Which tree will grow to be the tallest? A cautionary tale for investors by Phin Upham .
When looking at investing from a global perspective, sometimes it helps to see the forest rather than the trees. It is necessary to blend together different lenses to see what others are not seeing. If, for example, there were a competition to see what experts could predict what the tallest tree in a forest was in 10 years what would different experts say? An expert on tree species might choose the fastest growing species. An expert on tree disease might see disease in the forest and choose the tree that was resistant to it. An expert on soil might choose the tree in the most fertile ground. But they might all be wrong. Someone who stepped back and saw the dry brush might consider for a moment the possibility of a forest fire and choose the little lonely birch tree alone in the field – the only tree that would remain intact. Let us consider for a moment what happens if this crisis continues and something breaks on a global scale, what is the most likely equivalent of a global forest fire?
The depth of the global recession, perhaps even depression, and the structural dependency on globalization makes us think that “this too shall NOT pass” before some very ugly adjustments are made and the piper is paid. The great depression ended with WWII – indeed the US was lifted out not by FDR but by the war effort which used every factory, employed every man (and many women) and drove the economy with a feverish intensity. If that crisis was ended by a world war could this one too?
There are several obvious hotspots right now to consider: Israel seems to be increasingly at odds with a near-nuclear Iran. What will the cascade of responses to this be? There is discontent in the former soviet and Baltic states as their currencies are under increasing pressure, indeed even Moscow has seen violent protest of quasi-authoritarian rule. China has had escalating “protests” in recent years, and these have gained a ferocious intensity recently with economic slowdown. While the Communist government hides the severity of the statistics, those that know say the problems are significant. The crackdown on the Falun Gong a few years ago and the tanks in Tienanmen Square may soon seem benign as the grand bargain between peasants and the government (you make us rich, you can have power) is tested.
We think one area of deep concern for such a global “fire” is totalitarian countries that are oil exporters with high marginal costs.This means the middle east is fine, since their marginal cost of oil is, for example $10 in the elephant fields of Saudi Arabia. Similarly wealthy nations like Canada with its Oil Sands will be fine despite their $35 dollar a barrel cost of extraction. The three most troubling examples are Russia, Iran, and Venezuela. Their marginal cost to produce oil are close to $100 and the global spot price hovers there but only precariously.
Samuel Phineas Upham has a PhD in Applied Economics from the Wharton School (University of Pennsylvania). Phin is a Term Member of the Council on Foreign Relations. He can be reached at phin@phinupham.com