Submitted by Brian Rogers of Fator Securities
Economic Punctuated Equilibrium
“I have been studying the traits and dispositions of the "lower animals" (so called) and contrasting them with the traits and dispositions of man. I find the result humiliating to me.” - Mark Twain, Letters from the Earth
Talking Brazil
Happy Friday to one and all. First things first, I just finished a multi-city non-deal roadshow with Banco Fator’s head of equity research and strategy, Lika Takahashi. For those who aren’t familiar with Lika, you really should be. She has been one of if not the most pragmatic, conservative Brazil equity strategists in the market and typically destroys her competition with her price target on the Ibov. Investors we spoke to had 3 main questions for Lika: 1) what is our outlook for inflation in Brazil, 2) what is our outlook for growth in Brazil and 3) what is our take on the Brazilian central bank’s recent decision to cut rates by 50bps.
On inflation, I think central bank head Tombini has a problem. He said he expects global growth to decline and this downturn in GDP will attenuate inflationary pressures in Brazil. The problem I have with this view is that the Fed, BOE, ECB and BOJ won’t simply sit around and take a deflationary slowdown without a fight. They will print, obviously. This will produce monetary inflation and will help to keep commodity prices resiliently high. Tombini expects inflation to come down, I say good luck with that.
On growth, it’s possible that Brazil keeps the 3.4% or so growth next year based on the strength of their services labor market and government spending for the World Cup and other infrastructure projects. However, keep a close eye on China. For the first six months or so of the year there weren’t too many analysts overly concerned about dramatically slowing growth in China. However, the last few months have seen a bevy of “hard landing” articles about China. If China does hard land, say 6% growth, then Brazil will also slow dramatically.
On the central bank’s decision to cut rates only 2 days after Dilma went on TV and said that she wished rates would go down, I obviously feel that the days of central banking independence championed by Henrique Meirelles are dead.
All that being said, I should note here that I am actually quite bullish on Brazil. Why? Simply put, they have options. Despite my concerns about Tombini’s recent move, the central bank has a plethora of tools they can implement to help stabilize any major volatility. Government spending and general debt levels have been conservative recently and could be increased to offset bad times. And finally, Brazil has one of the best demographic profiles around with a huge population of young people and an increasing trend of poor people moving up the economic ladder.
It’s not that Brazil will avoid all problems, they won’t, it’s just that on a relative basis Brazil is much better positioned to deal with their problems than the vast majority of developed nations and nearly all of the emerging market countries.
Which brings me to the macro view.
Economic Punctuated Equilibrium
The late Harvard/NYU paleontologist Stephen Jay Gould and Niles Eldredge, who is the curator of the invertebrates department at the American Museum of Natural History, proposed a rather radical evolutionary theory in 1972 called punctuated equilibrium. The evolutionary thinking at the time was generally that species changed very slowly and gradually over time. Gould and Eldredge challenged this notion with punctuated equilibrium by arguing that rather than slow, gradual change, species remained stable for long periods of time and only changed during short, brief bursts of major change.
For example, an animal population could live for many generations without any noticeable change in genetic make-up. Then, due to the effects of an earthquake, volcano, climate change or some other major event, the population could be split into different groups with different geographies, food and water sources, climates, etc. As the populations react to the sudden change, they will go though rapid and noticeable adaptations to their new environment which will result in great change over a short period of time. However, after the major adjustment takes place, the population will stabilize again and largely remain the same until another great environmental change.
I’m obviously generalizing here and my apologies to the late Professor Gould and Professor Eldredge for the dumbed down explanation of their great theory, but I’m just an average equity research salesman and need to keep this simple.
When I think about the history of the financial and economic system of the US, I see many ways in which the theory of punctuated equilibrium is playing out. By and large, we have lived through long periods of general stasis punctuated by brief periods of radical change. Some of those periods of change can be identified as the creation of the Fed in 1913, the Bretton Woods Conference in 1944, the closing of the gold window in 1971 and the repeal of Glass-Steagall in 1999 via Gramm-Leach-Bliley. After every one of these major turning points, the market has had to make quick, radical adjustments. Following the adjustments, sometimes painful ones, the market would enter into relatively long periods of “stability.” But stability for whom? The 1% that controls the game.
He Who Controls the Game Wins
In my opinion, the problems we face today are not because we built a robust, transparent, fair system that is simply facing a few bumps in the road. Hardly. The problems we face today exist because the economic system has never been allowed to evolve into a system that is truly fair or just for all. Rather it is designed to ensure that the 1% who have always controlled things will maintain that control. It’s all very subtle, but make no mistake about it, crony-capitalism is the rule of the day.
And even when we did implement evolutionary changes that benefited all members of society (Glass-Steagall), the powers that be patiently waited until the moment was right to snatch that freedom away from the people and hand it back to the 1% (Gramm-Leach-Bliley).
The Fed controls the issuance of our currency and thus controls the price of money. The Fed also oversees our banks and thus plays a hugely vital role in how transparent (or not) our banking system is. Politicians control the legislative process and largely determine the judges that oversee the judicial process. These same politicians are controlled by large corporations and wealthy individuals due to the ridiculous way our campaign finance laws work and our lack of term limits. See the pattern?
Is a New Economic Punctuated Equilibrium Moment Upon Us?
Given the complete and utter disaster that awaits us once the curtain is finally drawn back in Europe, it’s important to consider whether or not the crisis we currently face is nothing but another downturn or is it in fact another game-changing, punctuated equilibrium moment? I firmly believe it is the latter. I’ll spare the audience the laundry list of challenges we face as a global economy - unsustainable debt loads, ghost cities, peak oil, climate change, over $700tr in notional derivative exposure, etc. - it’s a long list. In the final analysis, it’s hard to conclude anything other than the system we’ve known since 1971 is about to implode.
The powers that be know this and they are very afraid. Every piece of chewing gum they’ve tried to use to glue their global economic model back together again has failed. Humpty Dumpty has had a great fall but the cracking-up isn’t over yet. Indeed, we have arrived again at one of the great turning points in economic history. However, the current destination is the one that the 1% hate so much. This is the moment where some of the 1% lose their grasp on power and money and witness first-hand Schumpeter’s creative destruction.
Historically, these are the times when pitchforks are carried and torches lit. Think about how wealthy, powerful Brits felt when news of the original Tea Party made its way to London. Think about how a rich plantation owner in the South felt when news of Lee’s defeat at Gettysburg filtered down. Think about how a New York investment banker felt in 1933 when Glass-Steagall was passed. They were very likely afraid, very afraid. The edifice of their power and wealth was crumbling down around them.
Which brings me to Zuccotti Park.
Something Very Big Is Occupying Wall Street
Financial analyst and commentar Mike Krieger wrote a great piece yesterday where he discussed the Occupy Wall Street protestors and what’s happening in Lower Manhattan. One of the comments I particularly liked was Mike’s use of Mahatma Gandhi’s great quote to describe how the protestors are being viewed by the powers that be.
“First they ignore you, then they laugh at you, then they fight you, then you win.” - Mahatma Gandhi
The protestors downtown have moved past the ignore stage as the media blackout has given way to the sheer weight of the story. The strategy has now shifted to discrediting/laughing at/making fun of the protestors. The problem with this phase for the media will be the extremely difficult way it’s going to be to pigeon hole this crowd. They don’t represent the left or the right. They don’t represent the Dems or Repubs, business owners or labor unions, capitalists or socialists, rich or poor, black or white. They represent all of us.
All of the above groups are present and participating in these rallies. The protestors aren’t necessarily anti-capitalist or anti-corporation per se. They are anti the current system. The system that they have no influence over and yet controls their lives. The system that has seen average real wages remain flat for decades while inflation slowly exacts its insidious costs. The system that pushes forward fake politicians with movie star smiles, populist rhetoric and polished speaking styles, whose sole mission once elected is to maintain the status quo for the wealthy individuals and corporations that got them elected. The system that prints out of thin air and borrows from third world China and elsewhere trillions of dollars to bail out the wealthy while sending the bill the average taxpayer. The system that will produce, for the first time in the history of the United States of America, a current generation of young citizens who will be worse off than their parents were before them.
That’s what I think the protestors are all about and I support it 100%. Occupy Wall Street is creating the next economic punctuated equilibrium moment and I say the sooner the better.
Have a great weekend.
Brian
* Fator Securities LLC, Member FINRA/SIPC, is a U.S. entity and a member of the Fator group of companies in Brazil. The comments below are from Brian Rogers, who is employed by Fator Securities (Brian’s opinions are his own and do not constitute the opinions of Fator Securities or the Fator group of companies).
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