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The US system is under stress from both within and without. Because the US is the center of the global financial system, with the biggest economy and the deepest financial markets, this matters to anyone saving money. Will the US system endure the stress or, like Germany in the 1930s, snap?
For investors, this question is playing out alongside:
1. A technology driven boom that is improving living standards (like mRNA vaccines) and simultaneously rapidly disrupting cash flows, businesses and perhaps your job.
2. A pandemic that has killed 7 to 10 million people (based on excess mortality)1, disrupted production, boosted inflation and created a psychological shock such that we are now primed for bad news.
3. Waning government stimulation. The US central bank is beginning to very modestly slow the rate at which they are printing money, what is called “tapering.” This reduces the amount of money going into the economy and financial markets.
The question is how to invest to position for the good (growth, innovation and disruption) while recognizing the bad outcomes can be really bad. How much the central bank tightens is important but not fundamental. That large numbers2 of Americans believe the last Presidential election was fraudulent is fundamental. Could a disputed US election lead to widespread violence? Will perceived US weakness lead to war in Ukraine or Taiwan?
At the root, the stress is around the relative resilience of an open (more democratic) versus a closed (ruled by “enlightened” elites) system. Because I am rooting for the open system, it’s hard to be objective. Our own ability to self-deceive is high. Also, a system is dynamic, in the same way a financial market is.
Feedback Loops
We can’t be objective about a financial market because we participate in them. Markets are people, us. Nations are the same. There are feedback mechanisms in each. BLM protests send a signal that generates a response. Likely fear of Trumpism helped pass the infrastructure spend bill. The speed of this feedback loop is critical. The gap between slavery being abolished and the 1964 Civil Rights Act was … a century.
Covid is a case study in a closed versus open system. Initially, China’s lock-down response was much more effective than the de-centralized Western response. The feedback response was better. After an appalling number of deaths, an open system with private sector companies richly compensated to produce peer-reviewed studies developed amazing vaccines with closer to 95% efficacy. By contrast, Chinese vaccine efficacy is closer to 60%3 (which, to be clear, is much better than no vaccine). Short-term, the Chinese response saved thousands of lives and I’d prefer the Moderna vaccine.
Goals and Measurement
One of the beautiful things about investing is that results provide an objective measure of the quality of an idea. The best investors get around 40% of their decisions wrong so there is plenty of grist for reflection. Your goals determine what you measure.
In investing, the goal is to get the highest return possible for the least amount of risk. In terms of government, the goal is life, liberty and the pursuit of happiness. The US, Russian and Chinese Constitutions have much in common. “Citizens of the People’s Republic of China shall enjoy freedom of speech, the press….” Russia’s Constitution echoes this.4 Trump supporters storming the Capital saw themselves as patriots. The question is less what the goals are than in how to achieve them. With the help of Rose Technology, I tried to measure how we are doing.
Life
Open systems are good for life expectancy. Revolutions, be they Maoism or the collapse of the Soviet Union, are bad. Note how low life expectancy was in China in 1960.
The US has higher rates of violence than China, as seen below. Poor people in the US experience a disproportionate amount of this violence.5 Russia stands out as having both poor civil liberties and high rates of violence. Both Latin America and Africa have appalling violence.
Liberty
Disputed elections, gerrymandering and corruption all contribute to falling US scores. In China and Russia, term limits on the Supreme Leader have been abandoned, a problem the US was trying to solve in the 18th century.
Another perspective on liberty is migration. I showed this before. People want a better life and they will go great distances to get it. In this sense, the ability to generate wealth is critical for political stability and being open seems to help with that.
Pursuit of Happiness
Over time, the US has been a wealth creation miracle. Since the collapse of the Soviet Union, China has been a miracle. Russia initially did very well under Putin (in part due to an oil boom), but wealth has since stagnated.
Given this, why has a segment of Americans lost faith in the system? Likely disruptive economic change is a factor. It’s better to be a disruptor than disrupted. The disruptors are tech and the people that invest in and support tech. To be in the top 1%, you need assets of more than $10 million.
Debates about how open or closed a society should be are ancient. Breakdowns in opens societies are terrible for wealth. So far, the US is bruised but intact but that we are having this discussion should give you pause. Later this month, I’ll share my asset allocation with subscribers.
https://www.who.int/data/stories/the-true-death-toll-of-covid-19-estimating-global-excess-mortality
https://thehill.com/homenews/campaign/559402-one-third-of-americans-believe-biden-won-because-of-voter-fraud-poll
https://bjs.ojp.gov/content/pub/pdf/hpnvv0812.pdf