Today's Soviets & Long, Variable Lags

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Здесь девушки прекраснейшие спорят

За честь достаться в жены палачам.

Здесь праведных пытают по ночам

И голодом неукротимых морят.

Here the most beautiful girls fight/For the honor of marrying executioners./Here they torture the righteous at night/And wear down the untamable with hunger.

Anna Akhmatova, 1924

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THIS IS NOT INVESTMENT ADVICE. INVESTING IS RISKY AND OFTEN PAINFUL. DO YOUR OWN RESEARCH

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When I invest, I watch for data that breaks a pattern, that shows movement. Then I categorize that data into a rubric.

The first part of today’s post is about geopolitics, the second monetary policy.

Modern Soviets

This week one of the most powerful people in the world, China’s President Xi, visited Hungary and Serbia, countries with GDP a fraction the size of a major Chinese city. Further east, Russia lured an American onto Russian territory and promptly took him hostage as Putin began yet another term, a quarter-century in power. Each event is small, but they reinforce the perception we are moving into a more dangerous world. It’s the type of world I described in Master, Minion and further explore in the sequel that I am writing, Borderlands. I allocate my capital with this reality in mind.

I started investing in the 1990s. At the time, there was a widespread, in retrospect false belief the world was opening up and opportunities for diversification were growing. China and the former Soviet Union were going to privatize, so I thought.  We investors would give them our savings, everyone would get rich. Thirty years later, we know the inflation-adjusted price of stocks in these places is terrible.

Russian markets are a no-go zone for Western investors and the same thing will happen in China if Xi invades Taiwan. By the time that’s obvious, your money will be gone. You need to make a move before it happens. Both Putin and Xi believe their foe—Western Capitalism—is both mighty and weak and pick their battles strategically, constantly seeking to undermine the West.

Milosevic Mental Model

Investors, like lawyers, look to precedent. When it comes to Xi and Putin, names like Mao, Stalin or Hitler are one mental model. A more recent one is convicted war criminal Slobodan Milosevic. He was, like Xi and Putin, a product of the Soviet state and utilized propaganda and violence to achieve his aims.

It was in the service of such propaganda that Xi visited tiny Serbia. May 7 marked the 25^th anniversary, to the day, of a fundamental element in modern Russian and Chinese propaganda—NATO’s mistaken bombing of the Chinese embassy. If Xi prioritized commerce, he would have gone to Brussels and Berlin.

“Twenty-five years ago today, NATO flagrantly bombed the Chinese embassy in Yugoslavia,” wrote Xi in a Serbian newspaper. With Google, if you can access Google, which mainland Chinese can’t, you can figure out the truth. The bombing was an accident due to an intelligence failure. The US apologized and paid reparations. At the time, Serbia was preparing to slaughter Kosovar (Muslim) Albanians. The bombing was intended to dissuade them. There was nothing flagrant about it.

Putin also twists reality. “We do not refuse dialogue with Western states…Do they intend to continue trying to restrain the development of Russia, continue the policy of aggression…”. Of course, it is Russia doing the aggression. Putin’s hostage-taking is similar to both what the Iranians did in November 1979 and, more recently, Hamas to Israel.  This is an ancient form of war. Homer writes about it.  

To understand how Xi, Putin, and Milosevic think, distinguish different forms of control. Prohibiting action, like freedom of movement, is one form. Soviet ideology, since its inception, has been about controlling thoughts as well. There is one, Marxist-Lenninist truth, deviation is punishable by death. Serbia began the 1990s Balkan wars by attacking the Western part of Yugoslavia—Slovenia—for thinking it could operate independently.  Putin is murdering tens of thousands of Ukrainians for thinking they want to join the European Union.  Xi may do the same to Taiwan for thinking they don’t want to be absorbed.

When the Soviet ideology was in retreat, adding Russian, Chinese or their allies’ assets to your portfolio was a great idea. Not now. As the investor, you need to choose a side. In that sense, diversification is a trap. Yes, there can be a trade, like the recent pop in Chinese stocks. But I won’t touch Chinese stocks. Xi’s visit to Serbia is another data point in that fact pattern. He is telling you he isn’t friendly to capital. This is also an argument for owning defense stocks.

Current Conditions

Beyond geopolitics, we are getting increasing evidence, perhaps one or two data points away, of a possible break lower in yields. Here is the dynamic I believe is at work.