently his accelerated physical aging was noted as early as last summer and again this spring (with a tip of the hat for that last link to the Village Voice, which apparently — and perhaps justifiably — feels there are better topics for seasoned reporters to cover). Still, he continues to burn brightly, and we sincerely hope there’s enough fuel there to feed the flames, as a presidential burn out wouldn’t be much fun for anybody. If nothing else, it’s a good reminder that, despite what most of us like to think and say, public service does, at least in some important ways (and for some people, some of the time…qualifications galore…) entail sacrifice. Of course one juicy book advance or a few hitches on the lecture circuit can produce an extremely positive ROI on said sacrifice – but there’s some sacrifice involved nonetheless.

DISCLOSURES: The foregoing is for informational purposes and/or entertainment only. It is not an offer to buy or a recommendation to sell any security, or to engage in any investment strategy. Please note that Symmetry Capital Management, LLC earns a revenue sharing fee of 4% from Amazon.com for any ‘click-through’ transactions. The firm, its principals, and its clients do not own shares in Amazon.com.

URLs:

http://www.ghana.gov.gh/

http://news.yahoo.com/s/ap/20090711/ap_on_go_pr_wh/obama

http://en.wikipedia.org/wiki/Tyranny_of_the_majority

http://symmetrycapital.net/index.php/blog/2009/07/tr2-why-well-leave/

http://koranteng.blogspot.com/2007/05/on-ibm-and-africa.html

https://www.cia.gov/library/publications/the-world-factbook/geos/GH.html

https://www.cia.gov/library/publications/the-world-factbook/geos/BC.html

http://www.modernghana.com/news/226743/1/obama-and-ghana-vis-vis-us-foreign-policy.html

http://www.politico.com/news/stories/0708/11520.html

http://www.nytimes.com/2009/03/05/us/politics/05gray.html?_r=2&hp

http://blogs.villagevoice.com/runninscared/archives/2009/03/breaking_obama.php

Stratfor’s Take on Iranian Election

George Friedman of Stratfor offers an interesting dissection of the election outcome in Iran, allegations of vote fraud, and the impact of Ahmadinejad’s re-election on U.S.-Iran relations. In a more general sense, Friedman’s analysis is a powerful lesson in thinking more critically about what we don’t know – in this case, failing to assess the quality of information emanating from Iran has led westerners to draw unsound conclusions and make poor predictions – garbage in, garbage out, as the saying goes.

Americans and Europeans have been misreading Iran for 30 years. Even after the shah fell, the myth has survived that a mass movement of people exists demanding liberalization — a movement that if encouraged by the West eventually would form a majority and rule the country. We call this outlook “iPod liberalism,” the idea that anyone who listens to rock ‘n’ roll on an iPod, writes blogs and knows what it means to Twitter must be an enthusiastic supporter of Western liberalism. Even more significantly, this outlook fails to recognize that iPod owners represent a small minority in Iran — a country that is poor, pious and content on the whole with the revolution forged 30 years ago…

Last Friday, Iranian President Mahmoud Ahmadinejad was re-elected with about two-thirds of the vote. Supporters of his opponent, both inside and outside Iran, were stunned. A poll revealed that former Iranian Prime Minister Mir Hossein Mousavi was beating Ahmadinejad. It is, of course, interesting to meditate on how you could conduct a poll in a country where phones are not universal, and making a call once you have found a phone can be a trial. A poll therefore would probably reach people who had phones and lived in Tehran and other urban areas. Among those, Mousavi probably did win. But outside Tehran, and beyond persons easy to poll, the numbers turned out quite different.

Some still charge that Ahmadinejad cheated. That is certainly a possibility, but it is difficult to see how he could have stolen the election by such a large margin. Doing so would have required the involvement of an incredible number of people, and would have risked creating numbers that quite plainly did not jibe with sentiment in each precinct. Widespread fraud would mean that Ahmadinejad manufactured numbers in Tehran without any regard for the vote. But he has many powerful enemies who would quickly have spotted this and would have called him on it. Mousavi still insists he was robbed, and we must remain open to the possibility that he was, although it is hard to see the mechanics of this.

Ahmadinejad’s Popularity

It also misses a crucial point: Ahmadinejad enjoys widespread popularity. He doesn’t speak to the issues that matter to the urban professionals, namely, the economy and liberalization. But Ahmadinejad speaks to three fundamental issues that accord with the rest of the country [which are piety, corruption, and national security]…

Perhaps the greatest factor in Ahmadinejad’s favor is that Mousavi spoke for the better districts of Tehran — something akin to running a U.S. presidential election as a spokesman for Georgetown and the Lower East Side. Such a base will get you hammered, and Mousavi got hammered…That [Ahmadinejad] won is not the mystery; the mystery is why others thought he wouldn’t win…

This is a very different view of things then we’re used to hearing in the media, but the logic is compelling. And there’s some recent and interesting evidence in a new documentary of the relationship between Ahmadinejad and Iraq’s citizens, including those who are not typically accessible to the west, called Letters to the President (the website images seem to suggest that it’s a propaganda film, but it’s not – it’s a very good piece of documentary journalism).

Friedman then looks ahead:

The question now is what will happen next. Internally, we can expect Ahmadinejad to consolidate his position under the cover of anti-corruption. He wants to clean up the ayatollahs, many of whom are his enemies. He will need the support of Iranian Supreme Leader Ayatollah Ali Khamenei. This election has made Ahmadinejad a powerful president, perhaps the most powerful in Iran since the revolution. Ahmadinejad does not want to challenge Khamenei, and we suspect that Khamenei will not want to challenge Ahmadinejad. A forced marriage is emerging, one which may place many other religious leaders in a difficult position…

[Regarding relations with the U.S.] What we have now are two presidents in a politically secure position, something that normally forms a basis for negotiations. The problem is that it is not clear what the Iranians are prepared to negotiate on, nor is it clear what the Americans are prepared to give the Iranians to induce them to negotiate. Iran wants greater influence in Iraq and its role as a regional leader acknowledged, something the United States doesn’t want to give them. The United States wants an end to the Iranian nuclear program, which Iran doesn’t want to give.

On the surface, this would seem to open the door for an attack on Iran’s nuclear facilities. Former U.S. President George W. Bush did not — and Obama does not — have any appetite for such an attack. Both presidents blocked the Israelis from attacking, assuming the Israelis ever actually wanted to attack.

For the moment, the election appears to have frozen the status quo in place. Neither the United States nor Iran seem prepared to move significantly, and there are no third parties that want to get involved in the issue beyond the occasional European diplomatic mission or Russian threat to sell something to Iran. In the end, this shows what we have long known: This game is locked in place, and goes on.

From an investment standpoint, this would suggest that there’s a relatively low probability of Iranian politics imposing any significant shocks on markets, for the time being.

UPDATE  2009.06.19  There’s been a fairly powerful “iPod uprising” in Iran since the election, which appears to be composed primarily of young people and centered in Tehran. That doesn’t undermine Friedman’s analysis above – but iPod liberalism is apparently a powerful political force, perhaps stronger than he seemed to imply.  As for vote fraud, various experts are all over the map, while an allegedly leaked letter from the Interior Ministry to the Ayatollah – which plays like a Cold War spook novel, and a bad one – is supposedly stoking resentment. The transcript, according to The Independent:

Interior Ministry’s letter to the Supreme Leader

Salaam Aleikum.

Regarding your concerns for the 10th presidential elections and due to your orders for Mr Ahmedinejad to be elected President, in this sensitive time, all matters have been organised in such a way that the results of the election will be in line with the revolution and the Islamic system. The following result will be declared to the people and all planning should be put in force to prevent any possible action from the opposition, and all party leaders and election candidates are under intense surveillance. Therefore, for your information only, I am telling you the actual results as follows:

Mirhossein Mousavi: 19,075,623

Mehdi Karroubi: 13,387,104

Mahmoud Ahmadinejad: 5,698,417

Mohsen Rezai: 38,716

(signed on behalf of the minister)

Color us skeptical. A couple of aspects of The United article are more interesting. First, government paramilitary and police forces are reportedly protecting the mostly pro-Mousavi protesters against pro-Ahmadinejad militias, or at least standing aside for the most part (though we’d note that there are conflicting reports circulating the blogosphere). This would support Friedman’s analysis, insofar as it confirms Ahmadinejad’s popularity with the country’s poor, and his arm’s length standing from the ruling Islamic Council. Second, the reported green wrist band protest by Iran’s soccer team at a World Cup match in Korea involved only five players, which supports the idea that this is not a majority movement. But that said, it clearly appears to have some mass behind it.

URLs:

http://www.stratfor.com/weekly/20090615_western_misconceptions_meet_iranian_reality

http://www.letterstothepresidentmovie.com/

http://news.google.com/news?um=1&ned=us&hl=en&q=iran+protests

http://www.independent.co.uk/opinion/commentators/fisk/robert-fisk-secret-letter-proves-mousavi-won-poll-1707896.html

More on the Financial Industry

As a follow up to our post on the financial industry yesterday, Advisor Perspectives has offered a couple of interesting pieces on the state of the industry.

One is from former IMF economist Simon Johnson, who argues that the political power of large banks will tend to work against potential solutions to the financial crisis:

Overall…I think the administration has done a much better job than the last one in putting together a package that has a chance of turning things around.

But there could be an Achilles heel, and it’s likely to be the banking system.  That’s where many distressed economies often get into trouble.  We’ve seen even when a lot of good policies were in place that if you’re not fixing the banking system up front–that is to say, if you don’t recapitalize it sufficiently, and you don’t replace the people who got you into trouble in the first place–then those deficiencies could work against everything else you’re doing.

The reason the government gives is that it’s concerned stricter demands would further damage the banking system, which will cause additional problems for the economy.  Behind that kind of logic is the belief that big finance is important and good for the economy, and you need to support financial intermediation with whatever means you have during a crisis like this.  But if a troubled third-world nation was making this kind of argument, we would regard it as a mistake, and I think it is a mistake here too.

The other is from PIMCO’s Bill Gross, who foresees a “new normal” of high public debt and low economic growth in the U.S. Interestingly, he attributes much of the prosperity of the past four decades to abandonment of the gold standard in 1971-73, which made money more plentiful and thus accelerated financial innovation. This led to rising leverage and consumption that eventually reached unsustainable levels.

Gross offers a warning to investors, policymakers, and taxpayers…

To zero in on the U.S. of A., its annual deficit of nearly $1.5 trillion is 10% of GDP alone, a number never approached since the 1930s Depression. While policymakers, including the President and Treasury Secretary Geithner, assure voters and financial markets alike that such a path is unsustainable and that a return to fiscal conservatism is just around the recovery’s corner, it is hard to comprehend exactly how that more balanced rabbit can be pulled out of Washington’s hat. Private sector deleveraging, reregulation and reduced consumption all argue for a real growth rate in the U.S. that requires a government checkbook for years to come just to keep its head above the 1% required to stabilize unemployment. Five more years of those 10% of GDP deficits will quickly raise America’s debt to GDP level to over 100%, a level that the rating services – and more importantly the markets – recognize as a point of no return. At 100% debt to GDP, the interest on the debt might amount to 5% or 6% of annual output alone, and it quickly compounds as the interest upon interest becomes as heavy as those “sixteen tons” in Tennessee Ernie Ford’s famous song of a West Virginia coal miner. “You load sixteen tons and whattaya get? Another day older and deeper in debt.”

…and to the investment profession (including investors and regulators – see the last sentence):

I remember as a child my parents telling me, perhaps resentfully, that only a doctor, airline pilot, or a car dealer could afford to join a country club. My how things have changed. Now, as I write this overlooking the 16th hole on the Vintage Club near Palm Springs, the only golfers who shank seven irons into the lake are real estate developers, investment bankers, or heads of investment management companies. The rich are different, not only in the manner intoned by F. Scott Fitzgerald, but also in who they are and what they do for a living…over the next several decades, the ability to make a fortune by using other people’s money will be a lot harder. Deleveraging, reregulation, increased taxation, and compensation limits will allow only the most skillful – or the shadiest – into the…Forbes 400.

Intuitively, it makes sense that the same industries represented at the modern country club would wield asymmetrical power over government policies, as Simon Johnson argues. But Gross’ personal and literary reflections imply that other industries are going to displace  financial services at the country club buffet and government luaus.  Thus, while Johnson’s concern might be very relevant in a contemporary sense, it’s likely to fade over time, as other industries come to wield more power over public policy.

Although this post is getting a bit long on the verbage, Gross offers some policy views that are worth discussing. First, he throws a jab at supply side wingnuts (although he does pull it slightly):

The fact is that supply-side economics was a partial con job from the get-go. Granted, from the 80% marginal tax rate that existed in the U.S. and the U.K. into the late 60s and 70s, lower taxes do incentivize productive investment and entrepreneurial risk-taking. But below 40% or so, it just pads the pockets of the rich and destabilizes the country’s financial balance sheet.

That sounds like an awfully speculative assertion (and a veiled aspersion towards the Wall Street Journal’s editorial board perhaps). He might be on to something, but he doesn’t substantiate it. In similar fashion, he demolishes a favorite claim of many Democrats:

Bill Clinton’s magical surpluses were really due to ephemeral taxes on leverage-based capital gains that in turn were due to the secular decline of inflation and interest rates that at some point had to bottom.

That’s true to some extent, although to be fair, the Clinton administration and a Republican congress did some important leg work on outlays.

Regarding tax policy, Gross concludes:

We are reaping the consequences of that long period of overconsumption and undersavings encouraged by the belief that lower and lower taxes would cure all.

This leaves us scratching our heads a bit, as it obscures what Gross believes the underlying cause to be. Was it the shift in central bank operations in the early 1970s as he initially asserted, or falling tax rates? The best we can come up with is that Gross is conflating two arguments: (1) end of gold standard led to financial innovation, leverage, undersaving, overconsumption, to be followed by high public debt and slow growth; and (2) higher and steeper tax rates are going to be necessary in the future (a logical argument for a large bond shop to make under current circumstances). Perhaps he’s doing so in an attempt to defuse the resistance that the second argument is bound to arouse. We’ll try to do a bit of defusing ourselves.

As we pointed out in our Wingnuts piece, the argument that lower taxes can cure every economic ill is indeed tired and a bit threadbare (and arguments about taxation are largely debates over competing personal and social values). But that does not mean that a better designed tax system would have no impact on productivity, output, and public indebtedness, especially when considered in the context of an open and competitive global economy, as opposed to the system of closed national and regional economies that prevailed at the time Keynes developed his General Theory. As we wrote in 2007:

In a relative sense the U.S. tax system is probably more optimal than most, but that competitive edge is eroding at the margin, a fact that is critical to our future well-being. While other nations are creating increasingly friendly (and thus competitive) environments for capital, the U.S. is largely treading water (even taking it on, perhaps).

And in 2008 (emphasis added):

…our tax code interacts with inflation in a way that creates strong disincentives to saving, and encourages debt financed consumption.

…increasingly complex and heavy handed regulation, a rising tax burden, and restrictive trade policies are the last thing that a slowing or contracting economy needs.

Today, we can substitute China, India, Brazil, emerging Europe, and many other parts of the world for Germany, Japan, and the rest [in the 1960s and 70s]. And the current dynamic is similar to that earlier one: a combination of bad tax, trade, and regulatory policies are driving down the expected rate of return in the U.S. economy, and the Federal Reserve has reacted by lowering its interest rate target; but the Fed’s actions can do little more than fuel eurodollar or petrodollar financed growth and inflation in faster growing countries, which eventually contributes to stagflation at home. In other words, by trying to induce growth in the U.S. economy, the Fed unintentionally engages in inflationary finance outside our borders. The only way around this is to improve the competitiveness of the real economy through better tax, trade, and regulatory policies. Admittedly, these have improved since the 1970s, but what matters most is not the absolute level of taxes, tariffs, and regulations, but rather their relative level and direction compared to the rest of the world.

This topic brings a lot of threads together, but the bottom line, in our view, is that continuing to tax productive activity – via corporate and personal income taxes, at increasingly uncompetitive levels – will only increase the likelihood that the U.S. end up like Japan – older, slower, and deeper in debt (though according to GapMinder, it’s still not a bad place to live).

URLs:

http://www.advisorperspectives.com/newsletters09/Simon_Johnson_on_Obamas_Achilles_Heel.php

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/IO+June+2009+Staying+Rich+in+the+New+Normal+Gross.htm

http://www.symmetrycapital.net/idlespeculation/2007110701.pdf

http://www.symmetrycapital.net/idlespeculation/20080925_policy_mix.pdf

http://tinyurl.com/gapminder-japan

Two Tasty Web Tidbits

We happened across two web pages that we’d recommend to those who can carve out thirty minutes of their day.

First is a photo and video narrative of Venture Capitalist and uber-blogger Guy Kawasaki’s trip to the US Naval aircraft carrier USS Nimitz (as a full grown Navy brat, this one got its hooks into me easily).

Second is a video of a presentation given by Gapminder founder Hans Rosling, who’s not just brilliant, but also the king of Swedish stand-up (at least he’s the funniest Swede we’ve ever seen on stage). Rosling uses a very cool visual platform to convey the ideas he expresses, which are about global economics and then some. His objective is to get people thinking about the world in ways that avoid bias and oversimplification. As someone who teaches Statistics to undergrads, this stuff is golden.

We came across the Rosling presentation via an intermediary link from Kawasaki’s site – networks are so cool.

URLs:

http://blog.guykawasaki.com/2009/06/24-hours-at-sea-on-the-uss-nimitz.html

http://dotsub.com/view/3b345061-c5da-4604-b59c-404527f0bd68

http://www.gapminder.org/

http://www.presentationzen.com/presentationzen/2009/05/tedx-tokyo-this-friday-in-japan.html

¿Hugo Chavez Es Mas Macho?

IMPORTANT DISCLAIMER: The following is for informational and entertainment purposes only. It does not constitute in any way a recommendation or an offer to buy or sell any security, or to engage in any particular investment strategy. The clients or principals of Symmetry Capital Management, LLC may hold a long or short interest in any securities mentioned.  

Venezuela’s President (and president-for-life hopeful) Hugo Chavez caused his country’s capital markets to tank in a big way this week, by proposing to nationalize privately held assets in several strategic sectors of the Venezuelan economy. Some commentators have called this an act of lunacy, but we’re not so sure. Setting aside the man’s comedically brilliant theorizing — like the one about ancient extraterrestrial capitalists having raped the ecology of Mars long ago — we believe that if he’s dumb, he’s dumb like a fox. Chavez is essentially trying to diversify oil related revenues into other productive assets, increase control over how future revenues will be distributed, and strengthen his hold on power. Using the blunt instrument of government to ‘nationalize’ attractive assets at a steep discount to their intrinsic value is perfectly aligned with these strategic objectives. Unfortunately, over the long haul, his political shenanigans can only harm the future well being of Venezuelans, or at least those who are unable to escape, primarily because they will directly raise his country’s marginal cost of both human and financial capital (this claim is inspired by the work of our friend, economist Reuven Brenner; see, for example, http://www.cato.org/pubs/policy_report/v20n3/econgrowth.pdf).

Let’s look specifically at the case of Venezuelan telecomm CANTV, which involves something of a cross-border, mano y mano conflict, which we’ll bill by invoking the spirit of Bill Murray’s old SNL gameshow sketch, ¿Quien es mas macho? We’ll simply replace “Lloyd Bridges o Ricardo Montalban” with “Hugo Chavez o Carlos Slim”. Slim, a Mexican telecom magnate, recently offered to acquire a sizeable holding in CANTV at $21 per share. Apparently, something about this offer didn’t sit so well with El Commandante, and he decided to preempt the deal. Why?

• Economic necessity? The national portfolio of Venezuela continues to be concentrated in oil production, and the public coffers have benefited tremendously from the runup in crude prices and consumption. However, overall production capacity and output have suffered from government interference, and the government has taken on increasing financial leverage in recent years. Should crude prices fall to more normal levels, the country is likely to experience financial and social crises. By reaching for other strategic assets (see chart below), Chavez may be hoping to diversify government cash flows, and reduce their exposure to future oil price fluctuations. His desire to bring the Venezuelan central bank under state control may also be aimed at preventing an external financial crisis (though, like the other measures he’s enacting, it will cause more harm than good in the end).
• Socialist impulses? If we take him at his word, Chavez may believe that the Venezuelan government is able to acquire and manage strategic assets in a way that produces sufficient cash flows that can be invested for the benefit of the Venezuelan people, through education, health care, and other subsidies. Governments play an essential role in certain areas of public investment. However, they tend not to be effective managers of economic assets.
• Market manipulation? Put yourself in Carlos Slim’s shoes. A potential suitor for the shares of a public company is at the mercy of the market, and usually has to offer a premium to the prevailing market price in order to get a deal done. Now put yourself in Chavez’ shoes. You want to buy company X at a steep discount, and you have an incredibly blunt and effective weapon at your disposal — the power of a compliant national government. Simply threaten to nationalize certain industries and companies, and already high risk premia are suddenly doubled or even tripled (which is simply an inverse way of saying that an already depressed price falls another 50-70%). It’s not certain how much the government will eventually have to pay for publicly held assets, but it certainly gives him some negotiating leverage — a lot more than Slim or any other private suitor could generate through private networks. As Mel Brooks once quipped, “It’s good to be da king.”
• Power and greed? This is pure speculation at the moment, but it deserves investigation. What if economically meaningful ownership of these assets accrues to the politically connected, rather than the Venezuelan public? There is a longstanding tradition of elitism in the country, particularly in the area of resource and industrial management and administration. There is also a tendency for any unilateral government, regardless of its philosophical basis, to suffer from misallocation and misappropriation of capital. Chavez, who appears to be modelling himself as the next Fidel Castro, has set out some rather lofty personal ambitions for himself since being sworn in. While he appears to be successfully consolidating his power at the moment, such goals always have some cost attached to them. Viewed in that light, ownership of strategic assets could certainly be used to pay off critical allies, and thus maintain and expand power.

How this will all play out remains to be seen, but we suspect that all four of these possibilities are at work to some degree. However it turns out, we are highly confident in one aspect — that Chavez’ actions will continue to cost his country’s people dearly in terms of the improvements in living standards that accrue from economic and political dynamism. Chasing human and financial capital offshore and squelching internal dissent are all fine and good for Chavez and for those who benefit most immediately from his largesse. But for Venezuelan society at large, it’s a not-so-comic tragedy.

Whither the IMF?

A robust global economy isn’t good for everyone. Take the IMF, for example. Early repayments by certain debtor countries, downwardly revised estimates of the need for its services this year, and competition from the private market are taking a huge bite out of projected 2007 income. The tenor of the report seems to treat this as a challenge to year ahead revenues, but there’s some rather large-writ handwriting on the wall, we think. An institution born out of a long string of political disasters and resultant economic crises is bound to suffer as the global political economy has gradually returned to sounder footing. Is this merely a cyclical downswing, driven in part by global liquidity and economic activity? Or is this a dinosaur institution being forced to contemplate its fate?

We tend to think it’s the latter, but we’ll throw on a hedge, and toss in a caveat. Our hedge is that if large central banks push real interest rates to an extreme, the IMF’s services will be back in demand (though we’re not sure that their charter will allow them to bail out over leveraged U.S. consumers and homeowners…). The caveat we’ll offer is supported by basic supply and demand, and by more interesting areas such as institutional economics and power relationships: the IMF is likely to remain the lender of last resort to the most extreme basket case countries, i.e., those that have screwed up their public policies – and domestic economies – royally. There aren’t a whole lot of these countries in the world, but those that fit the description will be forced to pay a relatively hefty fee for the IMF’s services, especially if we assume that private sector alternatives will be unwilling to step into these more extreme situations.

You can peruse the full report here: http://www.imf.org/external/NP/pp/eng/2006/120706.pdf

A Couple of Trinities

Trinity #1 – CFO.com carried an interesting article from The Economist on Thailand’s recent bungling with capital controls, a problem related to the ”impossible trinity” of domestic liquidity, exchange rates, and capital accounts. We’re not so much interested in the trinity or the theory behind it as in this tidbit — the authors correctly point out that, although this episode might have reminded the markets of the currency crises associated with the ‘Asian Flu’ in 1997, it’s actually quite different [diametrically opposed, in our view]. Where the 1997 crisis was marked by capital outflows, the current challenge facing emerging Asian economies is one of capital inflows, a symptom of the so-called ’savings glut’ theorized by some economists in recent years. I suspect that many non-theorists would be curious to know how the world could go from a shortage of savings to a glut of savings in such a short span of time, given that we tend to think of ’savings’ as a reserve of wealth accumulated over long periods of time. The answer actually has to do with the money creation process, which is controlled largely by the U.S. Federal Reserve, and how this process influences the use of existing assets. Rather than delve into the theory behind it, we’ll just offer this pithy rule of thumb: when Federal Reserve policy supports a high real rate of interest, the demand for savings rises, pushing up the marginal cost of investment capital; while a low real interest rate dampens the demand for savings, thus lowering the cost of capital available for investment. From roughly 1996 to 2002 (ignoring the runup to Y2K), the Fed enacted policy that tended to raise the real rate of interest, and ended up causing all kinds of trouble globally, as capital became scarce: Asia in 1997, Russia in 1998, Argentina in 2001, and finally the U.S., starting with commodity and cyclical industries in the first half of the period, and ending with the infamous corporate debacles and bear market slides of the period. Since 2003, the Fed has kept the real rate of interest historically low, thus encouraging a ‘glut’ of savings available for investment globally. The recent episode in Thailand merely shows that both extremes (too tight or too loose) have global consequences.

Trinity #2 — Another Economist story carried on CFO.com discusses the ‘misaligned triangle’ between public companies, private equity, and investment managers, as articulated by Morgan Stanley strategist Henry McVey. The basic thesis is that long term investment by publicly traded firms is falling short of the level required to ensure long term profitability, because: (A) the executives of public companies are tending to hoard cash as a reserve for hedging against regulatory risk and for buying back stock in order to boost earnings per share and thus maximize expected compensation; (B) private equity firms are often attracted to firms with cash on the balance sheet, but rather than putting that cash to work in long term investments, their interest is typically in maximizing short to intermediate term cash flows, which naturally precludes capex; and (C) rather than fighting for the cash reserves that public shareholders are entitled to, many fund managers instead accept the performance pop their portfolio receives whenever a private equity bid is at a significant premium to market (or more precisely, to carry value). This is a great example of agency theory in action, and leads us to take a rather interesting long view: in coming decades, more and more of the heavy lifting related to investment will be carried out by closely held private firms (or consortiums of such firms), while larger pools of capital will take over an increasing share of financing such investments. In fact, we can think of several current examples that might mark the beginning of such a trend, and thus lend support to the hypothesis. The long term impacts on markets, investors, businesses, and governments could get very interesting.