The Market
After a precipitous decline from June 2014 to late January, oil prices have been forming a base over the past few months. As the chart below indicates, oil prices have mostly been trading between $45 and $55 per barrel this year. The recent rise above $60 per barrel is raising hopes that the bottom could be in for crude oil.
Are we there yet? In this report, we will discuss some arguments for whether or not the lows are in place for crude oil.
Since the beginning of the year, rebels in Syria have been making steady gains against forces loyal to the Assad regime. Over the past six weeks, these gains have accelerated. The recent rebel victories are raising questions about the Assad regime’s ability to survive.
In this report, we will recap the problems the Syrian government faces, including internal dissention and military losses. We will discuss the growing evidence of a Turkey-Saudi axis that may be aiding the rebels to weaken or eliminate Assad and pressure Iran. From there, we will examine the potential Iranian and American responses to the rebel gains and support from Riyadh and Ankara. As always, we will conclude with potential market ramifications.
The March edition of Atlantic Magazine published an article about Islamic State (IS) that examined its theology and ideology. This article along with a paper from the Brookings Institute on the ideology of IS form the basis of our report this week.
In this report, we will examine the intellectual foundations of IS, showing how it evolved from two different sources of thought. We will follow this with an analysis of the concept of the Caliphate and the critical importance it has in Islamic theology. A Caliphate is a form of Islamic government which, in some Islamic conceptions, is a universal government for all people. An examination of the eschatology of IS will also be included. The consequences of IS’s ideology will be discussed. As always, we will conclude with potential market ramifications.
China has founded an infrastructure bank, the Asian Infrastructure Investment Bank (AIIB), to compete with the World Bank (WB) and the Asian Development Bank (ADB). The U.S. has opposed the creation of this bank but, despite administration opposition, 57 nations have joined it, including 14 members of the G-20. A chorus of commentators has suggested that the founding of this bank may mark the end of U.S. hegemony.
In this report, we will describe the AIIB, including its members and capitalization. Next, we will cover the conventional wisdom surrounding the bank, and follow up with our analysis of the real impact of the bank. We will conclude with potential market ramifications of this framework.
On April 2, the P5+1[1] negotiating team and Iran announced a framework to deal with Iran’s nuclear program. The framework is a “roadmap” to establishing a final agreement in June. Negotiations on this issue have been underway for years; this framework could be a major step toward delaying Iran’s entry into the “nuclear club,” the group of nations that have nuclear weapons.
In this report, we will begin with a short history of Iran’s nuclear program. Next, we will review the details of the framework. The third part will address the broader policy issues surrounding Iran’s nuclear program. An analysis of the real issue, regional hegemony, will follow along with a review of the political factors of the deal. We will conclude with the potential market effects from this framework.
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[1] P5+1 includes the U.S., U.K., France, Russia and China (the five permanent members of the U.N. Security Council), plus Germany.
We lead off this quarterly letter where we ended our previous one, with the same quotation by Ben Graham, the father of securities analysis. He wrote in his wonderful book, The Intelligent Investor, “Indeed, the investor’s chief problem – and even his worst enemy – is likely to be himself.” What a humiliation to discover that the main problem you’ll have as an investor is dealing with yourself! Mr. Graham knew whereof he spoke, because experience had taught him that his emotional temperament was, if unchecked, likely to be the chief impediment to successful investing.
It’s easy to become emotional about investing; those old demons, fear and greed, will raise themselves within each of us and turn our good ideas into dust. Emotions can play an injurious role even when we think we’re doing careful analysis. For example, an emotional bias toward or against a certain type of investment or a company may look like reasoned judgment, but it’s not the same. Reasoned judgment can be wrong, of course, just like emotional attachment can result in success. But when looking to improve my odds of success, give me thinking over feeling every time.
But what about professional investors? Do investment managers ever get frustrated? I can’t speak for the entire industry, but from my desk the answer is an emphatic “Yes!” While we rely extensively on quantitative methods to do our jobs correctly, at the end of the day we are human beings attempting to make sound judgments. How do we keep emotions out of the loop? While one can never completely eliminate emotional responses, we have found that our collaborative investment process is the best way to keep decision-making as rational as possible.
A collaborative process means that each of our investment teams works as a unit, the polar opposite of the so-called “star system,” where a single manager makes all decisions. When one must test his or her ideas before colleagues and submit to their criticism, we believe better (and less emotional) decisions are produced. In particular, while one person may get emotionally positive or negative on an investment, it’s unusual that an entire team can get so emotionally involved. While we individually work hard to keep emotions out and bring rationality in, it simply works better when a competent team works together to stay focused on good decision-making. It’s not a guarantee of success, but we think it improves the odds.
We thank you for your confidence in us.
Gratefully,
Mark A. Keller, CFA
CEO and Chief Investment Officer
In this final installment of our four-part series on The New World Order, we will examine how, in light of winning the Cold War, policymakers have been unable to settle on a set of key priorities and offer what we see as “glimpses” of a new policy emerging. In a sense, the U.S. never really wanted to be a superpower; the nation’s founding story is one of wresting independence away from a colonial power. Americans were willing to put up with the economic and political distortions that came from becoming a superpower in order to defeat communism. Now that this existential threat has ended, the political class has struggled to create a foreign policy that can simultaneously provide the required hegemonic global public goods and create a working economic policy and political coalition that will build domestic harmony.
In this report, we will recap why the current policy mix is unsustainable and yet, why the U.S. remains indispensable for world peace and global growth. And so, if the U.S. cannot be replaced anytime soon, American policymakers need to create a solution that will allow the U.S. to fulfill at least some of the hegemon’s responsibilities and also create a sustainable domestic economy and political coalition. We will conclude with a broad examination of the potential long-term market effects from this evolving New World Order.
In this third installment of our four-part series on The New World Order, we will examine how policymakers coped with the new superpower role. First, we will examine how policymakers attempted to resolve the tensions created between the desires of its domestic constituencies and foreign superpower obligations. There are going to be periods when the requirements of the hegemon role adversely affect segments of society within the superpower. The political class must navigate these divergences in such a way so as to keep domestic tranquility and fulfill its foreign obligations. We will offer a history of how the U.S. managed these differences, with an analysis of Roosevelt’s political configuration and how the Reagan Revolution adjusted to the failures of the first program. Second, we will detail these periods with charts. Third, we will explain the capability and willingness of the U.S. to continue providing the global public goods to the world.
This report is the second installment of our four-part series on The New World Order. This week we will focus on two themes. First, we will examine the global public goods the superpower provides, and second, we will analyze how the U.S. has provided those goods. The global hegemon will often face tensions between the desires of domestic constituencies and its foreign obligations. Every superpower has to negotiate these pressures and each tends to have its own particular ways of meeting both objectives. However, it should be noted that no superpower can subjugate the goals and aspirations of its citizens indefinitely. In other words, if the cost of hegemony becomes too high, a nation may be unable to maintain the position. History shows that no superpower dominates forever. History also shows that there are sometimes “gap” periods between superpowers; unlike 1945, the changeover is not always simultaneous. I believe the evolution we are currently seeing, which will be discussed in Parts III and IV, will keep the U.S. as the reigning hegemon but with a much different manner of exercising that role.