October 18, 2010 – The Big MarketView From 30,000 Feet

Featured Trades: (IAN BREMMER OF THE EURASIA GROUP),
(GOOG), (SPX), (EZU), (FXI), (FXE), (EWA), (EWC), (EWY), (EWT), (THD), (IDX), (EWS), (EWZ), (ECH), (EWW), (RSX)


4) The Big MarketView From 30,000 Feet. There is a new war underway between two forms of capitalism. The traditional type is driven by the big global multinationals we all know and love which are being aggressively challenged by a new form of state capitalism, of which China is the prime practitioner. While it is too early to predict the outcome of this conflict, it is clear that western style multinationals are currently on the defensive. Witness the all out assault on Google (GOOG), whose business was so attractive that the Chinese government launched a concentrated hacker attack to grab technology and market share, both from within, and from outside the company.

I gleaned these incredibly useful insights from Ian Bremmer, president of the Eurasia Group, one of the top independent political research and analytics firms in the world. Ian received a BA at Tulane and a PhD from Stanford in political science. He has been at the forefront of bringing together the once disparate worlds of international investment and political science, a space once inhabited only by a few globetrotting journalists like myself, and commands a religious following among the large hedge funds and mutual fund groups.

Ian gave me a tour de force of the international investment landscape, where to put your money, and where to avoid. The US (SPX) is the smartest kid in the 'dumb class', and is clearly losing out in this new global competition. But it is still in the game, with the world's largest economy and an overwhelming lead in technological innovation and higher education. But the future GDP growth rates will be shadows of their former selves and, at 17.2%, real unemployment will remain chronically high. You might as well take any forecast now flogged by the major research houses and cut it in half.

Europe (EZU) is in dire straits, with economic growth rates plummeting. The big question is whether Germany pulls out of the EC, not Greece. Having nearly busted its own economy with the reunification with East Germany two decades ago, it doesn't want to replay that movie. The bad news: we won't know the outcome for five years. There is no visible support for the euro (FXE) anywhere. Take that newly cheapened European summer vacation, sip all the latte you want, and enjoy those topless beaches, but keep your investment capital in friendlier climes.

While the Middle Kingdom (FXI) is now ascendant, it is not without its challenges. They lag in local innovation, suffer a nightmarish environmental crisis, and down the road, will endure a demographic shortfall that will mirror Japan's. But Ian thinks that Jim Chanos's prediction of a crash in China is 'farcical', and that the country has at least a good five year run ahead of it.

The best places in the developed world to park your money and forget about it are in Canada (EWC) and Australia (EWA), which prosper from bounteous commodity and energy exports, stable political regimes, small populations, the rule of law, and conservative banking and financial regulation. Canada enjoys having the world's largest customer on its doorstep without any of the overheads.

While South Korea (EWY) has an economy that is the envy of many, it runs a gigantic 'fat tail' risk from North Korea, which could blow up at any time. The outlaw regime recently sank a South Korean warship and executed its minister of finance. A total collapse could stick the south with a massive reunification bill it can ill afford, and don't forget those loose nukes. Taiwan (EWT) looks like a no brainer as a takeover target by an acquisitive China, the financial, and not the military kind.

The fate of the monarchy in Thailand (THD) is now a hard fought battle, and it is better to fish elsewhere until the fires burn out. Indonesia (IDX) is nearly a model country these days, and should be the fifth country in 'BRIC', with huge energy and commodity exports and a rapidly growing middle class. Singapore (EWS) also looks great, with an incredibly well managed population of only 3.5 million, massive reserves, a high educational level, and sophisticated manufacturing base.

On the other side of the world, South Africa (EZA) is not just a gold story with a great structural foundation, it will also cash in on the rise of a consumer class in the rest of Africa. Brazil (EWZ), long a hedge fund darling, still looks good, but its glory days are behind it as it transitions to a more conservative government. Other enticing Latin American picks include Chile (ECH) and Mexico (EWW). Russia (RSX) is not just an oil story, but also a consumer one, but faces daunting demographic challenges.

Ian is also a prolific author, bringing out two new books in the past year, which are a must read for any serious global macro investor. They include The Fat Tail: The Power of Political Knowledge for Institutional Investing, and The End of the Free Market: Who Wins the War Between States and Corporations. To prove he is not a total wonk, Ian openly admits to being a card carrying member of the Stanford bowling team. Entirely composed of Russian speakers, they were appropriately known as the 'Bolsheviks

Readers can purchase their own copies of The End of the Free Market at a big discount through Amazon clicking here. To buy The Fat Tail, please click here.

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