I am with my friend and newly graduated student Maximo who I am reblogging his comment from Fred’s post:
I don’t know how useful this will be to a trader, but here is my view because the question you ask is an excellent question not just for investors but everyone who cares about this country.
Long before I got into into business school I was a Ph.D student in economic history. So naturally I pay close attention to geopolitical/Macro issues and I make this an integral part of my investment strategy now that I’m on my own trying to make my mark in this world. From 9/11 to the recent economic meltdown the U.S. lagged in growth because it got caught in a stupid militant crusade where business interests and national interests where not aligned to work for the same common goal (and let’s not forget the insane amount of money flowing into real estate which does not add to productivity and job creation like technology does). The interests of the nation state and the national economic interests were on opposite sides. Just as money follows the greatest return on investment so should the flag of empire. The war worked well for a few—Halliburton and Northrop Grumman come to mind but those are hardly the industries of the future or the most efficient since they depend on government favoritism. During the past 8 years the U.S. focused on one part of the world and that took a toll. Just take a look at the disproportionate flow of money to Latin America from China during the past 8 years. Of course conservative ideologues will deny this by saying war is a profitable enterprise. That was true in a different era as most of you fine gentlemen and ladies already know. Today we don’t fight over land (unless you’re Palestinian in the West Bank) but for access to cheap labor, knowledge, skill, and innovation. The global financial system is about relationships and that’s how money flows. In the past the IMF and the World Bank pretty much decided who would get what and under what conditions because that’s how the big players decided things at Bretton Woods.
So, why is the U.S. outperforming again? For the same reasons it did before. The U.S. dollar is reclaiming its place as the “reserve currency” for the nation-states which can’t have a constitution for longer than two years. Just look at the extreme opposite of what we represent: Chavez and Mugabe.
As a person who has traveled extensively to Eastern Europe, Asia, and Africa I can tell you that the so called emerging economic growth story is half-true and half lies. I knew Brazil would flop because you can’t sustain growth when you have more than 20% unemployment and a Jim Crow culture in place and very little industry to complement the commodity sector. Remember the 1970s Brazilian miracle? Some miracle that was! Same shit today. Bloated commodity prices (and demand from China) camouflaged the social warts for a while, but not for long. The last time my sister was in India she almost died! I’m tired of this BRIC bullshit. Yeah, you can make money, lot’s of money, but when people tell me these countries pose a threat to the U.S. I just have to contain my laughter. Maybe so, in 100 years.
The way I see it Zakaria and Freedman—brilliant that they are they are just journalists and they are not free from intellectual bias. I still vividly recall scholars at the University California calling the fall of the Soviet Union the End of History. It was one of those grandiose declarations by historians that don’t necessarily mean anything but it reflects how disjointed we are from reality. What does the rise of everyone else mean anyway? India has educated workers but no infrastructure. Jesus, 90% of the population does not have access to clean water (which tells you that might be an investment idea). Now let’s go to China where they have been building like crazy, but they have a workforce that is unskilled and aging. Russia? They have a mean oil oligarchy, nukes, and good Vodka and they want to be a player again. This brings me back to the End of History theme.
The end of history as Marx defined was supposed to bring workers to the apex of power. Instead, with the collapse of communism the end of history meant that capitalism had won—it was after the 1987 crash and the start of a huge bull market. Reagan was in Power and Thatcher ruled England. Western capitalism and the U.S. reign supreme. But the free market and the conservative manifesto of lower taxes had no opposition. Moreover, in the geopolitical arena the U.S. had no opposition either and I think that was a problem because it created a huge policy void. The thesis-anti-thesis model that makes reality more efficient was absent. We became complacent. Surely due to technology the world got better at making things and exchanging goods and services outside the U.S. sphere of influence. But there is no consumer nation that rivals the American market. And Adam Smith said it best: “Consumption is the sole end and purpose of production.” I would like to see how these economic miracles fair when you take out the American consumer.
I think those here with a sense of history will go back to the 1979 crisis which Volcker fought with monetary restraint. But let’s focus on the market reactions to the Fed policies because the situations are different—back then Volcker raised interest rates and restricted banks from lending to fight inflation. But like today we had a weak dollar and a huge federal deficit as well. The markets did not react badly at all.
This is my thesis: The dollar will gain strength. And I know many people are betting that the dollar will take a dive again but a strong dollar is needed now. I think the weak cycle might be over for now. I hear China suggested diversifying away from the dollar. My questions is into what? The Euro? I’m shorting the Euro right now because I saw what it’s doing to people in Europe. In economic and historical terms the Euro is an experiment and I doubt China will drop the dollar. Just because Gisele Bündchen wants Euros doesn’t mean the rest of the world is going to hate the dollar forever. The dollar means stability—and I mean political stability because our financial system certainly is not stable. But the U.S. is not going anywhere. This country is an economic Titan! We just had bad leaders for 8 years.