George Friedman's Thoughts: Deep Geopolitics

By: George Friedman


Geopolitics is, on the surface, about the relationship between nations and geography. At a deeper level, it is about nations and necessity and predictability. But the fundamental question is what we mean by geography.

Geography is about place; it is about the forces that converge on, shape and compel the individual to act, and to do so with other individuals likewise constrained. Physics asserts that the action of any given atom is unpredictable, and that the actions of a mass of atoms are predictable statistically.

The question is what permits that predictability. In the same sense, geopolitics makes no claim about what the individual will do. It makes a claim as to what we as a group will do.

Geography may be the pivot, but as I have tried to show in the past two weeks, a broader definition of geography is needed. It is of course about oceans, rainfall and grain production, but this provides us what I will call a flat geography, a geography of the moment generalized over time.

There is also a deep geography that sees the transformation of place over time, and with it the history of the place that explains the statistical – and individual behavior over time.

In the past two weeks, I presented two stories. One was of individuals, about my father and his half-brother. The other was of the way the American Revolution was influenced by the English Civil War between Catholics and Protestants.

I told the story of the great grandfather of George Washington and the way his father, a Royalist, lost everything to the Puritans, causing his son to come to North America to try to recreate the life he had lost in England.

The story flowed into the discovery by George Washington that he was not English but American, and how that led both to the revolution and the division between New England and the South that fueled the American Civil War.

The rise of Protestantism was itself deeply embedded in European geography. The Protestant Reformation touched most European countries, but its success centered on the North Sea. Christianity was European but divided between Orthodoxy and Catholicism.

Protestantism was the revolt of the Catholics centered on the North Sea against the European Peninsula. The issue was expressed theologically in terms of the relationship between the papacy and its priests to God. But it was also about who dominated the Atlantic.

Catholic Iberia discovered and exploited the Western Hemisphere. France then joined and as wealth surged, power flowed to the south. Maritime Germany rebelled. Bavaria did not. Britain became the center of the northern bloc and could not evolve with the power of forces loyal to the Pope and therefore under the control of the heirs of the Roman Empire.

Religious Divisions in Europe 1520-1600


There is a constant debate in the United States over the place of Christianity and Protestantism in the American regime. There is an argument that the American regime was intended to be a Christian regime, and a further argument that it was meant to be Protestant. There was great hostility to Catholic immigrants in the United States.

The United States emerged from the wars that created a Protestant North Sea basin. It follows, given that the founder was overwhelmingly Protestant, that this notion is correct.

But when you look at the two founding documents, there is no mention of Christ at all, although there is the implication of God. The answer was I think that the ancestors of the founders to a great extent were escaping from the brutal wars of the religion. They did not want to import the wars between Christians and even between Protestants to the United States.

This was not because the founders weren’t Christians and Protestants, even devout ones, but because they were all in some way fleeing Europe.

The point here is not to consider the American founding, but rather to use it as an example of what I mean by deep geopolitics. Geopolitics is not simply the physical makeup of a place, although it is that as well. It is layers of geopolitical reality interfacing in radical ways. The rising of the North Sea nations set in motion a new geopolitical reality in North America.

Geopolitics becomes chess at any moment in time. But when used to produce the broader history of humanity, it becomes three-dimensional chess, with geopolitical layers emerging.

It might have been expected that the Iberian discovery of America would have led the North Sea nations to respond, and that the wars and civil wars would create refugees who would populate North America, and given North America’s geography, that it would emerge as a great Atlantic and Pacific power.

But for that, the dynamism of geopolitics must be layered.

2019 Berkshire Hathaway Letter To Shareholders: 3 Key Takeaways

by: Get Rich Brothers

 
Summary
 
- Buffett's Letter to Shareholders was released today.

- Succession planning is of the utmost importance.

- Share repurchases are actively being pursued.
 
 
It’s that wonderful time of year again when Warren Buffett releases his annual Letter to Shareholders.
 
I view this as the single most important document published on an annual basis for investors.
 
As with the letters from 2014, 2015, 2017, and 2018, I will once again share what I see to be the three vital components of this year’s Letter.
 
Key Takeaway No. 1
 
Succession planning is one of the hottest topics at Berkshire Hathaway (BRK.A), given the advanced ages of both Warren Buffett and Charlie Munger, the current and long-standing leaders of the company. Two of the leading candidates to succeed Buffett and Munger are Ajit Jain and Greb Abel.
 
Jain effectively manages the insurance operations at BRK while Abel runs the non-insurance business. In this year’s Letter, Buffett revealed (though this had been floated previously) that Jain and Abel would be joining Buffett and Munger for the Q&A period at the shareholder meeting in Omaha this May.
 
While this does not guarantee that these two will be next in line to run the company, it is a strong endorsement of their value to the company and suggests they will indeed be with us for the long term. Given their strong track record over the past years in their respective areas of the business, I view this is as a hugely positive development.
 
Beyond succession planning directly—though with an eye to future governance at BRK—Buffett also detailed the importance of having a strong, devoted Board of Directors, devoid of conflicts of interest. As part of this discussion, he assured investors that BRK will continue to pursue directors who are also shareholders of the company as a result of making purchases out of their own savings.
 
As always, this assurance comes as no surprise given Buffett has always emphasized the alignment of interests between investors and management.
 
Finally, Buffett outlined the details of how his BRK stock should be managed after his death. A portion of his A-Class shares are to be converted into B-Class shares, which will then be distributed to a number of foundations with the directive to “deploy the grants” shortly thereafter.
 
Buffett estimated that it will take 12-15 years for all of his shares to make their way into the market. Given Buffett’s huge position in BRK, this provides assurance that the stock itself will not be impacted directly through a large sale in the time after his passing.
 
Key Takeaway No. 2
 
One of Buffett’s key tenets to successful investing is to be able to approximate the intrinsic value of a prospective company. When it comes to BRK itself, Buffett has often noted that even between himself and Munger, they would arrive at different numbers if they were to value the company independently.
 
When it comes to repurchasing shares of BRK itself, they will consider this course of action only if they believe the company is selling for considerably less than it is worth and that following the purchase, the company will still have plenty of cash on hand (the ultimate financial strength of BRK is among Buffett’s top priorities).
 
Through 2019, Buffett revealed that $5 billion of BRK was repurchased, representing ~1% of the company. Furthermore, he actually urged shareholders with $20 million or more of stock to give the company a call directly if they are looking to sell. This suggests that Buffett may still be interested at current prices.
 
While he doesn’t quote an actual amount that he would view as the intrinsic value for BRK, the actual share repurchases and call-to-action from prospective sellers speaks volumes.
 
Key Takeaway No. 3
 
There has been plenty of commentary over the past month in terms of speculation as to how Buffett might address the large outperformance of the S&P 500 in comparison to BRK stock.
 
From Page 2 of the Letter, BRK’s market value clocked in with 11.0% growth while the S&P 500 shows a whopping 31.5% (with dividends) through 2019.

ChartData by YCharts


While he didn’t tackle this topic explicitly, Buffett went to great lengths throughout the Letter to highlight the power of retained earnings and the differentiation of BRK from other companies given its huge combination of controlled and non-controlled businesses all housed under a single roof.
On Page 5, he detailed the importance of recognizing the retained earnings within the huge portfolio of marketable securities owned by BRK. Under GAAP accounting, only the dividends are reported as earnings, yet Buffett outlines how the retained earnings will in most cases either be used to further grow the companies themselves or, through share repurchases, passively increase BRK’s ownership stake (and thus its future claim on dividends and earnings).
 
I believe Buffett’s intent with this theme was to again emphasize that BRK is a different beast altogether when it comes to effectively valuing it. Its real strength comes from the diversity of its high quality businesses, most of which are able to effectively retain their earnings to compound for long-term growth.
 
Though he didn’t restate it in this Letter, Buffett has never been shy about recognizing that the S&P 500 is likely to outpace BRK on the upswing. The strength of BRK is to persist and succeed through all market conditions.
 
On that note, it is worth digging up a Buffettism from the 1992 Letter to Shareholders:
It’s only when the tide goes out that you learn who’s been swimming naked.

Conclusion

The theme I detected with this year’s Letter was around assuring investors that BRK will be healthy and growing well into the future, regardless of market conditions and the eventual change in leadership.
 
Giving us a view into his will is just one example of how extraordinarily devoted Buffett is to ensuring shareholders truly do feel they have all of the information they need to make informed decisions. It is, once more, Buffett walking the walk in terms of giving us the information he would want if he were in our shoes.
 
Reading through the Letter this year was particularly enjoyable for me as I took the opportunity to attend the Berkshire Shareholder weekend last May in Omaha. Seeing Buffett in the flesh and observing first-hand the community he has built on the back of timeless investing principles was inspirational and something I will never forget.

This year’s Letter once again provided plenty of food for thought as we move forward into a new decade.

Investors need to position for a US-China clash of civilisations

A ‘great decoupling’ is under way between the incumbent superpower and its challenger

Diana Choyleva

A U.S. one-hundred dollar banknote and a Chinese one-hundred yuan banknote are arranged for a photograph in Hong Kong, China, on Monday, April 15, 2019. China's holdings of Treasury securities rose for a third month as the Asian nation took on more U.S. government debt amid the trade war between the world’s two biggest economies. Photographer: Paul Yeung/Bloomberg
© Bloomberg


Financial markets welcomed last month’s truce in the long-running trade war between Washington and Beijing. But the “phase one” deal should fool no one. By parking core US complaints, including China’s weak intellectual property protection, forced technology transfer and pervasive state subsidies, the ceasefire merely drew attention to the difficulty of reconciling two fundamentally opposed systems.

This comprehensive contest for supremacy between the two nations demands a fundamental rethink of the approach to global investment. Two issues stand out: which economic and political model offers higher returns, and where will the underlying assets be more secure.

China’s handling of the coronavirus epidemic only accelerates this “great decoupling” between the incumbent superpower and its rising challenger. The sluggish response by local officials, evidently petrified of delivering bad news to their all-powerful bosses in Beijing, has highlighted the shortcomings of an autocratic regime that is obsessed with stability.

Foreign companies will understandably be tempted to join those that have already shifted production to countries such as Vietnam and Mexico because of US tariffs and rising costs in China. Beijing, in response, can be expected to redouble its efforts to become more self-sufficient, if not dominant, in a clutch of high-tech sectors such as artificial intelligence that hold the key to future growth.

US policymakers recognise that the battle with China will be fought in the technology arena — hence the ban on Huawei and attempts to get the UK and other allies to deny the telecoms company a role in their new 5G networks.

Be it in technology, trade or finance, the bifurcation between the US and China will be long and messy, but two main macroeconomic consequences are clear.

First, global productivity will suffer as efficiencies in production are sacrificed for political advantage. Meanwhile, deepening mutual mistrust will slow scientific and technological co-operation.

Complex cross-border supply chains are being shortened. That has been reflected in a slowdown in world trade, as businesses respond to tariffs and anticipate more sand being thrown into the gears of global commerce.

Second, prices will rise. Initially, the impact of tariffs can be viewed as a relative price adjustment, with higher costs eating into US real consumer incomes. Researchers at the US Federal Reserve have confirmed such effects.

But as global supply chains are rerouted — not in one fell swoop but in a process taking years — cost-push inflation is likely to take hold. The cost of capital is also set to rise, especially if financial integration goes into reverse, preventing savings from being put to their best use. In short, stagflation is set to raise its ugly head.

What does all this mean for investors?

If harnessing and analysing vast troves of data is the most valuable asset in an age of information, then Alibaba and Tencent might look a better bet than, say, Amazon. That is because of the absence of data privacy laws in China and the support — explicit and implicit — that Beijing lends to its tech giants.

But there are broader considerations. Importantly, investors who see opportunities in the Chinese economic sphere should not take the continued relatively free movement of capital for granted. Beijing has pledged to open its financial sector to foreign capital and competition, but a digital cold war will make that goal immeasurably harder.

Moreover, in China’s communist regime, the owners of capital can be sure they will be the last in the queue when Beijing, like many governments across the globe, comes to address the pressing problem of income inequality.

Investors have long viewed China with suspicion because of government intervention. The fear that they might not be able to cash in their investments or pull their money out of the country has grown as president Xi Jinping has taken an authoritarian, Mao-style grip on power.

And then there is the exchange rate. If Beijing fails to lift productivity growth substantially through sweeping structural changes — a task that the Great Decoupling will make tougher — a weaker renminbi will eventually become the only policy valve left to relieve pressure on the economy.

More broadly, as two different systems of values clash, the danger of miscalculations and mistakes will grow. Against this background, the equity risk premium around the world — the excess return investors demand to compensate them for holding shares instead of risk-free assets — is set to rise.

No matter who wins November’s US presidential election, the schism with China is here to stay.

Patience with Beijing has worn thin across the spectrum of US political and public opinion.

That sets up an all-encompassing contest for dominance that will reshape the world political and economic order. Investors need a new road map to navigate it.


Diana Choyleva is chief economist at Enodo Economics in London

Marching orders

As its covid-19 epidemic slows, China tries to get back to work

Officials shift their focus to reviving growth. But that isn’t easy




IF CHINA IS the world’s factory, Yiwu International Trade City is the factory’s showroom. It is the world’s biggest wholesale market, spacious enough to fit 770 football pitches, with stalls selling everything from leather purses to motorcycle mufflers.

On February 24th, as is customary for its reopening after the lunar new year, performers held long fabric dragons aloft on poles and danced to the beat of drums, hoping to bring good fortune to the 200,000 merchants and buyers who normally throng the market each day.

But these are not normal times. The reopening was delayed by two weeks because of the covid-19 virus, the crowd was sparse and the dragon dancers, like everyone else, donned white face-masks for protection. The ceremony complete, business began. All those entering the market had to pass health checks and were told to be silent during meal breaks, lest they spread germs by talking.

The muted restart of the Yiwu market resembles that of the broader Chinese economy. The government has decided that the epidemic is under control to the point that much of the country can go back to work. That is far from simple. More than 100m migrant workers, the people who make the economy tick, are still in their hometowns, and officials are trying hard to transport them to the factories and shops that need them.

Yiwu has chartered dozens of trains and buses to bring in workers from around the country. It also wants to lure in buyers from around the world: it has offered to cover the full cost of their flights and accommodation if they arrive before February 29th.

The market is, little by little, getting busier. But merchants lucky enough to find new customers have an even bigger challenge in fulfilling their orders. Wang Meixiao is a plastic-jewellery wholesaler, the walls of her store groaning with bead necklaces of every size and colour. But her company’s factories in Yiwu and in Haikou, 1,750km to the south-west, do not yet have enough workers to operate.

Many are reluctant to leave their hometowns, fearful of the virus and unwilling to trek across the country only to have to endure 14-day quarantines at their destinations. “I tell my customers they just have to wait another couple of weeks, but that’s a guess. No one knows,” she says.

Since the outbreak of the coronavirus, economists and investors have tried to grasp the basics of epidemiology, analysing such matters as the potential incubation period of the disease and the dangers of asymptomatic transmission. Recently, they have turned their attention back to more familiar terrain, tracking the state of the economy.

To gauge whether production is resuming, they examine an array of daily figures, including coal consumption, traffic congestion and property sales. All have started to rise (see chart). But all remain far below the levels indicative of a healthy economy.



One gauge has been far more upbeat—unrealistically so. China’s stockmarket fell by more than 10% after the coronavirus spread in late January but has since made up all of that ground. It even held on to its gains in recent days when global markets fell sharply because of concerns about the rise in coronavirus infections in Iran, Italy and South Korea.

The bullishness in China partly stems from the belief that the government could soon unleash a big stimulus to boost growth. So far, however, it has only offered targeted support: state-owned banks are extending loans, the finance ministry is cutting taxes on a temporary basis and landlords, guided by the government, are trimming rents.

Yet China has unquestionably shifted its focus, as underlined on February 23rd when President Xi Jinping spoke via teleconference to cadres around the country, as many as 170,000 watching him. In areas where the virus is no longer a big danger, it is time for companies to resume operations, he said, adding that China still wants to meet its economic targets this year. His words, taken literally, suggest that the government wants growth of at least 5.5% in 2020, a rate that would be hard to achieve if large-scale production outages dragged on into March.
So along with reporting the number of new infections every day, officials are now reporting on the number of reopened businesses in their territories. The province of Zhejiang, a manufacturing powerhouse and home to Yiwu, leads the country so far, with 90% of its large industrial enterprises having restarted.

But many of these are running at low capacities. Jason Wang is a manager with a clothing company that sells winter coats at Yiwu International Trade City. His factory started up again but only half of his employees have returned. “The government, enterprises, workers—everyone is making a gamble in restarting. But we have no choice, we have to make a living,” he says.

Like factory managers around the country, Mr Wang is taking precautions. Workers have their temperatures monitored throughout the day. They are required to keep empty seats between them in the canteen. Inside the factory, they must always wear masks (the one industry running at full tilt in China is the production of masks, which are required now of anyone taking a bus or going to work). But the pressure is intense. The government has told companies that if any of their workers become infected, they may be forced to shut.

All going well, the base case of many analysts is that China’s businesses will be back to full capacity, more or less, by the end of March. Economists at big banks think this resumption could allow first-quarter growth to reach about 4%, year-on-year. That would be the weakest since quarterly records began in 1992, but anything above zero will inevitably raise questions about whether the statistics bureau has toyed with the numbers.

The balance of risks is also changing as the virus hits other countries. Just as China tries to get its businesses on track, it now faces the prospect of much weaker global demand and the danger that the epidemic, controlled within its borders, re-enters from abroad.

Even if other countries succeed in limiting the spread of the epidemic, Yiwu is testimony to some of the ways in which people far and wide will feel its economic effects. Agnes Taiwo, a businesswoman from Lagos, arrived in China just as it started to implement its strict controls to stop the outbreak. She had hoped to book a large shipment of children’s shoes and get back to Nigeria by early February.

But nearly one month on, snarled by all the closures and delays, she has not yet been able to complete her order. And her return to Nigeria has been complicated because EgyptAir, the airline she took on the way over, has cancelled all flights to China.

“This is serious,” she says. It is a sentiment that many others around the world are starting to share.

The Coronavirus Scare: This Time Is Different

Even if health authorities get a grip on the outbreaks, counting on an economic and market recovery may be wishful thinking

By Spencer Jakab, Stephen Wilmot and Justin Lahart


The World Health Organization’s director-general, Tedros Adhanom Ghebreyesus, left, with U.N. Secretary-General António Guterres at WHO headquarters. / Photo: pool/Reuters .


This is the first column in a five part Heard on the Street series about the market and economic impact of the coronavirus epidemic.

They say that the four most dangerous words in investing are “this time is different.” Taking that sage advice too literally with the coronavirus crisis looks like a mistake, though.

Epidemics are of course older than humanity and economic scares as old as markets, but the confluence of a potential pandemic with today’s complicated and interconnected world is unique. Globalization has magnified local disruptions, government stimulus is already at once-unthinkable levels and, both ominously and hopefully, technology is far more advanced than during the last truly global pandemic.

The SARS epidemic, while deadlier for those who caught it, provides a faulty template for understanding the Covid-19 outbreak because it was contained fairly quickly. The 1918 “Spanish flu” pandemic, with a lower fatality rate but global, occurred in a world before jet travel, widespread stock ownership or complex supply chains.

Yet many on Wall Street are still adhering to the SARS analogy, even as evidence mounts that the coronavirus outbreak will last longer and spread much farther. Expectations that it will remain centered in China, and that Chinese economic growth will get just a couple of percentage points knocked off it before a “V-shaped” recovery takes hold in the second quarter, appear extremely optimistic.



There realistically are now two broad scenarios.

One is that the virus is contained through herculean efforts by health workers in China, South Korea, Japan, Italy, Iran and wherever else it crops up.

That will mean rolling disruptions for months.

The scarier scenario is that all that occurs and the virus spreads globally anyway.

Epidemiologists simply don’t have enough data to even put reasonable odds on that, says Alessandro Vespignani, an infectious disease modeler at Northeastern University. Slower growth in the number of new cases in China, for example, could mean the tide there has turned, but there may still be many undetected cases.

Moreover, there is no telling what may happen when China relaxes the unprecedented efforts it has put in place, including quarantining more than 60 million people.

Elsewhere, information is too patchy to get even a rough idea of how far the virus has spread.

Last Friday morning, Italy had just three confirmed coronavirus cases. As of Monday, it had 229.

“The next 7 to 10 days will determine the fate of this epidemic,” says Mr. Vespignani.


Last Friday morning, Italy had just three confirmed coronavirus cases. As of Monday, it had 229. Here, people are seen wearing protective masks in Milan./ Photo: miguel medina/Agence France-Presse/Getty Images .


Already the interruption of the supply chain from China and now South Korea is more significant than many appreciate and could worsen even if the virus is contained.

Manufacturing has become increasingly dependent on sourcing components from suppliers, often with little spare inventory. The auto industry is a case in point: If even minor parts are missing because China-based suppliers are unable to make them, it could force assemblers around the world to halt production. The country’s exports of car parts were worth $53 billion last year, according to customs data.

So far close neighbors South Korea and Japan seem to have experienced the worst problems: Hyundai and Nissan have both had to halt production in their respective home countries.

Others may be managing the problem by sacrificing their already slim margins. British manufacturer Jaguar Land Rover has resorted to flying components from China in suitcases, its boss told the Financial Times last week.

Volkswagen, the Western car manufacturer probably most dependent on cash flows from China, said Monday that most of its joint-venture factories were up and running again.

Tellingly, though, it also warned that they faced a “slow national supply chain and logistics ramp-up.” Such problems could remain in the system for months.



And what if the virus goes global?

While Chinese-style quarantines are tough to pull off in less-authoritarian societies, for better or worse, individuals’ reactions will have ripple effects. Hoarding, absenteeism and social avoidance may lift some sliver of the service economy, but will damage most consumer-facing businesses like bricks-and-mortar retailers, travel stocks and restaurant chains.

The upshot of either coronavirus scenario, and especially the latter, may be far steeper market drops and at least local recessions. Governments used fiscal and monetary stimulus to mitigate the last economic crisis.

This may be a tougher fight. Aside from the fact that the U.S. budget deficit is at a record high in a boom time and interest rates world-wide are at or near record lows, pouring on stimulus just may not work very well.

Technology, meanwhile, is a two-edged sword. Jet travel and social media have made the spread of epidemics and “infodemics” faster, but they also allow people to weather a period of social avoidance.

Working, filling your refrigerator or entertaining your family remotely makes limiting contact with strangers easier. Even education can be achieved remotely, as we have seen in China.

And when it comes to an eventual treatment, decoding the coronavirus genome and possibly being able to create a vaccine in record time based on that alone was science fiction when SARS hit 17 years ago. During the 1918 pandemic penicillin didn’t even exist to fight secondary infections.

Investors scrambling for a coronavirus playbook may have to accept that we just don’t have one.




China has quarantined millions of people in its efforts to fight the outbreak. Here, a nearly empty road in Beijing on Monday. / Photo: Kevin Frayer/Getty Images