Deep breaths. Three in. Three out. Try it. Aaaannnnnd… relax.
See? Do you feel it? It slows your pulse. Your mind calms. Sound body. Sound mind.
Sound markets? Sound money?
No guarantees on the last two. The world is full of too many meddlers and petty tyrants. More on them shortly.
In China, the Shanghai Composite index fell by nearly 5.9% again on Monday. Having become familiar, falling Chinese stocks no longer feel as threatening. In capital terms, it’s what I described last week: capital in flight. But why?
The Chinese are trying to have it both ways. Free markets and a managed economy. A “freely usable” currency but not a “freely exchangeable” one. All the benefits of a free market order, without a real free market. Investors don’t buy it. When they can, they leave.
The worse it gets in China, the more (capital) will leave. By “worse”, I mean when investors realise that growth achieved through ever greater amounts of debt is not a formula for long-term success. It’s success on political demand. The debt has investors spooked. Government incompetence in “managing” the market with circuit breakers didn’t help.
I’ll come back to what’s behind the government attempt to manage the market. But let’s move closer to home. Prime Minister David Cameron gave an important interview on the BBC’s Andrew Marr show this weekend. The path to Brexit is getting clearer.
Last week’s podcast reached an interesting conclusion: that 2016 could be a “make or break” year for the European Union. Robert Colvile joined the show and talked to Nick and me about the various factions in the “leave” camp. But it’s the “stay” camp that got more interesting over the weekend. The prime minister all but joined it.
He told Andrew Marr that he didn’t “think that [exit] is the right answer … Were that to be the answer, we would have to do everything necessary to make that work”. He added that, “The British public will make their decision. We must obey that decision whatever it is”.
Clear as mud. He’s for staying. But he’ll take Britain out if told. And he’ll make it work. Somehow.
Cameron wants to stay. But to do that, he says he’ll need to get a deal with the European Feds by February. He wants to take that deal to the British public and win a “stay” vote by June. Then he wants to put the matter behind him and forget he ever promised the British public a say in what happens to the future of their country.
What became clear, after the weekend, is that there really is no back-up plan if the public votes to “leave”. The prime minister promised to “obey that decision”. But under the European rules, it really isn’t up to him. It’s up to the European Union to decide on what terms Britain leaves. The diminished influence of democratically elected national leaders is one of the reasons the EU admits it has a “democratic deficit”.
That’s pretty much the problem. The EU has set itself up to be the final word on everything. In today’s EU, just legislative and executive power does not come from the consent of the governed. It comes from law that Brussels gets to make and that everyone must obey.
Every law, regulation and directive means what the EU wants it to mean. The British people are starting to see that. They’re also starting to see that uncontrolled immigration on the EU’s southern borders is a problem in Germany and Sweden now. If the EU can’t control its border, it will be a problem in Britain too. If Britain wants to control its border, it had better do something now.
Remember what Nouriel Roubini said to kick off the year? It’s a year of “existential crisis” for the EU. He also rated it as the chief geopolitical risk for markets. That’s saying something, given China, North Korea, Ukraine and Donald Trump.
But he’s right. If Britain doesn’t remain part of the European Union, the character of the EU itself changes. And all of that may pre-empted by the “clash of civilisations” in Germany, where Frau Merkel’s open-door refugee policy has raised tensions to the boiling point. It’s make or break… and it looks to be breaking bad.
Uber without the driver
If you want to get away from it all, follow in the footsteps of the early European settlers to America and head south and west. You can fly there, across the ocean. And this time, once you get to New York City, Tesla’s Elon Musk reckons you can get in a driverless car and go from coast to coast.
I call it Uber without the drivers. But Musk reckons you’re just two years away from hitching a ride on an autonomously operated vehicle and travelling from New York to LA in a couple of days. It’s a road trip without the driving, but with the sightseeing. Sleep as much as you’d like. Eat when you must.
Google, GM, and Ford are all moving in the driverless car direction. It obviously has game-changing implications for the car makers. But it’s probably an even bigger story for logistics and how goods and services will move between ports, cities, and towns in the future. Nick is all over this stuff with his new project. Meanwhile, in the present…
Aramco v Apple polarises investors
It looks like I ignited a bit of debate last week when I asked whether you’d rather buy Saudi Aramco or Apple. Actually, it wasn’t much of a debate. The votes are all in. And they’re all for Apple. Why?
I’ll let you read the comments below. But some context first. Apple plans to slash production of the iPhone 6s by 30% in the first quarter of this year. Inventories of unsold phones are reportedly building up at retail stores. And like all hardware companies in the tech space, Apple faces relentless imitation/competition.
Keep in mind, it was Nokia and Motorola who owned the “handset” space up until 2007. Then the epoch of the “smartphone” began. But in terms of geologic epochs, technology trends are a mere puff of breath.
You can get on top when you’re small, innovative, and disruptive. Staying there is harder. Especially once you’re big, bureaucratic, and your intellectual property is locked into hardware. That’s where Apple is today. But that doesn’t bother some of the readers below!
Daniel
For me it has to be Apple. Like James Anderson of Scottish Mortgage Trust and Tom Slater I am of the opinion that oil is on the decline, albeit over the next decade, and investing in a loss leader does not make sense. On the other hand, the future continues to lie with technological advances and Amazon’s proven track record with innovative ideas in that field would be a superior investment. I envisage Apple diversifying into alternative energy.
Regards, DW
Hi Daniel,
I look forward for your oil 2016 report! With regards to Apple or Aramco, I would stick with the US and Apple. We have war tensions in the Middle East, oil prices might drop further, but who knows, Aramco might be the deal of the decade in the long term.
All the best,
Mihail
Hi Dan,
Well, Apple might well creatively destruct. Nothing lasts for ever. On the other hand oil could be, most probably is, in systemic decline. Furthermore, it is possible that the current Saudi rulers may not last another decade. A new broom could well nationalise Aramco without compensation. There are political risks which I personally would not wish to take. Apple will not be innovative forever. Neither will they be able to command premium prices forever. However they have the financial muscle without the political risk. They can expand by takeover, further innovation – or maybe they could be bought up by a new, more powerful technical competitor, a business not yet created, by a genius not yet born. So my vote goes to Apple – provided the price is right.
Hi Dan,
I wouldn’t buy Aramco because I’m not sure how long the oil in the ground will have a value and, if it does, whether the amoral owners of the land above will allow me to keep it.
Apple, from an analytical perspective, is more attractive than the FANG’s (well, at least the Facebook, Apple, Netflix bit of it). But I wouldn’t invest in them either; they are, philosophically, a closed hardware company and, sooner or later, others will catch up.
Regards
Bruce
Daniel,
My vote goes to Apple, as the oil business is, or, very soon will be, in decline as a fuel. The tech companies will in the not so distant future make alternative energy price competitive. We have become a nation of small thinkers and tend to hang on to what we know. The good thing is that the emerging nations with their very large populations need to find an alternative to oil or the planet has had it, eco-wise. So oil in the medium term is “out the window”. Then watch the Middle East go to war with each other.
Bill Douglas
There you have it. Several votes for innovation and technology over scarcity and tangible assets. That’s a simplistic way of reducing both businesses. After all, it is businesses we’re talking about. But two things caught my eye.
First, that the future of Apple may lie in, “a business not yet created, by a genius not yet born”. That is well put. And it’s evidence of faith in the free market and the evolution of human innovation. Or if you prefer Biblical terms for your faith, try the King James Bible (Hebrews 11:1). “Faith is the substance of things hoped for, the evidence of things not seen”.
We never know where innovation is going to come from. And we never know how technology will help us solve a problem, lower prices, or improve choice. But it’s been working pretty well for the last 400 years, mostly thanks to free markets, small government, low taxes, sound money, and a legal/constitutional bias to individual liberty over “equality of condition”.
The other thing that caught my eye in the letters was the intuition that the drop in the oil price might not just be a blip. It might be a “big bang”. It might be the end of the oil era in a way investors haven’t fully priced in. It’s also a kind of faith that the modern world will be delivered from the evils of scarcity by technology.
I’ll write more about that tomorrow, bringing a bit of geology to the story. For today, let me get back to whether or not you can have free markets and redistribution at the same time. Is there a mythical “third way” between the failure of central planning and the triumph of the division of labour that makes capitalism more humane and just?
Well that’s assuming that capitalism is neither humane nor just. And that assumption would be wrong. But questions of moral philosophy are beyond the scope of today’s letter. Let’s stick with the idea that China has found a way to tame the market order and put it to use for the common good.
Mind you, Chinese central planners are not alone in wanting a “third way”. The European Union itself is an attempt at a “third way”. It’s socialism masquerading as the welfare state. in the welfare state, political elites allocate the spoils of taxation generated by of a mostly free market order.
In this sense, the designers of “third way” systems all have a kind of political lust in their hearts. It’s accompanied by an over-weening pride in their own intellectual powers. They think they’re smarter. And because they’re smarter, worthier of power. They always think they know better how to spend your money than you do. And they believe they have the moral right to do it.
The lust to meddle, to intervene, and to control is what passes today for “centrist” politics. Writing on the Soviet system in 1949, Ludwig von Mises described the “third way” as “interventionism”. He we wrote:
Interventionism does not want to abolish private ownership of the means of production but only to restrict it. It declares, on the one hand, that unlimited private ownership of the means of production is harmful to society; but it maintains, on the other hand, that public ownership of the means of production – socialism – is, either in general or at least for the time being, impractical. Thus it wants to create some third way: a state of society that is midway between private ownership of the means of production, on the one hand, and collective ownership of the means of production, on the other hand. In this way the “excesses” and damages of capitalism are supposed to be prevented, while the advantages of free initiative and vitality, which socialism cannot provide, are preserved.
The European Union is the “third way” run amok. Its excesses come at the expense of British freedoms. This is the year to leave.
Category: Brexit