In our list of great reads this week, we look at the success of nations and how that comes about and then compare that to what we are seeing globally today – from the rise of divisions in Europe to the increasing stranglehold on power coming from China’s ruling party to the Trump administration’s policy views on NAFTA. Start with the article on Why Nations Fail and then read the specific examples and see what thread (or threat) you draw from them all taken together? Finally, this week marked the 30th anniversary of the Crash of 1987 and Robert Shiller has written a wonderful piece in the NYT about his research on that event and what it tells about the times we’re all in today.
Here is a curated list of important stories outside the main headlines that caught our attention this week.
MIT’s Daron Acemoglu on Why Nations Fail (REIT.com) – This is a short read from which we learn a lot. It’s the cliffs notes version of Daron Acemoglu’s wonderful 2013 book “Why Nations Fail”. Acemoglu and his partner, Harvard’s James Robinson, studied what it is about successful nation states that make them successful relative to the majority that struggle. What is clear from their work is that inclusive societies prosper. Extractive societies benefit a powerful few for some period of time but descend into conflict as inequality becomes more apparent. There are a number of wonderful insights in this short interview. As investors, where would you put your money for it to have the best chance at growth over the long term?
Xi Jinping’s Marathon Speech: Five Takeaways (NY Times)
Xi Jinping has more clout than Donald Trump. The world should be wary (The Economist) – Both these pieces shed light on what’s coming from China. While no direct mention of the US and its controversial leadership was made, there were a number of contrasts drawn from Xi’s nearly 4 hour speech to the new Politbureau. While these speeches are long on promises and short on details, the NYT article makes a solid attempt at reading out the main elements – one of which is that China clearly sees itself as a growing global power and is working to build the military capabilities necessary to project it. China remains the engine of the global economy for the time being, but it has some real headwinds in front of it, not the least of which are the constraints placed on it’s labor force by demographic evolutions. Economic influence has bought China increasingly global reach. Mr. Xi is the most powerful Chinese leader since Mao. We will see how he wields that power. He was clear that political reforms are off the table. For us, that remains China’s greatest weakness.
The industries at risk if Trump quits NAFTA (Erica Pandey, Axios) – This is a wonderful info-graphic outlining the industries involved in the balance of trade with the USA in the current running dispute over NAFTA. One can easily see just what the US has to lose. As in all of the “nationalism” driven strife we are witnessing around the world, we are far more focused on looking at the minority losses than the majority wins. It would appear, at least to us, that we have been a bit hijacked by the minority in our current environment and that politicians are seeking to prosper from this most visceral discontent. This is not to say that globalism is all rainbows and unicorns, but broadly it has contributed to a rise in our global standard of living over the last 50 years that has no compare in our human history. That’s a fact none of us can walk away from, so we ought to carefully consider the costs of a less connected world.
After Catalans, Italian regions step up autonomy call:
Spain vows to push ahead with direct rule over Catalonia: (both stories from The Financial Times). With Brexit and the raft of terrorism and immigration issues of the last year, Europe has some deep challenges in front of it. In the Southern European countries people are just as frustrated with wealthy, successful regions paying for the poorer, more rural regions as the northern countries are with the southern ones. So, Catalonia, long on tenuous terms with Spain, has effectively declared independence. Similarly, prosperous regions in Italy are seeking more autonomy from Rome and seeking to have their policies become the policies of the state. We expect these fractures to continue as Europeans are asked to measure and decide how much benefit the Eurpean Union has brought them. Recently, it’s been far easier to count the costs that to count the benefits from free trade, free movement and the addition of new member states to the economic block. There will be more decisions to come.
A Stock Market Panic Like 1987 Could Happen Again (Robert Shiller in NY Times) – Nobel Prize winning economist pens this article in the Times based on his own research just after the ’87 Black Monday plunge. Down 22% in a day! “Watch that first step sir, it’s a doozy!” Shiller’s piece warns us not to look past humans as the key reason we have these sorts of panics. Structural inefficiencies are born from human biases toward greed and it is those inefficiencies that create booms and busts. But behind them is our willingness to set risks aside when there’s a fast buck to be made. The old Wall St. adage holds true, “Bulls and bears make money…pigs get slaughtered.” When everyone becomes a pig at the trough, things go badly – even when central banks pay the markets for that not to occur. They just put off the inevitable. This read is not to be missed.