The purpose of this letter is to review the big picture in terms of risk and take an initial look at some developing areas in terms of long term opportunity.
In the short and intermediate term it appears that markets have settled down and that we may have some stability for a period of time. Rates are low and likely to stay low for quite a while. Also, it is very likely that the “presidential cycle” will take hold and the stock market will be sideways to higher for the next two years. We could even see some dramatic rallies. But risk remains high. Many excesses remain in the marketplace: the housing bubble, massive debt, deflationary pressure, overcapacity to name a few. The biggest wild card at this time is geopolitical risk. If President Bush initiates war in Iraq, which he seems intent on, anything can happen. Administration hawks are supremely confident that American military action in Iraq will have a calming effect on the Middle East. The rest of the world is worried that war could stoke Islamic hatred of the West to the boiling point, causing the overthrow of pro-Western Arab governments, unleashing an all out war Arab war against Israel and promoting terrorism globally. We probably won’t have to wait long to see who is right. From an investment perspective, the main point here is that while there may be some trading opportunities to the upside over the next two years, we remain in a primary bear market and the risk of economic shocks remains high, with terrorism and geopolitical risks the main risk concerns at this time.
Also, the results of the recent election have the extremists in the Republican Party in a frenzy. Balanced policy making is not in the cards for the next two years. House Republicans demonstrated this in no uncertain terms in the lame duck session by sabotaging a painstakingly negotiated bankruptcy reform bill over abortion issues. A nuanced analysis of the many issues involved is beyond the scope of this piece, but the main point to be taken from this situation is that, borrowing from Nassim Taleb, “Hubris is not corrected by 20%.” Hubris is corrected by disaster. Unless victorious Republicans get a grip and discipline themselves they are likely to precipitate disaster in their blind arrogance. How and when are difficult to predict, as is the scope. In an unstable world there are so many possibilities. The big question is, will the disaster be merely a Republican Party disaster or will it be global?
Despite the veritable minefield of risk extant in the investment world, there are some interesting trends developing with long term investment implications. The “us vs. them” worldview that came in with the Bush administration, and which has become America’s guiding principle since 9/11, is creating an increasingly resented and isolated America. This is a major and fundamental shift with global implications. It undermines, and will eventually be the death knell of, global trade liberalization. It will probably take some years for this shift to become fully entrenched, but with war fever in Washington it could also happen quickly.
If one wants to continue to invest in the current paradigm then China is clearly in position to be the big winner over the intermediate term. If one is looking for a stable environment, New Zealand is the place to be. But if one wants to put some money into a future-oriented paradigm, then there are some interesting options right here in the USA.
The global economy is sucking the wealth out of the working and middle classes and concentrating it in the very rich. This is not a formula for social stability. But it is a major engine of change and with change comes opportunity. The trend toward downward mobility generated by the global economy is forcing growing numbers of people to rely more on each other. Social activity and certain sectors of economic activity will become increasingly neighborhood-centric. This trend is nascent but it will accelerate dramatically with the next major downdraft in the economy. The general effect on wealth will be a net loss but there will also be winners.
Financial pressure, urban sprawl and congestion are making neighborhoods increasingly attractive. Neighborhood development and redevelopment are major opportunities, emphasizing multi-use models. (Timing is important. Too early and you will get caught when the housing bubble bursts.) Along with redevelopment there are new business models designed to serve neighborhoods and local and regional economies. Smaller is beautiful. I can’t begin to enumerate all the specific opportunities, but there are and will be many. Security of all types is and will remain a sound investment theme for the foreseeable future. Also, integration of world class learning via the Internet with the vitality of local-focused and home grown enterprise. It sounds a little third-world, but the reality is that America is going to look increasingly third-world for the working and middle classes, with gated enclaves for the rich. The action and the opportunities are going to be related to the massive shift in lifestyle for the working and middle classes.
We have come a long way down the path to the utopian vision of a world-wide marketplace dominated by large corporations. We have come far enough to see that the reality is not what the distant vision promised. (Was there ever a utopian vision that delivered on its promise?) Much, if not most, of the global strife we are experiencing can be traced back to this development. (Read False Dawn by John Gray.) There are some sectors of the economy that are suitable to the machine model of society upon which this utopian vision is built; telecom for example, and information technology. But there are others which are not amenable to that model; food and medicine for example.
Local Grown Food
The typical American diet leaves much to be desired. With our diets and pervasive pollution it is no surprise that cancer rates are skyrocketing, along with many other health problems. Fresh, organic, local grown and processed food is far more nutritious, healthful, environmentally sound and sustainable than the vastly inferior product laced with chemicals, antibiotics and hormones that our current system delivers. Nowhere is the contrast more obvious than in the horrendous practices of the meat industry. Read “An Animal’s Place” in the November 10th issue of New York Times Magazine. Sustainable agriculture offers excellent lifestyle and long term investment opportunities.
Natural medicine is another area of long term opportunity. The machine model is currently all the rage in medicine but it is increasingly clear that this model is a disastrous failure. The real opportunity in medicine is in the return to natural and preventive medicine. All medical practitioners are aware that it is not the medicine or the physician that does the healing. The body does the healing. The thrust toward increasingly mechanistic, manipulative and ridiculously expensive medical practices runs counter to what all practitioners know about real healing. Corporate medicine in America has generated the most expensive health care system in the world along with the poorest national health of any developed nation. In addition, we currently have over 40 million uninsured Americans. Even those who do have insurance find out, usually the hard way, that a long term, serious medical condition is a one way ticket to the poorhouse. Financial pressures alone are going to force a return to natural medicine. The NIH has declared a health care emergency. See “Panel, Citing Health Care Crisis, Presses Bush to Act” in the November 20th issue of the New York Times.
Despite the obstruction of the current administration, alternative energy is the future. The fossil fuel industry is a fossil, and it is using its political clout to try and stave off the inevitable. The key word here is inevitable. As Buckminster Fuller once said, “We don’t have an energy crisis, we have a creativity crisis.” I would take that one step further and say that we no longer have a creativity crisis, we have a political crisis. Despite technical feasibility, the clear preference of the people and the obvious inevitability of change, our government is doing all that it can to delay and to maintain the current system for the benefit of its patrons. It’s only a matter of time.
Systemic risk remains high with geopolitical risk the most likely trigger for crisis. Just the same, markets are getting a breather and gaining confidence. Expect rallies, possibly dramatic rallies, but don’t forget that we are in a bear market that is not finished by a long shot.
Long term, the real opportunity lies with investment in business models, methods, products and technology which support the developing trend back to a more natural and healthy lifestyle. Neighborhood redevelopment and synchronous local and regional focused business models, local grown and processed food, natural medicine and alternative energy are all areas offering long term opportunity.