Ad Hoc Commentary – www is for Wealth, War and Wisdom

In my humble opinion, the best book written on the crisis is Tim Geithner’s Stress Test. Someone recommended me that book recently, and it was a very good read. You should read it if you have not. Please do not be fooled by the totally uninteresting title: Stress Test. We remember that Tim Geithner is known to be one of the worst communicator in the history of US Treasury Secretaries. In any case, if you can get over the uninteresting title, you will find a gem of a great book.

 

After reading Stress Test, yours truly started pondering on the best book he read since the crisis of 2007. After much deliberation, my vote goes to Barton Biggs’s Wealth, War and Wisdom. If you go to Amazon, the reviews for the book are not great. However, in my opinion, it attempts to fill up a void that sorely needs to be filled up. A book will not do justice to such an ambitious subject: how to protect wealth when the four Horsemen of the Apocalypse – Pestilence, War, Famine, and Death – ride again. However, Biggs’s book is a gem in the right direction.

 

The two horsemen, War and Pestilence is likely closer than the majority believes. Yours truly believes that we have war (US vs. Russia & China) and pestilence (Ebola) at the gates. Not to forget the internal wars that will be driven mainly by social inequality and tax. Until recently, the Ebola menace seems very remote. However, the recent US action to send boots on the ground to fight Ebola will likely bring the disease back home to US soil. It is pride that comes before a downfall. Just like how the proud Franco-German core tried to help the PIGS. In the process of sucking out the poison out of the PIGS, the Franco-German core put their own balance sheet under stress. With foreign holdings of Franco-German core beyond 60%, and municipals struggling, this balance sheet problem will likely overwhelm in the near future. Similarly, the United States is not immune to Ebola. It is prideful to believe that you can create a foolproof vaccine for the Ebola filovirus, when humanity could not find an effective vaccine for the HIV filovirus for decades.

 

The analysis of the past, rooted on economic fundamental analysis and technical analysis of charts is increasingly getting supplanted by the Horsemen. The economy is not doing well for the average man on the street, even though the affluent likely feels otherwise. Since economic statistics measures the majority, the majority of fundamental analysts had wrongly remained bearish on the stock market for most of the time since 2009. Technical analysts are slightly better off because they tend to focus more into the emotions, fear and greed. However, the most plausible reason for continued bullishness in equities today is not stock buybacks is not central bankers, or anything the mainstream wants us to believe. It is likely the fear of war.

 

If you have no time to read Biggs’s book, you would want to at the very least read the following excerpt from the Forward in Wealth, War and Wisdom written by the CIO of Yale University:

“…Biggs’s conclusion about 20th century returns for what he calls the ‘stable lucky ones’ that were spared catastrophe (US, UK, Australia, Canada, etc.) surprise no serious students of markets. Inflation-adjusted returns for stocks trump those for bonds and bills, with all of the asset classes besting inflation. In contrast, some of Biggs’s conclusion about the ‘losers’ (Germany, Japan, Italy, France, etc.) gives the reader pause. Unsurprisingly, the averages of the 20th century asset class returns for the winners exceed those for the losers in all categories. Surprisingly, the asset class returns in the loser countries show the familiar pattern of stocks beating bonds and bonds beating bills. Even more notably, only stocks in the loser countries managed to beat inflation, as both bonds and bills on average produced negative real returns…”

 

In short, if you know war is in the horizon, rotate out of bonds into equities. You will win over the long run regardless if the country you bought is the winner or loser in the war. Of course, if you are lucky enough to bet on the winning horse, you will win big. And that is perhaps what institutional investors can do. Individuals have the benefit of being able to enter into extreme form of diversification like farmlands and gold. Despite what the mainstream believes, yours truly believe that a US is not the guaranteed winner these days given Russian technology prowess in missiles and submarines. In fact, if Chinese history is any guide, when #2 and #3 combine against #1, the #1 is almost certain to be defeated. The US is the #1 today. And China and Russia are #2 and #3, in no particular order. Unless there is a change of heart, the prideful US will probably not recognize this until it is too late. This is evident in Obama calling Putin a mere regional power recently. The balance between peace and war among the superpowers likely sits in Syria. Russia needs hard cash, and Syria keeps Saudi oil and gas out of Europe. As long as Assa is there, Putin gets hard-EUR for his gas. Who will be the Barbarians at the Gate this time? In the Sack of Rome, it was the Visigoths. In the Sack of New York, if it ever comes to that, it could very well be those seeking Qisas (i.e. retaliation according to Islam) from Pakistan.

 

Even though the S&P500 is above 2000 again, yours truly maintains that S&P500 is a bluff. We probably need a correction here to bring it much higher.

 

Good luck in the markets.