Sunday, January 20, 2019

This century is not for China to win but a century for it to lose.

Lately we have seen how China is behaving when it does not get its way with other countries and it is a crude expression of their perceived superpower. As investors we always are told to diversify, and we have seen the obvious advantages of that.

In this modern world though it is not only China trying to bully the rest of the world; the U.S. has also shown its uglier side lately lest we forget about the NAFTA deal or whatever it is called. This seems to be the age that bullying your neighbors is the new form of statesmanship.  We may want to blame this all on Trudeau’s weak leadership but that is not entirely fair. 

Countries like China became affluent because of overseas money using their low labor costs. That is now something of the past since labor is no longer cheap over there. It is still cheap elsewhere in the world in areas like Mexico or Vietnam and along with current cheap transportation, that gives those countries the economic advantage. But I think that is all on the way out as well. 

With the 'internet of things', AI, and robotics on the way, I start to suspect that we will do a lot of manufacturing closer to home and  many countries are running behind the facts with their continued desire to globalize. I recently read a stat for the U.S. where AI and automation will eliminate 1 million or so bank teller and clerk jobs. But it will add nearly double in robotics and AI jobs. Schumpeter called that ‘creative destruction’.

The future will not be about the regional economic advantage but more about population density, technological skills, education level, and innovative attitudes. That is not a Chinese advantage where the government nearly tells you how to think or else… China in future years has many hurdles to overcome, its demographics not being the least. I now feel that those lower valuations of Chinese businesses in the stock market may reflect the risk of state intervention, the risk of poor and untrusted accounting practices, and the repression of free creative thinking. These add considerable economic disadvantage to China. China will be less and less allowed to commit commercial espionage and theft of intellectual property. Their bullying behavior will lead to their exclusion from our markets. These days more and more entrepreneurs are turning their backs on China and returning to their western roots.

This century is not for China to win but a century for it to lose. As such, we should continue to be very wary investing our funds in China and only expand into China’s markets with great caution. I think that a new investor trend will be to resist more Chinese investment here in the West and to restrict our own investment money flow into China. 

This may also happen with other countries that take on a more belligerent attitude while displaying hostility towards their own population. Countries such as Saudi Arabia, Russia, Venezuela, or Syria. After years of keeping its hydrocarbon reserves a state secret, Saudi Arabia has suddenly disclosed them and revealed much larger reserves than most thought. I suspect not enough investors were willing to put money into a semi-privatized Aramco without even knowing its reserves and being at the whims of Saudi's government. Being an oil-guy myself, I know how to value those reserves all too well: with an enormous grain of salt.

We should not be contemplative here in the West. Especially in Canada, I consider our increased loss of privacy also a loss of freedom. The increased interference of governments  in our lives is something of great concern.  It poses the same dangers that we observe in these other countries. We should stay on guard against our own governments and their ever-growing bureaucracies which are becoming increasingly malevolent.

For portfolio allocation, I plan to become more selective as to where to place my investment dollars. We may differentiate between investing in ‘free’ economies and 'dictatorial' economies. The latter should be avoided.  Avoid investing in countries with increased government interference in the lives of its citizen and I consider Canada one of these countries.

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