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Changing Fortunes

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The town I am in now in Istria, Croatia, was first occupied by the Histri, an Illyrian tribe, 13,000 years ago.  Since that time, it has been conquered by the Romans, Lombards, Franks, Venetians, Austrians and Yugoslavs and is now independent. Said differently, the hold of any one clan on power is temporary, a useful lens to look at today’s significant powers.

How to calibrate the relationship of rulers over the ruled is an ancient debate but, through enormously costly experimentation, much is now known about what does and doesn’t work. Entrepreneurialism outperforms planned economies but requires significant regulation to insure that there are clear standards regarding safety and fairness. Diffuse power outperforms concentrated power but requires majority populations to be amenable to the demands of minority populations. Here in Croatia, the Hapsburgs and today’s European Union achieved that balance; the Yugoslavs, of which Croatia used to be a part, not so much.

Today, the US is struggling to achieve that balance, while China and Russia are wildly off course and a vivid illustration of the dangers of concentrated power.  UBS’s annual wealth report provides useful perspective on relative systems. While wealth isn’t everyone’s measure of success, it is a measure of success. Below is UBS’s measure of “ultra-high net worth” people, those with more than $50 million in assets. The US system, despite its many flaws, is a wealth creation machine. Almost all of the countries below have two things in common, work ethic and rule of law.   

If you were to look at these numbers as a percentage of population, the numbers would be more stark because China and India each have four times the US population and 17 times Germany.  Going forward, I expect the number of wealthy in China and Russia to drop precipitously. Given the collapse of the Russian ruble, this is happening to Russians in real time.


In May, I wrote about China’s Deflationary Regime Change. We know less and less about what is going on in China because they are eliminating unflattering data, like youth unemployment that was at 20% before they stopped publishing it this week. But we know what is going on in China isn’t good–weak growth, deflation, a massive real estate debt bust (see chart below). We also know why—President Xi and the absolute power he arranged for himself and the weakening of albeit unwritten checks on authority that once existed.

The Achilles heel of any authoritarian system is terrible leadership. You can’t dislodge them easily and their power is simply incomparable to that of any elected leader. If anything, as it becomes clear the authoritarian leader has poor judgement, they need to exert even more pressure to keep people from suggesting exactly that, which sets up a self-reinforcing process whereby the leaders becomes ever more rigid and the economy slumps yet further as risk taking evaporates. Weak data should help focus policy, rather than be suppressed. As I was told recently by one high level contact, the goal of policy elites in China now is simply to survive lest they end up like Qin Gang, the foreign minister who disappeared for doing who knows what. As I have stated previously, I think China is currently uninvestable for foreigners.


In May, I wrote that Russia Is Becoming More North Korean and asserted that the sanctions are working. The clearest evidence for this is the collapse in the ruble. Just like Xi, Putin rather than looking at the ruble collapse as a useful economic indicator of the need for a policy change is, instead, going to establish foreign exchange controls. The basic issue is that Putin can not admit that he has made a massive strategic blunder by attacking Ukraine. Putin does not know how to go into reverse.  War spending is exploding even as the sources of financing (raw materials and borrowing) are diminishing. I noted in May that defense spending as a percentage of oil revenue was at a record high, 264%.

The simplest measure of bad leadership is how many of their own citizens the leader sends to meaningless deaths. A recent report by Mediazona and Meduza estimates that 50,000 Russian soldiers have died in Ukraine. But the data was estimated based in part on inheritance records. Given that many of the dead are former prison inmates or impoverished people from the hinterlands without any inheritance, I think it’s possible the deaths are above 100,000. One doctor I spoke to in Kyiv said that based on the ratio of injuries to probable deaths, he thinks the number can be as high as 200,000.


There are two big forces at work in the US. The first is the Trump indictments, the second the Biden boom.

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