Mike Lipper’s Monday Morning Musings
Chinese Emperors Learn “All Roads Lead to Rome”
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Before focusing on the underlying geopolitical/economic elements in our current tensions, we should focus on the immediate signals highlighted below:
The critical lessons of geopolitics and their accompanying economics are driving our two modern emperors today, the leaders of China and the US. The first era they should recognize is ancient Rome, which turned the Mediterranean into a Roman lake. Their power did not rest solely on the strength of the Roman legions, but more importantly on the success of their engineers in building roads and water viaducts. These were critical in supplying their capital center with imports of grain and captured slaves.
Over the centuries the Mediterranean held the keys to other powers. It was the last leg in the importation of spices and other materials from the “silk road” to Italian City states. The 15th century Europeans realized the nautical/military power of the Chinese when their armed junks entered the old Roman lake. (Due to a sharp change in the attitude of the Chinese government, which recalled all of their navy and destroyed their ships, their Navy was largely destroyed). Soon thereafter the Dutch replaced the Portuguese as the suppliers to Europe for much of what used to come overland. The Dutch East India Company (English translation of BOR) built a fortified base in Indonesia and controlled the South China Sea and much of the Gulf of India.
These strategic lessons were not lost on the Germans. They believed that whoever controlled “The World Island” (EuroAsia including Africa) controlled the world. The US view was enunciated by Admiral Alfred Thayer Mahan. (When I first read his views at Columbia I did not realize that he had spent two years there before going to the Naval Academy.) His basic view was that he who controls the seas, main islands and critical ports, controlled the world. He was particularly sensitive to “property” between 30 and 40 degrees latitude.
Underlying tension between the US and China today
I have always believed the tariff issues with China and other countries were a way to get vital national securities issues on the table. Going back to the roads of Rome, it’s apparent an empire is vitally dependent upon imports of critical supplies. (To some degree imports are dependent upon the combination of capital transfers and money earned from exports.) Unlike the US, China is much more dependent upon the import of energy, very high-quality semiconductors, and similar items, many of which are imported through the South China Sea and related bodies of water. China feels that it is a national imperative to control access to their country. Even with a fully developed “one belt, one road”, the land route is insufficient. Officially, the US is for the international right of free navigation of all major water routes. Like the Soviet Union, China wants to escape encirclement. China recognizes that at some point it may have to fight its way out of a perceived trap. In the modern world one of the weapons of choice is technology, particularly advanced semiconductors. Both sides recognize that they have attractive internal markets for other’s goods, as well as capital that can be used for their own imports.
Investment Conclusions
We should learn from both boxers and wrestlers. In terms of tactical investment decisions, be a counter puncher looking for the rare opportunity, but as a wrestler stay engaged and use the opponent’s weight as leverage at critical points. Bottom-line looking ahead, after investing focus on up-to-date strategies, successful investing.
Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/07/apollo-11-investment-lessons-weekly.html
https://mikelipper.blogspot.com/2019/07/us-stock-markets-new-highs-misleading.html
https://mikelipper.blogspot.com/2019/07/twin-problems-not-enough-greed-and-too.html
Did someone forward you this blog?
To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com
Copyright © 2008 - 2019
A. Michael Lipper, CFA
All rights reserved
Contact author for limited redistribution permission.
- As of this week seven of the twenty-one US Diversified Equity funds averages and five narrower sector fund averages have gained more than +20%, including the average S&P 500 fund. Years ago, a manager of a corporate defined benefit pension plan with an excellent long-term record had a tactical rule. In any year that he was up 20% he went to cash. This was not a market timing maneuver, he believed that earning two to three times his actuarial assumption was enough in any year. It didn’t warrant taking any additional market risk in that year. There would always be opportunities the next year, particularly if there was a flow of new money. Some investors should follow this approach with their equity investments today.
- Many so-called balanced funds or accounts don’t like high quality bonds. What they are holding in their fixed income allocation is meant to cushion a fall in a declining equity market. However, their fixed income allocations have assumed considerable equity type risks in currencies, high yield, or credits with very light covenants. This is particularly worrisome when the proceeds of these issues are used for increased leverage, without any substantial new earnings power being generated. Thus, many portfolios marketed as conservative investments have more than stock price risks embedded in them. Michael Cembalist of JP Morgan Asset Management is particularly concerned about leveraged loans, which are 95% covenant lite in Europe.
- Are we approaching a time where a radical change in thinking about future trends is required? Typically, many financial and economic organizations publish their mid to long-term forecasts over the next three months. They include forecasts on domestic and global GDP, rates of inflation, interest rates, market concentration and favored industries/individual securities. They are produced by learned individuals or teams and are based on the continuation of present trends. In other words, their forecasts are like the US Fed, “data dependent”. Odds are, many of these forecasts will be right in their extrapolations, with relatively low payoffs. They run the risk of a “Minsky Moment” after a long period of stable results. (A Minsky moment refers to a sharp decline in prevailing market sentiment and economic productivity after a long period of widespread optimism). I think we are due for such an occurrence, particularly in organizations headed by long successful leaders close to their last hurrah. Remember the planner’s curse, “Men plan and God laughs”. Looking at the composition of the Dow Jones Industrial Average, not one of the thirty names is from the original list. Even the S&P 500 index funds have annual turnover due to acquisitions or lost market capitalization. I suspect we are due for a series of unexpected surprises, suggesting that after the 2019 gains we should be willing to build opportunity reserves, not market timing reserves. A future blog will address market timing issues more fully.
The critical lessons of geopolitics and their accompanying economics are driving our two modern emperors today, the leaders of China and the US. The first era they should recognize is ancient Rome, which turned the Mediterranean into a Roman lake. Their power did not rest solely on the strength of the Roman legions, but more importantly on the success of their engineers in building roads and water viaducts. These were critical in supplying their capital center with imports of grain and captured slaves.
Over the centuries the Mediterranean held the keys to other powers. It was the last leg in the importation of spices and other materials from the “silk road” to Italian City states. The 15th century Europeans realized the nautical/military power of the Chinese when their armed junks entered the old Roman lake. (Due to a sharp change in the attitude of the Chinese government, which recalled all of their navy and destroyed their ships, their Navy was largely destroyed). Soon thereafter the Dutch replaced the Portuguese as the suppliers to Europe for much of what used to come overland. The Dutch East India Company (English translation of BOR) built a fortified base in Indonesia and controlled the South China Sea and much of the Gulf of India.
These strategic lessons were not lost on the Germans. They believed that whoever controlled “The World Island” (EuroAsia including Africa) controlled the world. The US view was enunciated by Admiral Alfred Thayer Mahan. (When I first read his views at Columbia I did not realize that he had spent two years there before going to the Naval Academy.) His basic view was that he who controls the seas, main islands and critical ports, controlled the world. He was particularly sensitive to “property” between 30 and 40 degrees latitude.
Underlying tension between the US and China today
I have always believed the tariff issues with China and other countries were a way to get vital national securities issues on the table. Going back to the roads of Rome, it’s apparent an empire is vitally dependent upon imports of critical supplies. (To some degree imports are dependent upon the combination of capital transfers and money earned from exports.) Unlike the US, China is much more dependent upon the import of energy, very high-quality semiconductors, and similar items, many of which are imported through the South China Sea and related bodies of water. China feels that it is a national imperative to control access to their country. Even with a fully developed “one belt, one road”, the land route is insufficient. Officially, the US is for the international right of free navigation of all major water routes. Like the Soviet Union, China wants to escape encirclement. China recognizes that at some point it may have to fight its way out of a perceived trap. In the modern world one of the weapons of choice is technology, particularly advanced semiconductors. Both sides recognize that they have attractive internal markets for other’s goods, as well as capital that can be used for their own imports.
Investment Conclusions
We should learn from both boxers and wrestlers. In terms of tactical investment decisions, be a counter puncher looking for the rare opportunity, but as a wrestler stay engaged and use the opponent’s weight as leverage at critical points. Bottom-line looking ahead, after investing focus on up-to-date strategies, successful investing.
Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/07/apollo-11-investment-lessons-weekly.html
https://mikelipper.blogspot.com/2019/07/us-stock-markets-new-highs-misleading.html
https://mikelipper.blogspot.com/2019/07/twin-problems-not-enough-greed-and-too.html
Did someone forward you this blog?
To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com
Copyright © 2008 - 2019
A. Michael Lipper, CFA
All rights reserved
Contact author for limited redistribution permission.
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