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GlossaryReflections on Coups, Information and Mentoring
February 5, 2021This edition is a “two-for,” a podcast and investment perspective. If you want the asset allocation that goes with this investment perspective, email me and I’ll share it. Also, if you like my book Raising a Thief, post a review on Amazon or tell a friend. If you like the podcast Things I Didn’t Learn in School, post a review on Apple Podcast. If you like these essays, share them. If you don’t like any of the above, tell me why and I’ll learn.
Regarding, the podcast, I recently spoke with Eileen Murray, the former co-CEO of Bridgewater. The full conversation is here, also on Apple, Spotify, my website, etc. Two things struck me in the conversation. First, the story of someone who made it from the projects to the boardroom. These stories remind us of the power of thinking BIG. Dreams and aspirations matter. Second, she spoke about her definition of management. In her view, the primary role is development. How many managers do that? Her answer: “not many.” I agree. Next week’s podcast will be with an old friend, Pierre-Yves, who recently stepped down as Chairman of SocGen China. He discusses what he learned from fighting a war, an uprising in Mexico and living in China. He also shares his view on the European Union. Spoiler alert: not good.
Regarding investing, the below is derived from a column I published this week in the South China Morning Post . I recalled the the first coup I watched, in 1993, in Moscow, with the one last month in Washington, D.C., where I grew up. In Moscow, rebels targeted two spots: the Russian White House and the TV broadcast center, Ostankino. Watching the rebels storm the US capital, I had a sense of déjà vu only this time Twitter mattered more than a TV tower.
The proximate cause of January’s attempted putsch was misinformation. Some of those attacking believed they were targeting a cabal of Satanist pedophiles. In shutting off Trump’s account, Twitter’s CEO momentarily wielded more power than the entire US Congress. This decision was applauded by many Democrats and condemned by Russian dissidents like Aleksei Navalny, whose anti-corruption movement depends on the same tools used to spread conspiracy theories in the US.
In terms of investing, I took away two points.
First, President Biden has 24 months (until mid-term Congressional elections) to demonstrate to 74 million Trump voters that following existing rules will produce meaningful improvements. If Biden is unsuccessful, in 48 months US Democracy may be overthrown, which is such a disruptive idea it is difficult to put into print. After all, Hitler didn’t succeed at first; 10 years elapsed between his beer hall putsch and Chancellor. Domestically, expect massive domestic fiscal spending. Internationally, expect a continuation of efforts to confront China, a position that now has bi-partisan support.
Second, many of the top US tech stocks enjoy enormous profits, economies of scale and unprecedented power. What qualifies a tech entrepreneur to decide life and death decisions, like that Trump is a threat and Navalny is not? Expect more regulation, a hit to profits and, ultimately, lower multiples.
Reform typically follows crisis, as seen in past low points in the US and other countries. The US Civil War led to amending the US constitution to abolish slavery and the Great Depression led FDR to abandon the gold standard. In China, Deng’s reform and opening followed the Cultural Revolution, for instance.
Given the constitutional right to free speech, reducing the proliferation of conspiracy theories will be surprisingly difficult for the Biden Administration. The most substantial change would be if the Congress held internet platforms like Facebook (2.7 billion users) to the same legal standards that it currently does publishers like The New York Times (7 million users). While not likely, a whiff of this becoming reality and the targeted stocks will tank. It’s interesting that Fox has been sued (successfully) for publishing mis-information. At present, that can’t happen to Facebook.
The inability to easily crack down on false information puts even more pressure on Biden to enact policy voters can see with their own eyes, like Covid control and infrastructure. Traveling in rural China, I was struck by how new airports and faster cell phone service created a very tangible sign of better living standards. At first glance, China looks much more stable than the US. However, given that open debate is forbidden, it’s hard to know. Many countries are experiencing significant tension between the countryside and cities. Given the rural/city split in the US, if the US population was slightly less urban Trump would likely have won. As far as I can tell, this tension exists in China as well.
The enormous change in communication infrastructure between the Russian coup and the attempted US one is creative destruction in action. Starting in the 1700s, there have been waves of disruptive innovation, from steam power to railroads to electricity to cars, computers, and the internet. The next innovation wave will likely include a merging of biological, computer and internet innovation to radically revamp industrial inputs, medicine and transportation. Appropriate law (be it taxes or regulation) always lags innovation, it’s tough to figure out what rules apply, but eventually catches up.
Change rattles people even as they are mesmerized by it. Many of the people who attacked the capital were caught when they utilized this new technology to post selfies of themselves breaking the law. In the US, rapid economic change is also mixed in with racial shifts, like having had a black President. How would Germany’s far right react if a Turkish-German became Chancellor? Make America Great merged economic, cultural and racial fears into a political platform. China’s economic success combined with President Xi’s more aggressive foreign and domestic policy both fed into this narrative and became easy to villainize, which I find tragic as I cherish relationships in both China and the US.
The most likely US policy shift is a massive fiscal program on Covid relief and infrastructure. The COVID spend is relatively obvious. Researchers suggest that 1 in 4 American families are now short of food. More Americans have died due to Covid than in World War 2. US infrastructure is well behind places like Singapore, Switzerland and Germany. An infrastructure spend can create jobs, precisely the type of jobs that would lift salaries and not require a college education. If I was in the Biden Administration, I’d be pushing for a significant commitment, bigger than what is now on the table.
The question will turn on financing. The real cost of government borrowing is negative. While the US is already highly indebted, the cost of that debt is a market driven interest rate. Biden can spend until those rates go higher and rely less on tax increases or at least immediate tax increases. Increasing the supply of dollars should reduce their value. My asset allocation remains long stocks in US and China, where much of the next wave of tech innovation will occur (though avoiding the name-brand stocks), short the dollar and long foreign bonds, including those in China, to hedge the risk that policy makers pull back on stimulus too early and the virus mutates such that vaccines are less impactful than we would all hope. At some point, US bonds will come under pressure. This is the most likely catalyst to do in the US stock market, higher rates will compete with money going into stocks.