Macro Tsimmis

intelligently hedged investment

Running with the Wolves

Posted by intelledgement on Sun, 24 Dec 06

I write these words sitting in my father’s cabin in Big Bear Lake, California; we are visiting in hopes of getting in some real skiing. The skiing in North Carolina was never great and ever since Al Gore invented global warming, it has become yet still lesser than great. Conditions here are a bit cramped…Lee normally shares the place with three cats and two wolf dogs, and piling five additional humans into the mix is a bit of a challenge, what with the one bathroom and one dialup internet connection. But the company and food is good, and there’s plenty of snow on the mountain, and he lives in a national forest allowing the wolf dogs the freedom to roam for acres and acres…so what’s not to like?

I mean to write about the model Intelledgement Macro Strategy Investment Portfolio (IMSIP) that we plan to launch next week…but this is a funny sort of investment report, in that we haven’t actually taken any positions yet. I guess that’s OK, however, as [a] we pretty much know the securities we are going to be buying and [b] I really want to talk about not so much what we are buying but why we are buying it/them.

Six years into the third millennium finds capitalism ascendant, but democracy under unanticipated pressure. In the wake of the collapse of the USSR, it appeared that what we like to think of as “the American way of life” was sweeping to world-wide triumph. Huge swaths of Eastern Europe began holding genuine elections and even Russia followed suit. As the last days of the 2oth Century ticked away, the old Cold War alliance still proved able to deliver the goods in Bosnia and Kosovo, and although it failed in the Sudan and failed even to try in Rwanda, these were considered sideshow conflicts with no serious international implications.

To be sure, there were some clouds on the horizon. The long-term health of the US economy was the most salient of these, if only because the USA is the bastion of democratic capitalism—without us, the Allies probably lose WWI and certainly lose WWII. But after years of running up budget deficits on top of the looming demographic time bomb of structural social program deficits—not to mention declines in savings rates, increased abuse of credit by consumers, and ever-widening trade deficits—in the years running up to 2000, the government magically appeared to solve the budgetary problems and have a handle on the solution to the social programs demographic issue. And perhaps free trade would improve the current accounts situation.

Another fly in the ointment was the rise of China. Since the defeat of the Gang of Four in the 70s settled the debate over the utility of communism vs. capitalism, the Chinese economy has been inexorably on the rise. But in the wake of the Tiananmen Square disaster, it became evident that the political elite harbored no tolerance for dissent either tactically or strategically. As the Century turned, it was an open question whether the economic need for creativity and innovation combined with the advent of 21st Century social communication tools would succeed in overwhelming the elite’s mania for tight control and move China towards the democratic capitalist norm.

The third concern was the festering strain of Islamic “fundamentalism” which rejected modernity and considered Western-style democracy as fundamentally subversive and antithetical to the natural order of things. But six years ago, this still seemed more an annoyance than a top-tier problem.

Then came 9/11. And six years later, all of these concerns loom much, much larger.

In the wake of ill-advised adventures in Afghanistan and Iraq, the US government’s finances lie in tattered ruins, with huge budget deficits financed through the kindness of foreign strangers, and six precious years past with no solution to the entitlements demographic time bomb in sight. The private sector has continued a stately expansion (following an initial convulsion after 9/11), but the savings rate had dipped into negative territory, credit debt is at an all-time high—with interest rates on the rise—and a bubbly real estate market has inveigled thousands of homeowners into houses that now appear overvalued, paying mortgages whose adjustable rates are soon due to rise from enticingly low teaser rates to the point where folks could easily be paying out more than the property is worth. Don’t even mention the trade deficit. On top of that, the competition for jobs from offshore has grown to the point where real wage growth is threatened, and inequality is growing, while political support for free trade wanes.

On the other hand, six years later, China is much more powerful, but no less authoritarian. 21st Century social networking tools have proven less of a viral mechanism for spreading diversity of opinion and more of an Orwellian tool for social control. The precept that “knowledge is power” cuts two ways: by disseminating information, it can empower heretofore ignorant folks to act more effectively in their own self interest, but by enabling central power brokers to collect information and monitor the activities of their citizens, it can also facilitate the suppression of dissidence. Furthermore, in the past six years, Russia has clearly backed away from the democratic capitalist norm and moved closer to the Chinese authoritarian capitalist model. It is by no means clear that the democratic flavor of capitalism will prevail in the long term.

And as for the Islamicists, the last six years have been a litany of triumph, with one misstep by the West after another: following the initial 9/11 attack, the USA blundering first into an indecisive sideshow in Afghanistan, then into a disastrous entanglement in Iraq—which eliminated the most ruthless and committed Arab modernist, demonstrate daily the point that the USA is imperialistic and seeks domination, and provide priceless propaganda triumphs (Abu Ghraib, Guantanomo Bay, a plentitude of instances of “mistreatment” of Afghanis and Iraqis by US military personnel)—the brain dead reaction of the Spanish government to the terrorist attacks there which lead directly to their defeat at the polls, the arrogant idiocy of the Israelis at once handing the Hamas extremists a huge victory and eviscerating a great potential ally in the pro-Western Lebanese government…the beat goes on.

So now we are in a pickle—the twilight is darkening, we are gathered around a flickering campfire, but the supply of wood is nearly gone and the wolves are gathering…they seem to be baying to each other from every direction. We have a bow but only a couple of arrows, so fighting is not a good option. Of course if wishes were horses, we could just ride away from danger and then focus on fixing the conditions that lead to the danger arising…but we have no horses, so that’s not an option. Right now, our priority has to be preserving life and liberty in order to maintain the opportunity to fight another day, under more favorable circumstances.

And that, in short, is the strategy of the IMSIP for 2007 and the foreseeable future: if you can’t beat ’em, join ’em! We will be hunting with the pack for opportunities to preserve and where possible to enhance wealth through a coming time of troubles. Our macro analysis tells us the USA economy is likely to decline, so we will eschew most USA-based investments and focus on where the growth is. Our analysis indicates that commodities are in demand, so we will look to preserve and enhance our wealth accordingly. Our analysis warns that a significant economic disruption is likely in conjunction with the demise of the dollar, so we will be prepared to shift into a defensive mode shorting the indices if appropriate. And if the more dire global warming predictions come to pass—or if enough folks come to believe they will—there will be serious economic consequences and we will need to adjust accordingly.

In the next week, we will be posting recommendations for the particular tactical positions we plan to take as of the start of 2007. We will publish any changes we make to the portfolio as they happen—although we do not anticipating making any trades for a year unless militated by our macro analysis—and we plan to publish portfolio updates quarterly.

Well, the skiers are back from Big Bear and the sun is beginning to sink in the west. Time to log off the computer and head out for our daily run with the wolves.

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