“Before I can solve a problem, I just state it to myself. When I think I have found the solution I must prove I am right. I know of only one way to prove it; and that is, with my own money.”
Reminiscences of a Stock Operator, Edwin Lefevere, 1923
“Happiness is the exercise of one’s vital abilities along lines of excellence in a life that affords them scope.”
Edith Hamilton (1867-1963)
“If you could wave a magic wand…there is this settlement that would make them both better off, but you can’t wave that magic wand because nobody knows what will happen.”
Page Fortna on this week’s podcast, here.
THIS IS NOT INVESTMENT ADVICE. INVESTING IS RISKY AND OFTEN PAINFUL. DO YOUR OWN RESEARCH.
The right framework makes all the difference.
To understand what is going on right now, three interrelated frameworks help. They are:
a) the primacy of positive cashflow,
b) the disruption (including global conflict) that follows when these cash flows shift,
c) and the relative attractiveness of longer-duration cash flows (stocks and bonds) compared to cash itself.
These frameworks explain so much, including the latest turn in the Russia, Ukraine conflict, the immolation of Ivy League Presidents on Capital Hill this week, the dead-end Xi is leading China down, and the apparent over-valuation of parts of the US stock market.
Cash Flow
By cash flow, I mean the ability of any country, company or person to generate cash in excess of expenses--debt, taxes, payroll, insurance, etc. That excess cash is where the power lies. Yes, there are other forms of power. The government can take away your liberty; a murderer or terrible disease can take away your life. But positive cash flow has profound power.
Consider Ukraine. The US Congress may cut off aid, which is what Putin has been banking on all along. While cutting aid is an enormous unforced geopolitical error, it’s also true that Ukraine’s cash flow is weak. Ukraine’s GDP is just $200 billion, about half of Apple’s sales. Ukraine’s key exports are wheat and corn, which are a lot less profitable than iPhones. (Ukraine also has a thriving tech sector).
Said differently, Ukraine’s cash flow leaves them dependent on fickle donors, while Russia, even if hindered by sanctions, has better cash flow, which makes them much harder to beat, and more lethal. Ukraine’s cash flow is both a function of its export mix and a legacy of thirty years of mismanagement following the collapse of the Soviet Union. The only way for them to keep fighting is to get more money on top of the roughly 250 billion euros they have received so far, as the table below shows.
Source: Kiel Institute
To be clear, the money Ukraine needs is tiny in comparison to the revenue of the countries that can give it. But the lesson is you need to look out for yourself or wolves will pounce. In this case, the wolves hail from Moscow and they will kill your youth and rape your women. It is an ugly reality. But this is how human beings are wired.
The same dynamic is evident in very a different context. This week, the Presidents of Harvard, MIT and the University of Pennsylvania scrambled to cover their asses after flunking the Congressional oral exam on whether calling for genocide violates university policy. The game and cash flows shifted unexpectedly and they didn’t see it. To rise to power, they had to placate staff and students, many of whom organized reality via a skin tone prism. Thus, these people see Israel/Hamas as a white/brown conflict, not a good/evil issue. But to remain in power, the Presidents need to placate donors, who disproportionately view Israel/Hamas through the good/evil prism. The donors have the cash flow and can cut it off, thus the administrative about-face.
The final point about cash flows concerns China President Xi’s speech at the Central Financial Work Conference (thanks to Bill Bishop of Sincocism for noting this). Several subscribers have asked me if now is the time to get back into Chinese assets given that they are “cheap.”
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