Wednesday, September 14, 2016

On the Cliffs of Marble

When I left France for the US in 1972, as it turned out never to come back, I packed a poster of the north wall of the Eiger and a copy of my favorite book of all times: Ernst Jünger “ Sur les Falaises de Marbre[1].

This extraordinary book recalls the last days in an imaginary land before its invasion and destruction at the hands of the Great Forester, a cunning and ruthless tyrant who lived in the vast forests nearby.  Jünger started his book while staying in a small town on the shore of Lake Constance.  Years later while on a vacation, I visited picturesque Meersburg and Lindau, drove through the rolling hills behind Hagnau and watched the sun set over the snowy peaks of the Alps beyond the shimmering lake, and memories of the book and its magic rushed back to my mind.

Some have said it was a criticism of Stalinism, others of Nazism.  It certainly was a paean to freedom, to what makes life in harmony with friends, neighbors and nature so precious, and how quickly we can lose these and how painful it then is.

I don’t believe that we are living on the banks of Jünger’s vast Marina.  But I do feel that we are in danger of slipping into a period of greater tension, greater division and failure to address our most pressing problems.  Before too long, and unless we regain our senses, the time for a Great Forester could arrive.

For many reasons, we are left with four candidates to the presidency: a populist and demagogue and Forester apprentice, an aging career politician with truth telling issues, an ex pot entrepreneur, and an activist who spray-paints bulldozers of companies she disapproves of (sadly, the Democrat, Republican and Green VP candidates are probably better than the top of their tickets).

It is difficult to imagine how any of these candidates could unite the country.  Hillary Clinton is probably the one more likely to try and build consensus because she is the one who most lacks a committed base, but can she bridge the trust gap?

Meanwhile, Americans are more divided than they have been in decades.  It is both ironic and sad that they were most united when President Obama took office in 2008.  Responsibility for this can be spread wide, and because of that, redemption will be hard to reach: Tea Party extremists unwilling to compromise, main stream Republicans unable to deal with them and the opposition, Democrats in Congress and the White House enamored with diktat and income redistribution without GDP growth; most of all, politicians deaf to popular angst and aspirations.

Against this dreary political background, the economy and the financial markets have been operating with a high degree of wariness, where extreme monetary policies have attempted to offset the absence of fiscal reforms and pro-growth policies.  The fix has carried increasing risks: financial assets are overpriced, public pension funds are hugely under water, the insurance industry is at risk and even consumption is threatened by the need for households to save more when 10 year Treasurys yield a meager 1.7% p.a.  

So we have a divided political class, a divided nation, a subpar economy and stretched financial markets.  I might add that the same combination of slow growth and excessive indebtedness is pressuring governments and traditional parties and giving openings to populists of all kinds around the world.

As an investor, I would think that prudence is in order.  Sure, stocks are not as expensive as bonds, but does that make them attractive, as a class?  Not really.  There is nothing wrong in keeping stocks of steady performing companies, or in buying into carefully chosen turnarounds.  But if one keeps a large exposure to equities, buying some protection seems advisable to me.

Alternatively, cash does look like a good temporary alternative.  Another one is real estate.

History shows that people and countries don’t change until they have to.  In America, I don’t think we have reached that point, nor do I see anyone able to mobilize the nation.  History has also shown that it takes time for a large country or economy to change direction.       

Caveat emptor!




[1] On the Marble Cliffs.

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