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“Poverty is the parent of revolution and crime.” — Aristotle

 

We tried to write about markets today. We could not. This was meant to be for subscribers only but we are putting it out there.

The great Libyan anti-colonial liberation fighter Omar Mukhtar (1858 — 1931), also known as the Lion of the Desert, protected two Italian prisoners in his custody saying, “We do not kill prisoners.”

In response to this, a fellow warrior protested and said, “They do it to us!”

The Lion of the Desert responded, “They are not our teachers.”

As images of the cold-blooded murder of Greg Floyd, wide spread police brutality against peaceful protesters and the senseless looting drowning out legitimate protests fill social media feeds, we want to remind ourselves first and then our friends and readers that “they are not out our teachers.”

 

 

The World We Live In

 

“We will not go into the ways in which geography shapes a nation’s culture. Thucydides noted the difference between a coastal city and an inland city. He discussed the difference between large cities and small ones, cities with enough resources to build walls and villages that lacked the resources to build walls and therefore never truly became cities. It is easy to consider the difference between being born in Singapore and being born in Ulan Bator. But there is a fundamentally important concept to introduce in relation to place: the idea of fear. Wherever you live, there is always the fear of the other nation, the other community. Two communities, living side by side, always live in fear of the other. The origin of the fear is the unknown intention of the other. No one can know what another person really intends. In casual relationships, where the cost of miscalculation is something trivial, you are free to assume the best about people. Where the only thing at stake is your own life and your own freedom, the consequences of miscalculation can be borne. But when the lives and freedom of your children, your spouse, your parents and everything you hold dear is at stake, then your right to take chances decreases dramatically. At this point, the need to assume the worst case takes precedence. Wars originate far less in greed than they do in fear. Thomas Hobbes in the Leviathan explained this in detail. It is the unknown intention and capability that causes neighbors to distrust one another. Knowing that one’s own intentions are benign does not mean anything concerning your neighbor. His appetite for conquest is the great unknown. This drives a community to more than defense. It drives them to pre-emption. If the enemy wishes the worse, then better to strike first. In a universe of mirrors, where the soul of the other is permanently shielded, logic forces one to act vigorously and on the worst case. Place determines the nature of a community. It drives the manner in which humans make a living, how they bear and raise children, how they grow old. It determines who will wage wars, who they will wage wars against and who will win. Place defines enemies, fears, actions and, above all, limits. The greatest statesmen born in Iceland will have less impact than the poorest politician born in the United States. Iceland is a small, isolated country where resources and options are limited. The United States is a vast country with access to the world. While its power is limited it is nonetheless great. Place determines the life of peasants and presidents. Place imposes capabilities. It also imposes vulnerabilities.” — Dr George Friedman, The Methodology of Geopolitics: Love of One’s Own and the Importance of Place (2008)

 

Nations are filled with communities, that are further divided by ethnicity, religion or socially defined constructs. The greatest divider of our age, however, is wealth. An individual’s wealth today moreso than most, if not all, factors decides how said individual lives their life. And as is well documented, the wealth gap between the haves and have nots has been rising for years if not decades.

An increasing number of nations across the world are facing both internal strife — the struggles within a nation’s borders that eventually lead to civil war or a revolution — and external conflicts between two or more distinct populations that may lead to war or severing of ties that leads to multi-polarity, much like during the days of the cold war.  Given that we live at a time when the wealth gap has risen to levels last seen during the Gilded Age, the rise in conflicts should not then come as a surprise.

The catalyst that tips internal and external conflicts from peaceful struggles to armed conflict is a severe ratcheting up of fear. A fear for one’s own life and the lives of loved ones. A fear of losing one’s livelihood. A fear of a drop in one’s standard of living. What ever the fear may be, if stoked sufficiently, it manifests as armed conflict against the oppressor, perceived or actual.

The greater the fear and the greater the probability of its realisation, the greater the propensity for conflict to erupt.

 

“A generation that has taken a beating is always followed by a generation that deals one.” — Count Otto von Bismark (1815 — 1898)

 

The continued brutality of the police force against African Americans and President Trump’s willingness to stir up emotions has probably tipped the fear scale to the point of no return. Barring a swift about turn and reparation in cross community ties — which we do not think is likely to happen or even be enough — the conflict between the oppressed and the oppressors will devolve to the point it becomes unbearable for the oppressors.

The first sign of victory for the protestors will come when the morale of the moderate enforcers, the members of the police force or the military that are begrudgingly carrying out orders, breaks and they join the protests as protestors not enforcers.

There are no bystanders. The time for passivity has gone, everyone in the US and the rest of the world has a choice to make. Remember not making a choice, is a choice.

Our forefathers may have watched as African Americans and minorities were oppressed. Let them not be our teachers.

The time to be better and to root out racism, bigotry and hate from within us, our households, our communities, our cities and our nations is upon us.

 

#BlackLivesMatter

“Good governance with good intentions is the hallmark of our government. Implementation with integrity is our core passion.” ― Narendra Modi, current Prime Minister of India

 

From the Wall Street Journal:

“India, the world’s biggest untapped digital market, has suddenly become a much tougher slog for American and other international players.

Over the past year, Indian policy makers have begun erecting roadblocks through special requirements for how U.S. tech companies structure their operations and handle data collected from Indian customers, according to industry executives and experts following the market.

Seeking to match China’s success at protecting and promoting homegrown tech giants, such as Alibaba Group Holding Ltd., Tencent Holdings Ltd. and TikTok parent Bytedance Inc., India is increasingly trying to shelter domestic companies. In the crosshairs, beyond Walmart, are firms including Amazon.com Inc., Alphabet Inc. ’s Google and Facebook Inc. and its WhatsApp messaging service.

Indian officials say they have an array of aims: protect small bricks-and-mortar businesses, secure user data and allow room for India’s own tech firms to grow. That smacks of protectionism to Western tech executives, who say India’s goals make it difficult to predict business conditions.”

 

The best laid plans of mice and men often go awry.

Investing in emerging markets is fraught with risk. Moral hazard and fluid regulatory regimes, means unsystematic risk cannot be easily diversified away, especially by foreign investors.

On to the update.

Change is Afoot: Fiscal Stimulus

Last week we commented that for markets to continue marching to higher levels there is a need for another catalyst. This week, we seem to have received the first hint what that may be.

Japan’s Prime minister Shinzo Abe has launched a new fiscal stimulus program with a larger-than-expected yen 13.2 trillion (US dollar 121 billion) package to repair typhoon damage, upgrade infrastructure and invest in new technologies.

According to the Financial Times, “the spending package is one of the largest since the 2008-09 financial crisis, as Japan seeks to fend off weakness in the global economy, drag from a recent rise in consumption tax and the risk of a slowdown after next summer’s Tokyo Olympics.”

Since the Global Financial Crisis, despite loose monetary policy and record low interest rates, corporate spending in most major economies, as a share of GDP, has failed to reach pre-crisis levels. For example, the below is a chart of gross private investment in the US as a percentage of GDP.

Cyclically, US domestic investment peaked at the end of 2014 ― right after oil prices collapsed, sending shale companies into a tailspin and drastically slowing the pace of capital heading for the shale patch.  Just as gross private domestic investment started picking up again in response to President Trump’s tax reforms, the Fed started tightening monetary policy by raising interest rates and shrinking its balance sheet. Meaning that the global economy remained deprived of the two engines of increasing capital investment and loose monetary policy in the US firing simultaneously.

The Fed has since famously reversed course by cutting rates and re-starting balance sheet expansion. Corporate spending, however, has not picked up.

Corporations do not like to invest in uncertain times and there has been plenty of uncertainty about. To continue with the US as an example, companies are still coming to terms with the impact of the trade dispute with China and at the same time facing the prospect of an Elizabeth Warren or Bernie Sander presidency ― both candidates running on platforms with socialist leaning policies and neither seeming in the mood to curry favours to big business.

With corporations unwilling to spend, governments need to take the lead. And Prime Minister Shinzo Abe’s announcement this week indicates that the powers that be in developed market economies are getting the message.

Europe, too, seems to be getting its act together. Governments, universities, EU institutions and a number of major corporations have joined forces in a new industrial policy drive that could become a blueprint for many other technologies and sectors. A fear of becoming an economic and industrial backwater in the face of US technological supremacy, growing trade protectionism and Chinese state capitalism, European leaders, despite facing much political criticism, have embraced a reinvigorated industrial policy as a tool to assert the continent’s technological independence and ensure its economic survival.

The next step for Europe is too see a coordinated effort towards a comprehensive fiscal policy and loosening of the purse strings. With discussions over the EU’s euro 1 trillion-plus Multiannual Financial Framework on going, there is still hope for Europe to follow Japan’s footsteps towards a looser fiscal policy.

If the US, Japan and Europe can pick up the slack from corporations and engage in loose fiscal policies in and around the same time, the longest economic expansion on record can get longer and global equity markets can head higher still.

The Importance of Fiscal Stimulus

Why is fiscal stimulus important? To answer that question, we turn to the Kalecki-Levy Profit Equation:

Corporate Profit = Investment + Dividends – Household Saving – Government Saving – ROW Saving

From Profits and the Future of American Society: A Dramatic New Perspective on Capitalism by S Jay Levy and David A. Levy:

“The effect of government saving on the profits of the consumer-goods sector is the same as the effect of household saving. Whether consumers themselves save or government acting as their “purchasing agent” saves, the money will not reach the consumer-goods sector. Thus, a government surplus, like personal saving, would be a negative source of profits.

In 1980, the government had a deficit; its outlays exceeded its receipts. In other words, the government borrowed. Thus, it added to the flow of funds into the consumer-goods sector; it contributed to the sector’s profits. A government deficit is always a positive source of consumer-goods-sector profits.”

Most developed market governments can create money directly. Giving them, at least theoretically, an infinite capacity to borrow and dissave. More importantly, governments do not, or at least should not, operate for their own wealth generation, rather they operate for the benefit of the populace.  For this reason, in periods where the desire to save is high, and the desire to invest is low, governments must dissave by running deficits and be the propellant for their stalling economies.

Based on the above formula, we can see that government spending (or dissaving) increases corporate profits. Increasing corporate profits, generally, translate into increased employment, higher wages and increased liquidity. All factors that contribute positively to household wealth and should translate into rising equity prices.

This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.