These Are Interesting Times – A Hegemon Struggle Not a Tradewar-Week 2

Hegemonic Drama: When Trump was announcing his cabinet appointments, one of the most remarkable was Wilber Ross becoming the Secretary of Commerce. I remember wondering why Mr. Ross, one of the most intelligent and wealthy global investors of our time, would agree to serve in that back water capacity. Can you name any of the last ten USA Secretaries of Commerce? However, Mr. Ross being appointed as Secretary of Commerce will be judged by historians as a brilliant decision. In that position, Mr. Ross is the equivalent of the Field General in the economic war of the Hegemonic struggle currently underway. The media is demonstrating their consistent ineptness by labeling this amazing drama as a simple trade war. It is accurate that the debate is about “free trade” versus “free and fair trade”. But blinded by their hatred of Trump, the media is apparently unable to understand the true significance. Here is what is actually happening. The USA, which has been the Hegemon for almost 100 years, is attempting to confirm its hegemonic position by demanding that “free trade” also be “fair trade”. Having been the Hegemon since WWI, the USA has always been in favor of free trade, as am I. But “free trade” requires all countries to play by the same rules. China has not done so. It is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long-term the best investment is...

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These are Interesting Times – A Hegemon Struggle Not a Tradewar

Introduction: While on vacation I read seven books. My favorite was the book entitled “Safe Passage” by Kori Schake. Ms. Schake researched the history of Hegemons, the one country so dominate at any point in history that it exercises control over the actions of all the other countries in the world at that point in time. In history there have been a number of Hegemons. Think of the Babylonian Empire, Alexander the Great, The Roman Empire, etc. From her research the transfer of power from one Hegemon country to another occurred via military conquest, except for one instance. In her book Ms. Schake discusses the single peaceful Hegemonic transfer of power… from Great Britain to the United States of America (USA) over the period of 1823 to 1923. Those dates are derived from two treaties that she feels bookend the transfer that was actually finalized as a result of the ripple effects of World War I. For over 150 years Great Britain ruled the world because of its empire and its dominate military. Significantly, the shift to the United States of America being the Hegemon ended the age of European Empires as the USA exercised its Hegemonic position to replicate around the world our values of democracy, self-determination, and free trade. Armed with the information in “Safe Passage”, one realizes the significance of the disagreement over trade that is currently occurring globally between the USA and China, Europe, and NAFTA. This is not a simple “trade war”, this is a Hegemonic Conflict. The outcome is critical to our economic future. We will explore what that means over the next few weeks. It is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long term the best investment is land....

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How to Recognize the Peak of the Market – Week 6

An Unstable Global Economy: It is extremely rare for all of the cylinders of the global economy to be working together in an optimum fashion. But the current global economy is remarkably unstable. After seven years of Quantitative Easing (QE) on an unprecedented scale, two of the central banks most involved in QE are either actively reducing QE or have announced plans to do so. Reducing QE reduces the level of liquidity in the global economy. In turn that raises interest rates and the demand for money continues (or increases with economic growth) yet the supply of money is being reduced. When QE has been used previously, by individual countries, it is at the point of reducing QE that failure occurs. Prudence requires you to get your investment portfolios in shape for a bumpy ride. It is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long term the best investment is...

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How to Recognize the Peak of the Market – Week 5

Tesla: In the first week of May, Tesla reported its first quarter financial report, which was exceptionally disappointing to the market. It appears that perhaps the irrational exuberance for Tesla stock and bonds may have peaked. Let’s look at the three worst numbers: The Current Accounts (combination of cash equivalents on-hand and short-term liabilities) was a negative $2B (a very bad indication of the health of the company). The reported loss of $1B in the first quarter of 2018 leaves them with perhaps one year’s worth of cash on-hand. Of the cash on-hand, one-third of it is refundable customer deposits. This further reduces the liquidity available to operate Tesla. Because Tesla has been such a darling of the stock market, if it has an Enron moment, confidence could evaporate in other unprofitable or marginally profitable high-flying companies. A loss of confidence could ripple through the stock market and global economy. It is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long term the best investment is...

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How to Recognize the Peak of the Market – Week 4

Turkey: Prime Minister Erdogan of Turkey believes he is the next Caliphate of the Muslim world. He has been busy over the last several years, consolidating his power by a combination of persecuting his opponents and buying votes funded by massive debt. This year, the International Monetary Fund (IMF) warned that Turkey’s rate of growth was so high as to be unsustainable. In the month of April: Standard and Poor’s downgraded Turkey’s debt to BB- which is a junk bond rating; The manufacturing index was less than 50, which means that the manufacturing sector of their economy is contracting; It was announced that inflation in April hit 10.8%; The Turkey currency in the first week of May dropped 5% (remarkable for a one year change, much less a one week change); The current account deficit hit 5.5% of the GDP trade. This illustrates the difficulty of a country fueling its growth with debt to the point of it being out of control, now being impacted by the Federal Reserve raising interest rates and reducing global liquidity. It is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long term the best investment is...

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How to Recognize the Peak of the Market – Week 3

Argentina: Despite electing a business person as President in 2017, the Argentine legislature has been unwilling to pass the new President’s pro-business agenda. You will recall that in the early 2000s under a socialist President and government, Argentina defaulted on its loans. That made them quite unwelcome in the global bond markets, as you can imagine. In early 2018, Argentina’s central bank was able to go back into the bond market and sell $4.3B worth of bonds that they needed in order to support their currency, which was weakening. In the first week of May, the following things happened in Argentina: The Argentine peso lost 5% of its value, a truly remarkable change for a year, much less a week. Interest rates surged to 40% per annum, and the Argentine peso dropped 50% in value since January of 2017. All this reflects a government whose finances are out of control, probably in reaction to the American dollar strengthening, which is a result of the Federal Reserve raising interest rates. It is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long term the best investment is...

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