We start this week with the realization that we now live in what George Friedman, PhD., founder and chairman of Strafor Global Intelligence, calls the “Post-Post-Cold War World.” He freely admits it is a poor name, but it is the only one he has at the moment.
The “Post-Cold War World” was a world dominated by America. We had won and the Soviet Union had lost. More than that, capitalism had triumphed over the command economy, freedom and democracy had triumphed over communism and its weaker cousin socialism, and the United States of America was the sole world power. Our way of life was looked upon as being the correct model.
For much of the next twenty years the rest of the world not only relied on us to keep the peace, they copied us. Economic freedom grew globally. Democracy, at least in name, grew globally. Prosperity grew with it, as it always does. Then two events happened in the summer of 2008 that, according to Friedman, marked the end of that era and the beginning of the new era with the really bad name: Lehman Brothers collapsed, creating a financial crisis that eventually spread throughout the Western world. Then, Russia invaded the small country of Georgia.
We have obviously given much thought and written a great deal on the financial crisis, but until I heard Friedman speak a month ago I had not given much thought to the invasion of Georgia since it ended almost as quickly as it began. Friedman, however, makes a solid argument for how the two events are linked. The first showed that even our mighty economy can be vulnerable, while the second showed that we no longer possess the strength to deter all the potential bullies in the world. In his view after the summer of 2008 the United States became just a world power, instead of being the world power.
Perhaps Friedman is correct. It certainly appears that this was the lesson Vladimir Putin learned. Russia threatens Ukraine, the Western world threatens consequences, and the Wall Street Journal reports Monday that Oleg Panteleyev, a member of Russia’s upper house of parliament, said Saturday, “They talk and talk, and then they’ll stop,” noting that the West made threats but did little in 2008.
The geo-political and humanitarian consequences of these events in Ukraine could be huge. While that concerns us, as it should everyone, we are at work today and our job at Iron Capital is not to pontificate on global events, but to understand how they may impact our clients’ investment portfolios. So that is where I will focus.
The immediate reaction is likely to be negative. Markets were down yesterday, as the knee-jerk reaction to any global unrest is always to sell. Soon, however, investors will realize that these events, as important and tragic as they are, do not really impact the amount of iPhones that Apple will sell, or the Xboxes that Microsoft sells, or even the number of trucks Ford may sell. Ukraine – and even Russia, for that matter, – are not really important business partners to most companies, and ultimately investing is about what happens at the company in whose stock one is invested.
In the long term the post-post-Cold War world may be re-introducing us to something we had forgotten about over the last twenty to thirty years: the concept of political risk in international investing. The world is no longer marching in unison toward more economic freedom and opportunity. Whether it is Russia or Brazil or Argentina, we are surrounded with examples of government corruption, incompetence and bullying. This environment requires a prudent approach to investing, and that is what we strive for at Iron Capital every day.
Chuck Osborne, CFA