Con dinero o sin dinero

 hago siempre lo que quiero

y mi palabra es la ley….[1]

Three decades ago, in the depths of the Latin American Debt Crisis, the CEO of a major New York bank was on a business trip to Santiago de Chile.  Debt restructuring talks led by the minister of finance were on a rational path, certainly a much better one for all parties than those in the rest of the region. 

The CEO asked his well connected local lawyer how to frame his forthcoming speech to a bi-national professional audience.

“Well” said the lawyer, “you tell them that the minister is a pain in the neck, that he doesn’t budge from his position, that he just drives you nuts!”

The CEO, a gentlemanly banker, thought such a discourse was both unfair and unbecoming.  Instead, he complimented the minister on being constructive and willing to negotiate for the good of his country. 

The result?  The local press soon ran articles scolding the minister for selling out to the Americans and letting Chile go down the drain.  Within months, he was out[2] of office.

Minds and attitudes have evolved, to a degree, since the 1980s, but the United States remain immensely more powerful than any of its Latin American neighbors, and the suspicion that the US will readily abuse such power still lies just below the surface.  Call it history, culture, or a bit of both.

When President Trump said that his Mexican counterpart shouldn’t bother coming unless he agreed to pay for the “Wall”, that Mexico should respect the US and (falsely) that both had agreed to call their meeting off, he revived all those deep seated feelings of mistrust and not being respected.

Just like the Chilean Finance Minister of yesteryear, President Peña Nieto was put under great stress and the presumption that, if he negotiated, he would be steamrolled by the Americans.  Whatever new Nafta deal is reached with the US (and there should be one), it will now be put under a microscope by the Mexican press, and there will be a sizable part of the population to believe that somehow their country had got taken advantage of, particularly since the US have openly stated that they wanted the Mexican bilateral trade balance to shift their way.

More ominously, there is now a risk that the main benefit of Mexico joining Nafta could be lost.

Since 1929, Mexico had been ruled as an authoritarian state by the Institutional Revolutionary Party (PRI)[3].  The PRI tolerated little political dissent, had a leftist bend yet let its luminaries get very rich[4].  The Latin American Debt Crisis of the 1980s and the Mexican Tequila Crisis of 1994 were major blows to a system which was coming undone at the seams[5].

President Carlos Salinas (1988-1994) started to reform and privatize the economy which allowed Mexico to join Nafta in 1994.  For the US, the key driver for inviting Mexico was to ensure lasting conditions for its political stability - meaning democracy - and also economic liberalization.  This accession did much to convince President Bill Clinton and Treasury Secretary Rubin to take decisive action to rescue Mexico from its financial crisis in 1995.

Now, key reactionary forces in Mexico, such as former presidential candidate Andres Manuel Lopez Obrador (AMLO), are clamoring for leaving Nafta and abandoning the open economy model.  In other words, there is a risk of undoing the basic raison d’ȇtre of Nafta. So far, the country is rallying behind its president, not splitting into different factions; but this could change unless the president is viewed as “winning” rather than simply holding his own against the US. 

President Trump, ever the showman, may at some point find it useful to take a cue from the above Chilean lawyer and bolster his counterpart's image.  He may also get somebody to translate the lyrics of El Rey:

..no tengo trono ni reina

ni nadie que me comprenda

pero siguo siendo el rey.

I don’t have a throne or a queen

nor anybody that understand me

but I remain the king.

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[1]“ With or without money, I always do what I want, and my word is the law”.  Beginning lyrics of El Rey, the iconic ranchera written by Mexican legend Jose Alfredo Jimenez.

[2]  True story.

[3]  A political oxymoron if there ever was one.

[4]  As one famous Mexican politician and businessman famously said, “Un politico pobre es un pobre politico” – A politician who is poor is a poor politician.

[5]  Local elections started to go against PRI candidates in the early 1980s and the 1988 presidential election was widely viewed as having been manipulated to favor the official candidate. 

The Trump Prism

One cannot count the number of verbal bombs which Donald Trump threw during the 2016 presidential campaign.  Many were calculated provocations, baiting TV networks to put him front and center of the day’s evening news, others were fodder for his enthusiastic fan base. 

Trump’s campaign was brutal and divisive.  But it led him to victory, Pyrrhic as it could still turn out.

So what did we learn about Donald Trump that will likely shape his presidency?  What is he likely to focus on? 

From the campaign, we learned that:

·        He wants to “win” and that winning is everything,

·        To that end, he will fight to the last minute,

·        He sees himself as the leader of a movement, not a staid party,

·        He feels that middle class Americans want him to put them first.

Whether it is Hugo Chavez, Charles de Gaulle or Donald Trump, there is much to be learned from their earlier writings.  This is what the President wrote 30 years ago[1]:

“Most people are surprised by the way I work.  I play it very loose.  I don’t carry a briefcase... You can’t be imaginative or entrepreneurial if you got too much structure.  I prefer to come to work each day and just see what develops…I can be a screamer when I want to be.”

Running the Trump Organization is not the same as running the US government, but a 70 year old man will not drastically change his habits, particularly if he considers that they made him very successful.

Summing it all up, it is reasonable to conclude that for President Trump, ultimate success will mean winning (or believing he could win) a second mandate, that progress will be measured mostly by domestic milestones (“the economy, stupid”[2]), and that foreign policy will be a means to that end.

Priority #1 will be improving Americans’ disposable income.  This necessitates growing the economy faster.  Regulatory and tax reforms will be necessary but not sufficient.  As I see it, he and his advisors believe that China is the single biggest external obstacle to reach their goal. 

As this effort will consume vast amounts of political and financial resources, and these are to an extent limited, it will be imperative to reallocate some existing ones.  So, Europe will be asked to shoulder more of the security responsibilities which are regional (Eastern Europe) and near-regional (Middle East) in nature: hence the call for NATO members to meet the 2% of GDP defense threshold. The same will go for Japan and South Korea.

Finally, I believe that the talks of a “rapprochement” with Russia stem from the same rationale – freeing time and resources – rather than an infatuation with Putin.  It shouldn’t be difficult to improve on the current bilateral relationship, but by how much is an open question: Russia has its own priority objectives, some of them expansionary in nature; additionally, any effective accord will have to also involve Europe.

Let us look at the foreign trade issue into some details.  The table below depicts the US trade in goods and services with select partners in 2015:

Trading Partner	Trade volume	US deficit w/partner	Deficit as a %
China	$   659 billion	$336 billion	51 %
European Union	$1,063 billion	$  99 billion	9 %
Japan	$   290 billion	$  57 billion	19 %
Mexico	$   584 billion	$  49 billion	8 %
Canada	$   663 billion	$  12 billion	2 %
South Korea	$   129 billion	$    8 billion	6 %

      Source: US Trade Representative. Statistics are for goods and services. Korean data is for 2012.

It is clear that there is only one critical imbalance - with China which accounted for 2/3 of the overall US trade deficit - and a few important others.    

The US economy is perhaps the most efficient and advanced in the world, yet it has consistently produced trade deficits for four decades!  Either its currency has been overvalued, or the terms of trade have not been fair.  It is difficult to conceive of many other explanations.

Germany, with a 2015 US goods surplus with the US of $74 billion (42.6%) has benefitted from a very undervalued currency[3].  China has long managed its currency and tightly protected its domestic market[4].  So has Japan.

I have no doubt that rebalancing trade will be a bruising battle.  Trump has chosen a very experienced cadre of international trade specialists[5].  As for China, it has not succeeded in really boosting domestic consumption[6], its slowing economic growth has called for ever increasing credit creation and popular sentiment is uncertain (low wages, high pollution, no ready outlet to vent frustrations).  It is apparent that the new US administration believes it holds strong cards to force a change, while the Chinese leadership probably feels that it has little margin for error[7].

Mexico is a different situation.  Over the last 20 years, it has not had a single annual global trade surplus, but in 2015 it had a US surplus of $49 billion vs. a global deficit of $15 billion.  The surplus was mainly the result of its close integration with the American economy[8], favorable cost differentials and history.  Politically, it is an easier target than China, but a trade war would have immediate fallouts because its industrial integration with the US is often based on just-in-time supply chains and of its extensive shared border region.

Nafta will be amended/updated with a view to reducing the trade imbalance.  This will mainly be done by boosting US exports and taking advantage of the opening of the energy sector to foreign operators.  Mexico will not send a check for the “wall”, but president Trump will likely declare victory by pointing to the reduced trade deficit.  In the end, Mexico is a better place for US companies to invest (where they can operate freely and aren’t forced to share their technology) than China, and it is likely to benefit from any relocation away from Asia.

A word of caution:  There is little point in repatriating basic industries which generate low added value (and thus pay low wages) and cause the kind of pollution that chokes big Asian cities.  Furthermore, creating high paying jobs requires qualified labor.  There were 5.5 million unfilled job openings last November[9]; while employers’ expectations were often too high, it is clear that there is a skill gap, and so far there hasn’t been any broad initiative to help displaced or unskilled workers bridge that gap.  Upgrading the skills of millions will take time.

While Donald Trump has a track record of being a successful negotiator, all of the above reforms – if successful - will take time to bear fruit, months and more likely years.  It took over two years for Ronald Reagan’s policies to translate into tangible economic improvements.  In the meantime, a president needs to retain the support and confidence of the people.  In today’s divided society, it will be a quite a challenge.

The Trump agenda will also take place in the context of a more fluid global scene.  The world is no longer divided between two stable political and security blocks, Europe is economically weak and more politically frayed than ever, Islamic Jihad is a new threat, and the list goes on.  This will give the new president more room to move, but big mistakes will still be costly: they might just result in chaos rather than war.

My crystal ball has a faint green glow.

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[1]  The Art of the Deal.

[2]  The famous slogan of James Carville who was Bill Clinton campaign strategist.

[3]  According to former Fed chairman Ben Bernanke, that undervaluation likely exceeded 20% in 2015.

[4]  Even if it is now struggling to keep its currency from depreciating too fast.

[5]   Wilbur Ross as Commerce Secretary Robert Lighthizer as US Trade Representative, among others.

[6]   The percentage increase in the share of GDP accounted by domestic consumption resulting mainly from a drop in capital investments.

[7]  Politically and socially.

[8]  The top US imports for Mexico were machinery (US$ 112 bn) and vehicles (US$ 74 bn).

[9]  US Bureau of Labor Statistics. 

Foundation revisited

The 2016 presidential elections reminded me of Isaac Asimov’s Foundation, the famous science fiction trilogy. 

The Galactic Empire had been on the decline for many years which only Hari Seldon, the preeminent sociologist, had realized.  He had mapped a way to both reduce and shorten the chaos that was bound to ensue.   Seldon’s insight and plan were made possible by psychohistory, a new social science combining sociology with statistics, which he had invented. Yet all of Seldon and his vast team’s efforts were nearly wrecked by the appearance of the Mule, a mutant endowed with extraordinary para-mental powers.

The US have never seen a candidate like Donald Trump, and while he doesn’t have the Mule’s mental powers, he has read the electorate like nobody else.  Reagan saw America’s longing for a change and infused it with his optimism and confidence.  Bill Clinton offered youth, moderation and the promise of “a new beginning”.  Trump sensed the people’s rising frustrations with a mediocre economy, a dysfunctional political establishment and widening social and cultural gaps.

All presidential campaigns have had their nasty moments, but where the Clintons had been insinuating, Trump was crude, in your face and openly aggressive.  Soon, TV ratings took off, with viewers smelling the blood-soaked sand of the Coliseum, cheering for the candidate’s political incorrectness, sneering at the embarrassed faces of prominent journalists and anchormen.

Facing Trump was Hillary Clinton, a long time establishment figure, backed by a very strong organization, extensive party support won over many years, but ill at ease with crowds and beset by too many skeletons in her closet.

In the end, against all odds, Trump pulled a surprise victory. What happened?  What of the future?

In my view, the crux of these elections was the dichotomy between message and messenger.

The most insightful commentary, attributed to financier Peter Thiel, a Trump supporter, is that the media [and the elites] always took Trump literally but never seriously, while a lot of voters took him seriously but not literally.  He went on to say that “when these voters hear things like the Muslim comment or the wall comment... what they hear is we’re going to have a saner, more sensible immigration policy”.

The preliminary results give Trump 306 electoral and 60.4 million (47.3%) popular votes to 232 and 61 million (47.8%) to Clinton. 

In appearance, this was a very close contest.  Our foremost political pollster Nate Silver calculated that, had 1% of the people who voted for Trump chosen Clinton instead, she would have won the contest 307 to 231. 

But Democrats suffered a bigger defeat than the above numbers show.

First, many Republicans, who largely shared Trump’s views (bombast and hyperbole aside) but objected to his persona, didn’t vote for him but did vote for the rest of the Republican ticket.  This explains the Republican Party sweeping in the House and the Senate.

Second, voter turnout, while lower than in the most recent elections, was higher than the average of the last 40 years, and, importantly, was lower in traditionally Democratic states, about the same in Republican ones and higher in the swing states that Trump won.

Finally, these elections were a referendum on the last eight years.  While President Obama is liked personally, many voters didn't absolve him from the Washington gridlock, were unhappy with soaring Obamacare premiums and uneasy with his stance on terror.

All this means that, depending on what President Trump does, he could tap on an additional reservoir of support beyond the 60 millions who voted for him.

What of the future?

Americans want results, more and better jobs.  Hopefully, Trump will not make the single biggest mistake Obama made, which was not to give absolute priority to economic growth.  There should be room for consensus there.  But he will also have to deliver on many of the promises which propelled him to the White House.  Even if people understand that there was much hyperbole, it will be difficult.

Trump’s appointments will be the first test of his ability to build an effective cabinet without losing his popular support.  The presidential campaign has shown that he is driven more by a desire to win than by ideology.  His business career also shows that he has greatly reduced the level of risks he is willing to take.  I would say that it is premature to plan a move to Canada.

America is a country which gravitates to the center, which prefers reforms to revolution.  It is also one where federal powers have been distributed among three institutions, independent of each other.  It does best when it sticks to these fundamental tenets.

The cart before the horse

Back in March of 2009, in a CNBC interview, investor Warren Buffett suggested that President Obama should prioritize reviving the economy which “had fallen off a cliff…and put other problems on the back-burner”.  Buffett, a life-long Democrat, had made it clear that he supported President Obama so that there was every reason to believe that he was offering his best advice. 

As we know, the White House chose “not to let a good crisis go to waste”[1] and, instead, focused on launching Obamacare and on other policies aimed at income redistribution.  In the rush to complete its critical piece of legislation while Democrats controlled the Congress, the White House didn’t spend much political capital trying to reach a consensus with their political opponents[2].

So far, Obamacare has had very mixed results, with both increases and decreases in insurance coverage as well as very large rises in premia for middle class enrollees, particularly at Medicare.  The economy itself has been lackluster, although performing better than its European counterparts.  Sadly, the country is much more divided today than it was in 2008.

A similar situation has developed in Chile, long the best performing economy in South America.  For years, it consistently outpaced its neighbors both in terms of GDP growth and growth in the ranks of its middle class.  In 2014, President Michelle Bachelet started her second mandate with much more radical political, social and economic objectives than in 2006-2010. 

The gist of these was to step back from the liberal economic system, increase state participation in such areas as pensions, increase union power, effectively increase corporate taxation (even at the cost of new investments) and generally engage in income redistribution.  Crucially, the government rushed these far-reaching reforms in Congress with the intent of steamrolling the opposition.  So far, it has been an embarrassing failure.

This new orientation, plus a number of political scandals[3], has resulted in a sharp drop in GDP growth, from 4.1% in 2013 to 1.8% in 2014, 2.1% in 2015 and probably 1.7% or so this year.  Worse, growth in GDP per capita on a PPP basis was only half as much over the same 2013-2015 period.

As in the US, the rush to impose income redistribution measures without spending substantial political capital in search of a broad consensus[4] and without setting the base for strong economic growth has proven ineffective and divisive.

Lest we forget, in 1999 newly elected President Chavez started a far greater redistribution effort which was financed initially by booming oil prices, then price freezes, and finally via nationalizations and expropriations.  No serious effort was made to boost or diversify the economy; every effort was made to replace private initiative with bureaucratic state control.

With the passing of time and the drop in oil prices, any social gain[5] obtained was reversed and turned into massive losses.  Today, Venezuela is on the brink of economic and social implosion.

Critics will object that this post is about promoting selfish capitalism and rejecting socially progressive policies and governments.  They would be wrong.

Case in point, the Socialist President of Chile, Ricardo Lagos.  During his term (2000-2006), he reached a consensus to create a number of major social programs to benefit the less affluent among the population, including unemployment insurance, an anti-poverty program extending into many areas deemed essential[6], healthcare and others.  At the same time, he expanded Chile’s foreign trade potential by signing trade agreements with the EU, the US and others. 

President Lagos clearly understood that to finance income transfers without being socially divisive, you needed to create more revenues by growing the economic pie, via free-markets and prudent fiscal policies.  By the end of his term, GDP per capita on a PPP basis had grown at a rate of 6.5% p.a[7].

It is quite possible that the social programs of President Lagos slowed real economic growth from the 7%+ p.a. of the 1990s down to 5% p.a.[8]  But the purpose of government is not to maximize economic growth but to improve the overall well-being of the population, and 5% in real terms isn’t bad when it also brings social harmony. 

I recall a meeting I attended back then between US investors and the President in which he very bluntly told Wall Streeters that if they wanted to continue enjoying the fruits of Chile’s growth, the less affluent could not be left behind.  He was right.  Mr. Lagos has announced that he is considering running for a second term in 2017.  If he does and wins, I expect him to succeed where many current political leaders are struggling: healing national divisions.

The global economy has been slowing down for almost a decade.  The Great Recession of 2008, excessive reliance on debt to sustain growth and the end of the Chinese investment boom have been as many headwinds.  As Ringo Starr would say, economic growth don’t come easy. 

So far, many governments have taken the easy route: borrow more, inflate financial asset prices, avoid reforms and pit the haves against the have nots.  The dividends of such choices are currently zero.

A wiser, more difficult but more rewarding, course is to recognize that people will accept some necessary hardship if the burden sharing is viewed as fair.  In that same vein, income redistribution in a democracy, unless it is accompanied by (the prospects of) real economic growth is inherently destabilizing.

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[1]  Famous quote attributed to then White House Chief of Staff Rahm Emanuel.

[2]  Conservative Republicans but also the Roman Catholic Church and unions and others opposed Obamacare as drafted but often for different reasons.

[3]  Some but not all involving people in the President’s entourage or political party.

[4]  Even if it meant less ambitious reforms.

[5]  Such gains are highly suspect.  Poverty rates were calculated by the government National Statistics Institute and changes were made to the basic food cost index (canasta familiar) so that it was not comparable with data from before 1999.  So while the apparent purchasing power of the poor was raised, that of the ones better off was reduced as a result of a failing economy.

[6]  Such as health, children education, housing, family, income.

[7]  Despite a difficult first two year period due to external shocks.

[8]

The harder they fall

The revelation that Wells Fargo employees had opened millions of accounts without the knowledge of their customers has come like thunder in a bright blue sky.

Here was the most respected of the big US banks seemingly behaving as the reviled Wall Streeters, after it had touted its plain vanilla business and earned Warren Buffett’s confidence and admiration[1]!

Of course, not everybody cried, as Congressional critics were quick to point out that they had been right all along: big banks were out to trick their customers rather than serve them, and their staff would stop at nothing to earn fat bonuses.  It also provided a timely boost to the controversial Consumer Financial Protection Bureau which uncovered the problem.

Still, the bank has given them ample ammunition:

-         The scope of the fraud, close to two million accounts and credit cards,

-         That some 5,300 employees and managers were fired, hardly “a few isolated bad apples”,

-         That the leader of the unit where the shenanigans had taken place chose that time to retire with US$125 million in stocks, options and retirement benefits, a large chunk of which had been accumulated during her stewardship of the consumer banking unit,

-         Finally, that the bank CEO squarely blamed employees but didn’t name any high ranking executives among those responsible and was vague as to his own accountability.

At the same time, it should be noted that the actual financial damage inflicted on the bank customers was light: some 14,000 accounts incurred an average of US$28 each, and, in total, US$5 million was refunded which works out to less than US$5 per client[2].  This explains why, by today’s standards, the fine was a very modest US$185 million.

Nevertheless, I expect that the final cost to the bank will be much higher.

To begin with, the bad publicity will bite all the more so that Wells Fargo had such a good reputation.  Negative sentiment will weigh on the stock price.

The bank will need to spend hundreds of millions on better internal controls and training.  The decision-making will likely be slowed down as transactions will need to go through lengthier and slower approval processes.  Risk taking will probably diminish, and with it profits as staff will be wary of making career-ending decisions.

This scandal will likely take a bigger toll on top management than we have seen to-date.  Let’s face it, when thousands of employees feel so pressured to reach their goals that they resort to fraud, either (1) they were poorly trained and/or of uncommonly bad character, or (2) the top down pressure was so intense and widespread that it was no accident.  Either way, management is at fault.

Having worked for a large bank, I for one believe that corporate culture determines how business is conducted; it is critical in guiding managers’ and employees’ behavior and decision making.  In this instance, and from anecdotic evidence, I believe that there was a corporate cultural problem.  Setting the appropriate culture IS the responsibility of top management, under the supervision of the board of directors.

A key Wells Fargo strategy toward growth and profitability has also been called into question: the much advertised effort to deepen and broaden the relationship with customers by selling them ever more products.  Yet in recent years, while the goal had been set at 8, they had plateaued just north of 6.  If 6 rather than 8 is the effective ceiling, how will the bank make up for this setback, especially since cross-selling will be under closer scrutiny?

Some have compared this crisis to the JP Morgan “London Whale”.  JPM was punished much more harshly, even though its victims were its own shareholders rather than its customers.  With its “fortress balance sheet”, JPM recovered relatively quickly although it is likely that its future profitability suffered because of rising compliance expenses and lower risk tolerance.

Wells Fargo has in my view a bigger problem: besides incurring greater compliance expenses and dialing back risk-taking, it faces a greater strategic challenge and it may suffer from upheaval in its top management ranks.

For all these reasons, I wouldn’t be surprised if its stock price were to drift down toward book value, i.e. US$36 vs. US$47 today, reflecting a loss of premium valuation and lower future earnings.

Although it is no excuse, I think that the current financial context of quasi-zero interest rates keeps exerting ever stronger pressure on banks’ net interest margins, and Wells Fargo is the latest but by no means last victim.

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[1]  Buffett’s Berkshire Hathaway owns 9.7% of Wells Fargo, a stake worth US$21 billion.

[2]  In the absence of further details, such average number is difficult to interpret.  My own hunch is that some customers were charged fees of about US$30 while others incurred no charges.

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!

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[1] On the Marble Cliffs.

“You will need a bigger boat!”

If you have read this blog for several years, you know that swimming, next to investing, is my favorite activity.  As the Olympic Games of 2016 are under way, we have seen some great racing already, like the 4x100 men free relay and both 400 free finals.

But we have also witnessed the controversy about doping rising to the point of nearly overshadowing the athletes’ performances and, at times, turning these Games into confrontations from a bygone era.  The Olympics are supposed to bring people together through sport, not to cause spectators to boo its actors.

As with all important issues, making an early decision, even an imperfect one, beats delaying; as time passes, problems get bigger and control over resolution timing is lost.

The German broadcaster ARD had long been leading the charge against doping at home and around the world, but it was their 2014 reporting on organized doping that set in motion a series of official investigations and the suspension of the Russian track and field federation.  The swimming federation (FINA) was much slower in responding, as was the International Olympic Committee (IOC). 

The result was a series of, literally, last minute decisions, often contradictory, which left everyone unhappy.  More importantly, it didn’t address three issues which are critical to public and corporate sponsors' perception.

-The “unlucky” doper:  Behind the relative tolerance of first time offenders is the impression that these were unlucky enough to have been caught just that one time when they cheated.  In reality, doping is never a onetime event; most drugs need repeated intakes to produce results; furthermore, athletes and their medical staff need time to adjust the dosage and strike a balance between effectiveness and detectability.  In reality, the unlucky doper is a repeat offender.

-The penalty box:  If you watch ice hockey matches, you see players commit a fault and skate towards the penalty box where they will spend a few minutes before resuming normal play.  Penalties are part of the games.  In swimming, doping and serving a time suspension is becoming the norm.  Now, if you are an unknown Peruvian flyer, you will incur a four year suspension, effectively ending your career.  But if you are a star, your federation will fight for you, assemble a top notch legal team if need be, and you will either go scot-free or stay a few months away from the pool.  So, for too many elite swimmers, the choice is between risking a slap on the wrist and winning a medal.  Tempting isn’t it?

-State organized doping:  We thought we had left that nightmare behind when East Germany collapsed.  Apparently not.  Most people will recoil at the thought of a state putting its might behind an organized effort to corrupt testing procedures and results.  Clearly, this would put competitors at a disadvantage.  But what if the top athletes from the country in question had little choice but to dope?  Not that they would be jailed if they didn’t, but they wouldn’t receive the kind of technical, medical, financial and logistical support that fulltime athletes can’t do without.  That would be even worse.

Procrastinating FINA and the IOC have dug themselves into a big hole.  So far, they have shown that they are incapable of getting out of it on their own.  The main factor is money, and I expect that, if we get to a solution, it will be because MORE money speaks again the status quo than for it; I mean the corporate sponsors and broadcasters.  This is how the Tour de France overcame its own scandals.  Unfortunately, the spirit and ideals of the late Baron de Coubertin have long been left behind by the very same people entrusted to uphold them.