Where do we go, nobody knows

Most medium-long term investors are facing a tough question. Where do I invest, apart from Gold and soft commodities? The fundamentals of US doesn't look attractive as I have pointed out in my earlier posts. Lets travel east across the Atlantic.

Couple of centuries ago, the sun never set in the British empire; and now the light seems to be fading quickly.  England became the world's first industrialised nation in late 18th century. It relied upon its colonies to bring in resources. English factories processed the goods and sold them all over the world. Cities grew and large industrial centres were established as a result the island was prosperous. Currently North sea oil and London's financial services account for 95% of UK's GDP. Depleting oil reserves, low oil prices, financial turmoil and reduced tax collection worries me. Coupled with QE and high deficit as a %GDP makes me not to invest in UK for years to come. 

Eastern Europe is on the verge of bankruptcy. They have $500 bln  (50% GDP) to pay out on maturing debt this year. The stakeholder of the debt is western europe banks and sovereign states; who themselves are crippled by slump in manufacturing, increased national debt and a real estate bubble. Driven by their own exposure to the rest of the region, Germany and France are willing to help the "union". Im deeply skeptical on the effectiveness of the plans put forward. 

Moving further east, I will not put a nickel into India. India is a land of hundreds of languages, cultures and traditions mixed together that its never meant to be a country. It is defined by a silly line draw on the map by the clumsy English. The Indian government has the spell of satan, anything it touches turns rotten. The IT sector is an instance in point. The government regulated the hardware industry imposing taxes and involving with the private sector. It neglected the software industry as it saw no value in services business. And two decades later the results are too obvious. The IITs were the best education system in the world as it was run purely in a meritocratic manner. It brought together brilliant young minds in a competitive environment without any intervention from the government. My concern is with the onset of economic downturn, the government is getting involved with every parts of the economy including education. Im skeptical about India's growth, peace in the region and am increasingly skeptical of the quality of future graduates from IITs. 

The only bright spot seems to be China. China is a capitalistic economy. In fact they have understood that for capitalism to work efficiently, it needs government intervention; which I shall cover in my next post.  

"Where do we go nobody knows

Don't ever say you're on your way down, when..

God gave you style and gave you grace"         

- Coldplay

 

Deja Vu

"Mankind never learns from its mistakes hence history repeats itself" – Bible

The rise and fall of most great empires have striking similarities, and I would like to highlight one such example. The growth of Rome was fueled by increased agricultural productivity, transparent governance on a diligent citizens and strong army. Education system was great, dining and art were at their peak. They accepted other cults and religions; personal and social ethics was at its peak. The empire flourished for two centuries right from Julius to Alexander Severus.

The decline in Roman empire was the systemic economic weakness that crept during the pan romana period (3rd century). First the empire was built upon the labour of the exploited aka slaves. Second, the maintenance costs of the empire were huge and continued to expand all the time. The upholding of the Roman standard of culture meant huge amounts had to be spent to provide an adequate supply of the amenities that were considered essential to the full life or a Roman citizen. The empire had to be policed and the imperial post and the ever expanding army had to maintained.

The empire found itself in a catch-22 situation in which there no solution to the problem. On the one hand there was the ever growing need to maintain the affluent lifestyle and on the other the ever diminishing capacity to carry it through. Taxes were increased and Hardin, then ruler of the empire, started borrowing money through issuance of notes. Historians argue that the enormous borrowing coupled with lack of investments continued for five decades. The eventual explosion of the empire was caused by the lack of circulating currency in the western empire. Two reasons for the lack of funds were the hoarding of bullion by Roman citizens, and the widespread looting of the Roman treasury by the 'barbarians'. These two factors, coupled with the massive trade deficit brought down the once great empire.

At the root of every great empire lies an idea. Patliputhra was an idea, Rome was an idea and America was also an idea. The spirit that fuels an idea and creates an empire typically runs out of steam over time. The society increasingly become lethargic, inefficient and complecent laying seeds for its own demise. As bitter as this sounds, we are witnessing an empire falling from a cliff. But a different kind of new world order will emerge. The engine that drives the global economy will be where people are. It will be a bumpy and ugly journey to the new destination. I do hope an eventual destination would be one world with one dream. Empires, countries and states are just imaginary lines drawn on the globe by men hungry for power. The challenges facing humanity today are universal and we need an united world to fulfill those dreams. Unfortunately I do not have a time machine to fast forward. Until then I shall stock up in gold bars, cans of beans and sacks of rice !!