Hong Kong Protests, Politicians Going Gray by Salient Partners
Everything under the sun is in chaos. The situation is excellent.
– Mao Zedong (1893 – 1976)
Forget it, Jake. It’s Chinatown.
– Chinatown (1974)
Language is conceived in sin and science is its redemption.
– W.V.O. Quine (1908 – 2000)
I am, as I am; whether hideous, or handsome, depends upon who is made judge.
– Herman Melville (1819 – 1891)
All -ism’s end up in schisms.
– Huston Smith (b. 1919)
What Asians value may not necessarily be what Americans or Europeans value. Westerners value the freedoms and liberties of the individual. As an Asian of Chinese cultural background, my values are for a government which is honest, effective and efficient.
– Lee Kuan Yew (b. 1923)
Two years ago, the new seven-member Standing Committee of the Chinese Communist Party Politburo – the most powerful political entity in the country – was introduced to great fanfare. All seven men walked on stage wearing a dark suit and a red tie, but to me the most striking aspect of their appearance was their hair. Yes, their hair. Their dark, immaculately coifed, powerful hair. Despite an average age of 65, not one of these men has EVER been seen in public without sporting a mane that would make their grandsons proud.
On the other hand, consider this handsome man, Bo Xilai. Once the princeling of princelings, the son of a Long March vet, Bo was enormously popular for his Redder-than-Thou politics and enormously rich from his mayoral “crackdown” on organized crime in Chongqing, a municipality with about the same urban population as New York City. To put Bo Xilai in a US context, he was richer than Michael Bloomberg and more politically ambitious than Rudy Giuliani, if either of those two qualities can be imagined. And of course, this 65 year old politician had the luxurious jet-black hair as befits a man of his position.
But alas, Bo’s political reach exceeded his political grasp. Undone publicly for abuse of office and a murder conspiracy, privately for his creation of a top-notch intelligence operation that spied on his fellow Politburo princelings (again to put in a US context, imagine if a mega-billionaire mayor of New York City created his own electronic FBI that could monitor everyone’s market activities … crazy, right?), Bo found himself on the wrong end of a show trial and is currently living out the rest of his days in a Madoff-style cell. How do we know that Bo is gone for good, that he has lost whatever political support he formerly commanded? Because they took away his hair dye. He’s “gone gray”, as they say in the Chinese political lingo, portrayed to the world as a frail old man who not only lost his freedom but much more importantly lost his mojo.
Patrick Henry famously said, “Give me liberty or give me death!”, a sentiment that makes sense in Western political culture but is met with puzzled looks in the East. Personal liberty is, in an important sense, everything in Western political culture. In Chinese political culture … not so much. On the other hand, signifiers of personal potency – like maintaining dark hair – have enormous meaning in China and, at times, a diametrically opposed meaning in the West.
Okay, Ben, kinda interesting in a cultural anthropology sort of way, but what in the world does this have to do with investing? Simply this, and it’s a core Epsilon Theory tenet: the meaning of events and market signals differ hugely from country to country, tribe to tribe, generation to generation. Ferguson does not mean the same thing as Hong Kong. Hong Kong does not mean the same thing as Tahrir Square or even Tiananmen Square. Monetary policy does not mean the same thing in Beijing as monetary policy means in Washington, which in turn does not mean the same thing as monetary policy in Paris or Rome. But we have an innate tendency to act as if these signals DO mean the same thing, and we can totally wrong-foot our investments as a result.
The biggest thing happening in the world today is the growing divergence between US monetary policy and everyone else’s monetary policy. There is a schism in the High Church of Bernanke, with His US acolytes ending the QE experiment in no uncertain terms, and His European and Japanese prelates looking to keep the faith by continued balance sheet expansion. That divergence plays out mostly in exchange rates, and it has three HUGE implications, one for investment strategy selection, one for global growth, and one for … (gulp!) gold.
First, this is great news for global macro strategies and their low-cost, populist cousins, so-called “alternative beta” strategies. Global macro performance has been absolutely atrocious over the past five years, driven primarily by a coordinated global monetary policy regime that squeezed out the historical patterns of difference between geographies and asset classes. Now that monetary policy is uncoordinated, with every major economic region essentially fending for itself, global macro and alternative beta strategies have “room” to work. To be sure, some of these strategies will still be confounded by an investment regime where monetary policy trumps economic fundamentals at every turn, but the sine qua non for ANY active investment strategy is distinction and dispersion. For the first time in more than five years, we can see this sort of distinction and dispersion in regional macroeconomic policies, giving traditional global macro strategies at least a chance of success. Vive la difference!
Second, this divergence in regional monetary policy creates enormous strains on the tectonic plates of modern international trade – currency exchange rates. In the absence of a re-convergence of monetary policy I don’t see any compelling reason why recent dollar appreciation should slow down, much less reverse itself, with the obvious consequences for US S&P 500 earnings (negative), commodity prices and commodity-related securities (negative), most EM markets (negative), and European and Japanese earnings (positive). But the greatest risk for global economic stability from a dollar on steroids is, for my money, China. Why? Because as I’ve tried to point out in prior Epsilon Theory notes (here, here, and here), China’s political stability depends on economic growth – it’s the mojo of the Party just as surely as jet-black hair is the mojo of Party leaders – and Chinese growth depends on exports. So long as the yuan is effectively tethered to the dollar, a stronger dollar means a stronger yuan, which means weaker exports to Europe, Japan, and EM’s. Sure, it’s cheaper now to buy more iron ore and copper, so I suppose you could build another ghost city or two to keep the growth train on track, but the Politburo’s only serious answer to the politically existential question of growth is to sell more advanced products to more people, most of whom don’t live in China. That means selling medical devices to Japan and telecom equipment to Germany, tasks made