Investment Strategy

Don’t panic…just another mad month

July 2014 was a dramatic month. Many Western politicians, aided by tame propaganda media outlets, have been trying to re-start the Cold War with Russia. The Israeli military has attacked the densely populated ghetto known as the Gaza strip, with the inevitable loss of many civilian lives. And Argentina has defaulted on its debt (again) – for once not for lack of money or willingness to pay, but because it was forced to by a New York court. The world appears to have gone mad. So it’s business as usual, then, and there’s no need to panic.

Eastern Europe, the Middle East and South America all made headlines for bad reasons last month. And all with potentially significant implications in the world of investment.

We still don’t know who shot down Malaysian Airlines flight MH-17 over eastern Ukraine on 17th July. The most likely explanation is that anti-government rebels in the region mistook it for a Ukrainian military supply plane. On the other hand Russia has produced satellite imagery showing a Ukrainian fighter jet nearby at the time, hinting that it could have been ordered by the Ukrainian government in Kiev (denied, obviously).

Whatever the true story, it’s 99.999% certain that the Russian government didn’t order a commercial jet en route from the Netherlands to Malaysia to be shot down. Such an act would defy logic, as the subsequent international outrage has demonstrated.

What’s also known is that neither the US regime in Washington, nor its allies in Kiev, have provided compelling evidence of what actually happened.

What’s also known is that neither the US regime in Washington, nor its allies in Kiev, have provided compelling evidence of what actually happened. Just some references to postings on social media (since when was that hard evidence?) and statements along the lines of “It’s all very complicated and top secret, so you’ll just have to trust us.”

Sorry folks, no one has trusted you since you fabricated the existence of “weapons of mass destruction” to justify the invasion of Iraq in 2003. Please try harder, at least if you want intelligent people to believe you.

But none of this vagueness has prevented a political and propaganda frenzy. I’m currently visiting England. All appears peaceful, and surprisingly the sun is shining. But a week ago the front page of the Daily Mail, a national “newspaper”, screamed “PUTIN KILLED MY SON” in giant print at anyone careless enough to get too close to it. This is pretty typical of recent coverage of the Ukraine crisis. High on emotion and low on fact.

There are obvious motivations for this kind of hysterical propaganda. First up, the European oil and gas companies, and their pocket politicians, need excuses to overcome the powerful environmental lobby in Europe.

The argument goes like this: Europe needs natural gas, Russia supplies lots of natural gas to Europe, but Russia is evil, so Europe needs to produce more natural gas, that means “fracking” on a grand scale.

Fracking, short for “hydraulic fracturing”, is the process of extracting natural gas or oil from shale rock. It has taken off in the USA in recent years, creating an energy production boom. But environmentalists claim it’s highly damaging to the environment since it uses a lot of water, pumps harmful chemicals into the earth, and can even cause earthquakes. Wells also deplete much faster than conventional drilling.

Whether or not the environmentalists are right with their concerns, they make for a powerful political lobby in Europe. Demonising Russia, and making a big issue out of energy security, may be enough for energy companies to break the deadlock.

Second are the imperialists, egged on by the military lobby, who are keen to build up NATO forces close to the Russian border. (NATO is the North Atlantic Treaty Organisation, a military alliance between Europe and North America formed to confront the Soviet Union.) Their argument goes like this: Putin is evil, hence we must spend more on guns and ammo, yee-haa.

What’s conveniently forgotten in all this is that the whole mess in Ukraine was started by a coup d’etat, blessed by the West…

What’s conveniently forgotten in all this is that the whole mess in Ukraine was started by a coup d’etat, blessed by the West, which deposed an elected government (new elections were due in 2015, and offered in 2014).

Admittedly it was an incompetent and corrupt government, but an elected one nonetheless. As best I can tell, this confrontation always about trying to put NATO bases closer to Russia’s south western border. This was to be achieved by way of inserting a government more friendly to the West and less friendly to Russia (something which the West has been attempting for many years). Unsurprisingly, in the face of this threat, Russia has stood up for its own best interests.

Advanced-placement BMD systems encircle Russia and China, fundamentally altering strategic balance
Advanced-placement BMD systems encircle Russia and China, fundamentally altering strategic balance

The result is a spectacular own goal by the US and Europe. Despite the politicians’ huffing and puffing, and some relatively modest economic sanctions (…we still await Russia’s response…), it’s the West that will lose out. Russia is now aligning itself much more closely with China and other large and fast growing developing countries, and turning away from Europe (it already has few economic ties with the US).

The West is indulging in diplomatic and economic idiocy on a staggeringly grand scale. This is just so the current generation of career politicians that run Western countries these days…

The West is indulging in diplomatic and economic idiocy on a staggeringly grand scale. This is just so the current generation of career politicians that run Western countries these days – who by definition have very average decision making abilities – can strut about and preen themselves in front of the cameras. Future generations will look back, and scratch their heads, and wonder how this could have happened…

Then there’s the conflict in Gaza. This issue is like an old skin complaint that subsides only to flare up again from time to time. It could last for decades more. The only remedy will come when both the Israelis and the Palestinians are led by people who value peace over revenge. The chances of that happening seem remote for now, given that their leaders won’t even talk to each other directly.

This is just the latest reminder that much of the Middle East and North Africa is unstable. The civil war in Syria continues, violent fanatics have declared a “caliphate” (Islamic dictatorship) across much of Syria and Iraq, and the Kurds in north east Iraq continue to push for independence.

Yemen looks like a failed state. Egypt remains under military rule after kicking out the government a year ago. And Libya appears to have no central control, just hundreds or thousands of rival armed militias spread across the country. So much for the much touted “Arab spring”, a series of popular revolts against authoritarian governments in the region that was supposed to bring peace and prosperity.

And then there’s Argentina, which has been prevented from paying interest on its debt by a New York judge. As such it is in “technical default”, even though it has the money to pay. Long story short, a couple of hedge funds have refused to accept terms on previously defaulted debt, insisted on full payment, and a judge with dubious specialist expertise has agreed based on contract technicalities.

The result is that the judge has blocked bond holders that did accept the restructuring terms (the vast majority) from being paid what they are due by the Argentine government, until agreement has been reached with the holdouts (or “vulture funds”, as the Argentine government prefers to call them).

So far, no hard evidence has been forthcoming of bribery or attempted bribery by any party in the creation of this mess of conflicts of interest. So that probably means we should blame the Russians, right?

(Actually Russian president Vladimir Putin visited Argentina in mid-July as part of a tour to the region that also took in Cuba and Brazil. He was followed shortly afterwards by Chinese president Xi Jinping, who also visited Cuba, Venezuela and Brazil. High on the agendas of both presidents were cementing economic links between their respective countries and Latin America. We should expect to see a lot more of this in future…)

But a “default” of this kind is just the sort of news that can unsettle overvalued markets looking for an excuse to crash. Indeed most global stock markets fell around 2% on the news.

As far as we know, no innocent civilians have been killed as a result of the Argentine default, at least not yet. But a “default” of this kind is just the sort of news that can unsettle overvalued markets looking for an excuse to crash. Indeed most global stock markets fell around 2% on the news.

What’s the link between these events? Nothing really. It’s just a timely reminder that we live in a highly uncertain world. Just this week I visited Stonehenge, a mysterious (some say mystical) stone circle built in southern England about 4,500 years ago. That makes it about the same age as the pyramids of Giza, outside Cairo in Egypt.

Gazing at the stones I was amazed that it had lasted all this time. But then I remembered that most had fallen over in the past, many had been stolen for other construction at some point, and those stones that were standing had been put back that way between 1901 and 1958.

Nothing is forever. Change and turmoil are permanent features of life and investing. Don’t panic. Just take a deep breath and follow my five simple guidelines for your investment strategy.

Stay tuned OfWealthers,

robmarstrand@ofwealth.com

 

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.