Overview
Negative press garners attention. However, a core job of sophisticated institutional investors and risk managers is to provide an accurate assessment of current and likely future events. Our premise is that the future is far more promising than what you have been led to believe. In writing these installments, we aim to be apolitical and to write from a perspective that assists sophisticated institutional investors and risk managers.
Bene Nota: the author knows a bit about risk, having been the primary person to raise the alarm about Enron and WorldCom, and having been designated to be the number one person to warn about the Great Financial Crisis of 2008 by Fortune Magazine.
Major Developments
There are several factors providing a basis for optimism over the next several years. Below is a short listing:
- Geopolitical
The geo-political environment is critical for the long-term health of any country. America benefited from being bordered by two wide oceans and neighbors that are non-threatening. During World War II, America could attack the production facilities and supply lines of the Axis, while its homeland remained protected. Several actions have recently been taken to maintain and enhance that protection.
- Panama - While not receiving much media coverage, Panama’s Supreme Court decision to void Hong Kong-based CK Hutchison’s contract to operate two ports at either end of the Panama Canal is a game changer. With this decision, America has protected its access to the canal in times of turmoil.
- Venezuela - The removal of Maduro as Venezuela’s president nullifies the influence of two potential adversaries, assists major energy firms in obtaining recovery of nationalized assets, assists in boosting global energy production, and reduces the flow of illegal drugs.
- Cuba - The country has long been a concern because of the communist government and the bases and support provided by two potential adversaries. With the restriction of energy imports, the country might see a regime change.
- Greenland - The purchase of Alaska from Russia in 1867 was widely viewed as a mistake and given the sobriquet “Seward’s Folly”. Given the thawing of Arctic waters and the increasing importance of rare earth minerals, it is hard to ignore the importance of Greenland.
- Iran - The surgical strike on the country’s nuclear facilities has addressed a major threat in a key area of the world. Tensions are heating up again with protests, and time will tell whether there is a regime change.
- NATO - Taking a step back from the current rhetoric on Greenland, over the past twelve months NATO has added two powerful countries (Sweden and Finland), and member states appear more committed to increasing their military spending.
- Mexico - While many question whether any progress has been achieved, the country recently turned over 37 individuals involved in drug trafficking.
- Russia - Russia appears to be on an unsustainable path. Via the Ukraine war, it has exhausted its treasury, military hardware, and manpower reserves and shown the world that its military and military hardware are weak.
- China - There is little doubt that the country has achieved much over the past couple of decades. However, the economic malaise and leadership turmoil have sapped some strength.
- Fiscal Prudence
This area appears to regularly receive significant attention but remains nettlesome for nearly every administration. The largest expenditures are Social Security, defense, interest, and social services. The current administration has continued efforts to cut expenditures and appears to be making headway via headcount cuts and social services fraud-related cuts. Nonetheless, significant challenges remain, particularly due to interest rate increases over the past five years.
- Economic/Productivity
Numerous economists claim the primary pathway to increased living standards is a rise in productivity. Upon reflection, the notion makes sense. When most citizens were subsistence farmers, the standard of living was relatively low. With the emergence of the industrial revolution, one worker could accomplish significantly more.
The new development in this area is the convergence of several technologies promising vast increases in productivity. The widely touted Artificial Intelligence is probably at the top of the list, but should be joined by robotics, improved energy generation and storage, space development, medical advances, and a plethora of other advances. If we reach the stage of machines building machines, then productivity will increase without the involvement of humans.
- Threats
Despite the achievements of the current administration, midterm elections are around the corner, and there is a fair chance the House of Representatives will flip. The media remains powerful and the coverage from Minneapolis has been harmful. With a reset, the sting will fade over time. Additionally, with all the changes comes some pain. Sarah Paine, a well-regarded military historian, believes the current administration is making policy mistakes. While with change comes risk, many actions appear to be long overdue.
Conclusions
Sophisticated institutional investors and risk managers need to make accurate assessments of the most likely outcomes. Skewed media reporting often makes it difficult to obtain an accurate view of true conditions and likely outcomes. The purpose of this installment is hopefully to provide some perspective.
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