Obama   The Poison Chalice
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Obama The Poison Chalice

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Barrack Obama has been chosen as the next president of America and has accepted a poison chalice from Alan Greenspan.

Barrack Obama has been chosen as the next president of America and has accepted a poison chalice from Alan Greenspan.

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Obama   The Poison Chalice Obama The Poison Chalice Document Transcript

  • Obama - The poison chalice James Vinall - Thursday, November 6, 2008 Barrack Obama has been chosen as the next president of America and has accepted a poison chalice from Alan Greenspan. As we know, Greenspan kept rates too low for too long and the American government and public borrowed and spent with impunity. The Economy The overinvestment and irrational exuberance of the late 1990’s left US corporations with huge debt which led to the technology collapse in 2000. Greenspan bought Fed Fund rates quickly down to 1% and effectively transferred debt to individuals from corporations. China and Asia sold goods to the US consumer, but kept the cash in US$ by buying US treasuries and printing money at home. This kept their currency down and their products affordable. Greenspan had not learnt from the Japanese suppression of the Yen in the 1970’s and early 1980’s (before the Plaza Accord) which allowed Japan to export cheaply at the expense of the US consumer. On the December 1989, Japan had racked up it’s own debt and the Nikkei 225 topped out at 38,957. To show how Japan has never recovered in the following 18 years, on October 2008 the Nikkei 225 hit 6,994 (down 82% from the high) and is currently at 9,521. All of this happened with initially high levels of domestic savings that America does not enjoy. What change can Obama effect when faced with this overburdening debt? America has very little export manufacturing industry to support it’s balance of payments. Obama has said he will stimulate the domestic economy, but in absence of corporate capex the state will need to borrow and spend to pick up the slack in the economy. So the Fed will have to bring down rates at the short end to stimulate the economy. But the government will need to expand debt beyond the record US$11 trillion it is currently borrowing, which will push up longer term rates. 45% of US Treasury securities are foreign owned. If the US consumer is not buying Asian goods, their governments may choose to sell their vast holdings of US Treasuries to stimulate their domestic demand, putting pressure on the US$ at a time when mid/long term rates are rising. Obama has vowed to protect America and national interest will take precedence. This raises the ugly spectacle of protectionism and conflict is inevitable. Obama is fiscally beholden to China and Asia as Greenspan has already sold the deeds to the White House. It is impossible, given the balance sheet, to advance the interests of the American people and keep Asian governments happy at the same time. Many people cite the flexibility of the US economy to quickly dig itself out of previous mires for their lack of longer term concern for the world position of America . Asia is not going to let America climb back to top of the fiscal pile using their hard earned resources. Asia is creating a middle class that want cars,TV’s fridges and air conditioners that they manufacture themselves. Asia doesn’t need America as they are learning to run their own full service economies. America does however need Asia as their paymaster. Obama has limited “wiggle room” between keeping the Asian central banks onside and fighting the clarion call of US introspection. As I said in my October letter (attached below), this is Asia ’s century.
  • In my September letter (attached below) when the S&P500 was at 1,186, I set a short term target of 835 (down 47% from the Oct 2007 peak). On Friday 8th October, the S&P500 index reached a low of the day at 839.80, which has been the bottom so far. This is likely to be a medium term bottom, before we see a more orderly slide over the next two/three years (as the recession bites) to 630 which is 60% down from the Oct 2007 peak. Asia has a huge period of adjustment ahead. Free markets and free trade are nice ideals that just went out the window in the name of national interest; just watch the fall out in the European Union. Global trade on trust is being seriously eroded and we will have to return to letters of credit and goods inspections (by people like SGS) as executives are scared of not getting paid for items delivered. I have already seen companies offering their customers a 25% discount to settle their outstanding balance immediately America has been particularly responsible for executive avarice, where directors pay themselves vast sums and will do everything to grow share prices. This meant employees and suppliers were paid as little as they could get away with and clients relieved of as much cash as they could “corralled” to commit. This credo to enrich yourself at the long term expense of the organisation was never more prevalent than in the financial industry. Greed is good now applies to individuals not corporations. Asia works for longer term growth of the organisation, forging alliances and developing markets that will last. Working on capital rather than debt, Asia is not beholden to rapacious fund managers demanding short results as the expense of future growth. As Asia embraces rational debt growth will expand. The investment community needs to revisit its quarterly profit relationship with public companies so as not to compromise their growth and survival. The West has to rethink its priorities if it wants to compete. Foreign Policy Much has been said of Obama’s popularity in Africa . But as China has been quietly signing up mineral rights deals across the continent and will seek to ensure the signatory stays in power while they extract the natural resources. Obama will have little real or economic influence in Africa . If Obama can make friends in the Middle East , perhaps he can transfer some of the debt from the Asian sellers to petro-dollar buyers, but that will cost. The Jewish lobby are already hostile to Obama and any significant change of stance on Israel that the Middle East demands would cause multiple domestic problems. However, this will define what Obama will mean to Islam and his Iraq/Afganistan/War on Terror policy. Russia could turn out to be the early test for Obama’s foreign policy. Russia has been emboldened by no real international censure for invading Georgia and South Ossetia . In my mind this was a to test the response they might expect from putting military force behind a huge claim of oil bearing territory around the North Pole, now free of Arctic ice that can now be economically extracted. Last year, Russia planted a flag on the seabed of the Arctic Ocean on the Lomonosov ridge. World leaders will have no appetite to fight Russia given their focus on more national than international affairs. America has no real perception of how their political stock has fallen during the Bush administration. Even in Europe, few people look up to America , especially as the guardian of democracy. If Obama proceeds down an introspective, national interest path as many expect, the backlash in Europe could be strong. Europe feels they have been trampled by the USA over the past decade and would secretly enjoy pulling them down a peg. Obama’s patriotic zeal could quickly find his traditional allies less accommodating. Europe does have an export manufacturing economy, is more used to dealing with economic strife and has less debt than the USA (excluding the UK ). Although Europe has been hit hard by the failing
  • economy, it has greater flexibility, more savings and new markets to exploit. Europe should be able to rise from the ashes sooner than America . Asia is not going to have it easy as the retreat of the US consumer will need significant adjustment that they have not seen before. In the end stimulating and developing their own economies will be their triumph. Conclusion Obama has been right to warn America of the difficult times and sacrifices ahead. However, main stream America has not fully realised how their Greenspan fuelled consummate spending habits over the past 5 years has truly compromised their global leadership forever. Life will be harder in America over the next decade while everyone earns to pay down their debt, especially with an ageing population. When the US finally returns to growth, the world will be a different place. The world is going to be less trusting for a while, conflicts are likely to break out and protectionism rear its ugly head. Debt will be a dirty word and cash will be king. Anyone with money in the bank will see a multitude of extraordinary opportunities over the next three years and should choose their projects carefully. Great ideas need to be backed up with sound and proven management to succeed and deliver. With regards to investing, I have always said follow the money. So who has the money? In the Western world, the baby boomers are retiring and a great deal of wealth has also been created over the past decade. Any sound project in the retirement or high net worth individual (HNWI) markets will have spending customers. The beneficiaries of “belt tightening” and thrift should do well (like Marks and Spencer). When Asian domestic growth starts to bear fruit, natural resources prices will recover as demand picks up. China needs to build its service economy and India needs to build its export manufacturing economy, which is where early movers will gain market share. Overall, keep defensive, the world picture will get more complicated and events will overtake economics over the next two years. Foreign exchange is likely to be very volatile as the “depression” word is bandied around. Cash rich investors should bide their time and remain open to distressed and value situations as they emerge. The optimism currently surrounding the president elect will quickly subside as he becomes embroiled in events beyond his control. A poison chalice indeed. As I said before, this is Asia ’s century; all they have to do is deliver and the world will benefit with them. Best regards James Vinall