I promised to focus on China's property bubble this week, but other important events are approaching fast and the planned feature will be delayed by several days
BARACK - OH, BUMMER!
When fear and uncertainty spread their repulsive tentacles, many humans react by displacing and even personalizing the elusive object of such emotions. A similar phenomenon of projective blaming is now underway among sections of the American electorate. At a time of unprecedented wealth destruction, many Americans are obsessed with a myth of dark, menacing Otherness. According to the myth’s organizing principle an Indonesian Muslim Communist from a Radical Black Church could actually be a Kenyan Weatherman Arab Terrorist. And yes, the real danger is that this person, with his un-American name, is getting perilously close to be the next President of a country which, until two months ago, was still a beacon of free market capitalism.
The despair runs deep. So deep that these frustrated groups of the American voters have placed their hopes with an occasionally electrifying, though often syntax-challenged personality of an admittedly handsome woman who prides herself with her utter disdain for the intricacies of the global economy and the world affairs. Supreme in her fiery harangues, the Republican VP candidate has been unable to properly construct subordinate clauses when speaking of that country we are in of which one state she is the executive of where Putin rears his head and we send them out to keep an eye on. Ok?
PALIN’S ELECTION IS AMERICA’S ERECTION
Palin was handpicked by McCain’s entourage to ‘shore up’ his credentials among the powerful Evangelical voters. Although many foreign observers see the Evangelicals’ influence through the prism of their support for Bush’s failed foreign policies or their biblically sealed alliance with Israel’s right wingers, the group’s impact on the quality of American political debate has been much more pervasive and wide-ranging. On talk radio shows earlier this year, John McCain came under assault from Evangelicals who castigated him for opposing torture in Guantanamo. “He is anti-torture”, yelped with high-pitched indignation an obviously deeply religious woman, “but I am pro-torture!” It was not until McCain’s campaign organizers increased the frequency of his interaction with the Evangelical “base” that the sectarian reaction became less strident (“he is one of us”). But some have remained reserved, noting that McCain never quite captured the wisdom of George W. Bush, the wisdom of finding all the right answers in the Scriptures. Astonishing as it might seem, the hapless Mr Bush will be sorely missed by that orphaned 30% of the US electorate and by their allies from one small country in the Middle East.
Palinism is arguably more than a daily fodder for late night comedy show chuckle. The real risk for America’s value system lies in the fact that as many as three Supreme Court judges could be confirmed by the new President. The country’s direction could thus be durably affected by these choices and the fears about the very sustainability of the ‘value crusade’ contribute to the hysterical anti-Obama atmosphere at many of Palin’s rallies. The reactions have become so hostile that some opponents likened Palin to segregationist George Wallace. Suddenly it is the Democrats who had to apologize for the comparison; the organizers of the anti-Obama rallies did not have to. And yet, the emotions among the ignorant mob run high. Calls to “kill him” reflect the fear displacement of small town America. It is bemusing to relive it during interviews with white youngsters from the Deep South, who threaten to “relocate to a Communist country” if Obama wins. I concur that North Korea could actually be good for their eating habits.
Meanwhile, the American media remain puzzled. Accused of uncritical approach to the excesses of Bush’s first term, most mainstream networks find it hard not to betray their pro-Obama sympathies. It leaves the Fox TV as a lone conduit of rather farcical right-wing propaganda. But the spin feels tired and worn out. When four years ago John Kerry won another TV debate against the incumbent, the Fox TV proclaimed that although Kerry was “glib” and probably a better debater, Bush was “a better President”. Four more years of war and trillions of dollars of lost wealth later, that argument is markedly less airborne. Besides, arguing that Palin would make a “better” President could prove risqué outside the avidly sectarian circles.
IGNORANCE AS VIRTUE
The spin doctors are, therefore, at pains to turn ignorance into virtue and mediocrity into value. Instead, they have tried to undermine the opponent’s appeal by further stressing his Otherness. After Obama’s triumphal tour of the Middle East and Europe, I received emails with some astonishing accusations of the Democratic candidate’s betrayal of America. According to the slur, Obama proved that he was not truly American because he…. “spoke to 200’000 screaming Germans”. This sticks. After all, Kerry was accused of being fluent in French. Palin’s oversize flag pin, and her sub-Bush distaste for anything foreign plays well with this audience. And, unfortunately for Obama, his daughters are still too young to “proudly serve the nation” in Iraq.
The race card and the anti-Muslim innuendos are a frequent motif in these mailings. In one such email, sporting the picture of Obama’s poor, wrinkled Kenyan grandma, the outraged caption read: “do you want the First Family of the United States of America to look like THAT?” Obama’s absent father’s ethnic roots are also dragged out as a proof of Barack’s own radical leanings
IT’S 401k, STUPID
With the economic situation dire and the real life consequences of the financial meltdown too complex for even well informed people to grasp, the “it’s economy, stupid” argument can only drive home the message through anecdotal or better yet first person experience. The 401k checks, which most Americans receive monthly are a home run “free mailing” for the candidate who has crafted a message of ‘change’, even if his program, as much as his opponent’s, will be at pains to incorporate the fiscal and financial constraints within which the future administration will have to operate.
The new inhabitant of the White House will inherit a country diminished abroad after 8 years of shameful unilateralism, and severely hobbled economically after the last 16 years of bubbly hubris. Cleaning up the mess left over by the Clinton/Bush era will be a task of Herculean proportions. The new administration will have to deal with mounting public debts, bad assets and corporate failures. In such circumstances, it will not be easy to re-ignite the nation’s energy without the (tempting) handout of easy credit. Instead, America will have to enter the unpleasant era of deleveraging. And with half a trillion dollar of annual deficits - something will have to give. The unenviable choice will fall somewhere between reflation, tax increases and spending cuts.
Reflation makes one shudder at the thought about the potentially disastrous, long term consequences for the savers. It is difficult to believe that the application of openly reflationary measures would signify a full circle in the economic orthodoxy. Still, your best protection against the potential ravages of debt reflation would be… gold. Purchase of gold should be facilitated by its subpar performance during the initial deflation and aided further by the artificially strong US dollar which depresses the value of the dollar-denominated gold price. Dollar’s strength is ‘artificial’ because it is supported by three, temporary events: European banks’ unwinding of their short dollar positions in the wake of the CDO breakdown, US-based hedge funds’ closing out their dollar-denominated debt after selling their large positions overseas, and US corporations benefiting from IRS tax breaks for repatriation of profit from overseas. The relative weakness of the yellow metal (in dollar terms) could, therefore, provide an excellent entry point to secure future insurance against reflation.
During electoral campaigns, no one’s lips will read “more taxes”. But the unpleasant reality for either candidate is that the deficit will force such increases in some form, as soon as the immediate recession has passed. The proper timing of such fiscal rebalancing will be tricky and, if implemented prematurely, it could suffer from the so-called Hashimoto Effect. Ten years ago, the Japanese Premier managed to smother a recovering economy by showing that low interest rates are a necessary, but insufficient condition to offset the weakness in growth indicators. Regrettably, I have little advice for Americans who are bound to face a heavier tax burden. But one obvious choice would be to swap your US passports for the passports of Burundi, Bhutan or Barbados.
Finally, the most appealing solution of all, i.e. spending cuts. In the last televised debate, both presidential candidates were patently vague as to which public program should be trimmed – health? Education? Social security? Tough to build new America without them. The wars in the Middle East and Central Asia could be one target, but this is not instantly achievable. Should such a pull-out, if implemented for fiscal, rather than strategic reasons, could lead to seriously destabilizing consequences. But you could still make money on it, for example by investing in burqa stocks.
HOPE WE CAN BELIEVE IN SURMISING
One thing is certain. After the unilateral (and misguided) decision to go into Iraq and the equally unilateral (and misguided) decision to let Lehman Brothers fall, the costs of Washington’s solitary adventures are now more obvious than ever. These expensive blunders have led not only to multibillion losses but also to an extraordinary loss of America’s geopolitical and financial power. This is because much of that power was predicated on counterparties’ and rivals’ critically important perception of power.
All those valuations – from net present value to earnings multiples to cash burn rate to liquidation value - are in fact highly dependent on the thin layer of trust in what constitutes “fundamental value”. Only now do we realize how much of America’s power lied in its addictive optimism. And without optimism, Uncle Sam is worth a lot less.
Yet for as long as America continues to attract talent from around the world and continues to create favorable conditions for hard-working people, the promise of this land of opportunity will tower high above many others. The next four years will be crucial. The challenge to wean the economy of its addiction to credit supported by property values should not be underestimated by even the most skilled motivational speaker of his generation.
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