Events in the Middle East have dominated the news in recent weeks, and been a major factor in the rise in energy prices. George Soros, whose ongoing feud with Fox News got a bit more heated of late, commented:
What has caused the revolutions is a revulsion against a corruption that is fed by the misuse of natural resources like for instance in Libya. Transparency, and even more importantly, accountability in the use of natural resources is what you need for people living in those countries to get the benefit of those national resources. Libya produced enormous wealth which Gaddafi took as his own and now the people rebelled against it.
Soros also predicted the Iranian regime would be overthrown in the "bloodiest of the revolutions."
Does the Middle East matter?
The extent to which these uprisings should affect the markets is not at all clear. From a financial point of view, Ken Fisher describes himself as "not terribly concerned":
I would point out that the fears that many people have over Egypt and Libya, for example, are both drastically overblown and way misplaced. Egypt is about one-and-a-half General Motors … Egypt is actually too small to matter. It constitutes 2% of the emerging markets index and a fraction of 1% in the world's index, and if the whole thing went to hell in a hand-basket, it wouldn't really matter.
As for the effects on oil prices, Fisher makes the point that:
[Egypt] consumes most of its own oil production, and it's a tiny piece of the world anyway. If they disrupt the Suez Canal, it increases the transportation cost slightly to go around the south, but all that does is increase the transportation cost. It doesn't do anything else. So that's not really the catastrophe that people are saying it is.
Apart from possibly Saudi Arabia, he is not concerned about contagion in the region. "Markets are not kind, fair, [or] concerned about democracy."
Mark Mobius remains "very positive" about Egypt and the other countries that are rising up against their rulers:
They are on the reform path. … This is one great thing that is happening globally, not only in Egypt. … It is not a matter of democracy, it is a matter of reform, of letting people get on with business.
A glut of houses
On the subject of emerging markets, Invesco Perpetual's Neil Woodford has been expressing his caution on China:
You have 26 million homes lying empty in China and sooner or later that will have an impact on the banking system, economic management and on China's appetite for commodities.
Another market with a glut of unoccupied homes is Ireland, which was visited recently by Michael Lewis, author of Liars' Poker and more recently The Big Short. While it is often grouped with Greece and Iceland, Lewis was keen to point out the differences between the countries in an interview with RTE:
Iceland and Ireland are forever compared with each other, as the two cases where the banking systems went crazy … but they're actually quite different. … The Icelanders wanted to allow a handful of megalomaniacal tycoons to go off and conquer the world, and what they did they did largely outside their own country. … What was peculiar about Ireland was that you did it to yourselves -- what people wanted to do in Ireland was buy Ireland from each other at higher and higher prices.
The Greek people borrowed the money themselves through their state, it was government debt, it wasn't bank debt … the Greek banks were blameless. But the people won't pay the debt … there's a lack of civil society and a lack sense of responsibility to the world outside itself. Ireland is exactly the opposite. The banks sunk the country in Ireland. Banks took on the debt, it's private debt … then all of a sudden the government comes in and says 'no, it's not bank debt, it's Irish government debt, and we are essentially going to guarantee that debt.'... There are traders in London who could not believe their good fortune. … If I were to ever lend money to anyone it would be [the Irish].
He goes on to recommend that the newly elected Irish government should "play a game of chicken with the European government" because the debt is not sustainable.
The knock-on consequences of an Irish default (sorry, "restructuring") is just one of the potential disasters facing investors. Seth Klarman sees the biggest risk as one of hyper-inflation:
Disaster hedging -- always an important tool for investors -- takes on heightened significance in today's unprecedentedly challenging environment. Yet, as this insight is not unique to us, the cost of insurance is high. There are no easy ways to navigate these turbulent waters. But because the greatest risks are of currency debasement and runaway inflation, protection against a currency collapse -- such as exposure to gold -- and against much higher interest rates seem like necessary hedges to maintain.
Which brings us neatly to our ...
… Obligatory Hugh Hendry section
Never one to be concerned about short-term performance, he reports:
Net, the fund lost 1% for the month [January]. We are bearish and the market is bullish. Our risk book is correspondingly small. But have no doubt that we have a strategy for making money this year.
Someone who is rarely either bullish or bearish is Jack Bogle, and he has again been turning his attentions to our motivations in investing: "Greed is not good; ambition is good."
Addressing the fact that many institutions only promote the idea of financial incentives, he says:
Isn't living a worthy life an incentive? Isn't being a good member of the community an incentive? I read a wonderful quote the other day -- it said the great thing about money is that it will buy you all you want of anything in the world that is totally unimportant. It cannot buy you what is important.
More financial quotes:
Padraig owns gold through a physically backed ETF. GM is a Motley Fool Inside Value recommendation. The Fool has a disclosure policy.
