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Investment climate, world economy
Jul. 2nd, 2007 11:14 amBefore I get bogged down in other projects, I should write down my periodic observations on investments and the economy.
Since I retired from portfolio management four years ago and moved my own investments into bonds and stodgy dividend-paying utilities and REITs, I don't pay all that much attention to the market. But in some ways the distance makes it easier to see general outlines of what's happening.
In the last few years, the global economy has benefitted from continued expansion of trade and the resulting efficiencies of specialization. In some ways it's a return to the climate pre-Depression, when advancing technology and global freedom of capital movement resulted in major infrastructure investment in under-developed countries. We're seeing similar willingness to risk capital in faraway places with good growth prospects. Yet, as then, there is always the possibility that the politics of nationalism will limit or roll back some of these benefits of globalization, since the downside is often more obvious than the more general upside and it's easy to blame any domestic problems on foreign devils. The reactionaries and nativists would have us return to high trade barriers, believing that trade with other countries (or cities, or the next valley over...) reduces their natural birthright to a good living with little effort. If they had their way, as they did in the 30s, global trade would collapse, production would decline around the world, and mass starvation in the poorest places would go hand-in-hand with war and disease.
There are many signs that political factors are going to limit further progress in trade liberalization; from Venezuela to our own Congress, a backlash is in progress. Gaining power by blaming foreigners is popular worldwide, yet more sensible voices still rule, in most places. But it's very easy to fan the flames of nationalism, reap the benefits of power, and then take only symbolic actions that don't damage the domestic economy enough to create unrest. When such programs are actually implemented, as in Venezuela and Iran, economies are damaged enough to endanger the demagogues' hold on power, so there are limits. As long as this only occurs in small, less important countries, the world scene staggers along without problems, but if a country like the US starts to act offensively on trade, the great reversal could begin as others retaliate. And then the nativists would wonder why everything collapsed, and call for more trade barriers.
So there is some danger lurking in the otherwise benign climate. Which is why one should always keep some bonds in hard currencies (or TIPS, inflation-protected bonds) at the core of a portfolio, so that a decade of economic stagnation could be survived. Bonds, of course, suck badly in all other scenarios...
[next missive: subprime and junk bonds, hedge funds, etc.]
Since I retired from portfolio management four years ago and moved my own investments into bonds and stodgy dividend-paying utilities and REITs, I don't pay all that much attention to the market. But in some ways the distance makes it easier to see general outlines of what's happening.
In the last few years, the global economy has benefitted from continued expansion of trade and the resulting efficiencies of specialization. In some ways it's a return to the climate pre-Depression, when advancing technology and global freedom of capital movement resulted in major infrastructure investment in under-developed countries. We're seeing similar willingness to risk capital in faraway places with good growth prospects. Yet, as then, there is always the possibility that the politics of nationalism will limit or roll back some of these benefits of globalization, since the downside is often more obvious than the more general upside and it's easy to blame any domestic problems on foreign devils. The reactionaries and nativists would have us return to high trade barriers, believing that trade with other countries (or cities, or the next valley over...) reduces their natural birthright to a good living with little effort. If they had their way, as they did in the 30s, global trade would collapse, production would decline around the world, and mass starvation in the poorest places would go hand-in-hand with war and disease.
There are many signs that political factors are going to limit further progress in trade liberalization; from Venezuela to our own Congress, a backlash is in progress. Gaining power by blaming foreigners is popular worldwide, yet more sensible voices still rule, in most places. But it's very easy to fan the flames of nationalism, reap the benefits of power, and then take only symbolic actions that don't damage the domestic economy enough to create unrest. When such programs are actually implemented, as in Venezuela and Iran, economies are damaged enough to endanger the demagogues' hold on power, so there are limits. As long as this only occurs in small, less important countries, the world scene staggers along without problems, but if a country like the US starts to act offensively on trade, the great reversal could begin as others retaliate. And then the nativists would wonder why everything collapsed, and call for more trade barriers.
So there is some danger lurking in the otherwise benign climate. Which is why one should always keep some bonds in hard currencies (or TIPS, inflation-protected bonds) at the core of a portfolio, so that a decade of economic stagnation could be survived. Bonds, of course, suck badly in all other scenarios...
[next missive: subprime and junk bonds, hedge funds, etc.]
