Wednesday, December 23, 2009

The Rise and Fall of Empires

I originally wrote this blog almost six months ago. I have been holding off posting it due to the potential for some readers to be “put off” by the topic matter. As we head into 2010 with Hugo Chavez and the “mean little guy in Iran” forming more alliances, I cannot hold it back any longer.

War and peace and the rise and fall of countries have a direct impact on your well-being and personal wealth. It is for this reason that I have chosen to devote this article to sharing with you my opinion, not the opinion of Wade Financial Group, Inc. or its team members, on these related and somewhat sensitive topics.

In my opinion, the study and knowledge of world history are critical in discerning what is going on in the world, why it is going on, and what the potential future outcomes may be.

Since the beginning of history, great empires around the world have risen to economic and military greatness, enjoyed their peak status, and then suffered from an eventual and inevitable decline. Examples are numerous, including the Greek, Aztec, Mayan, Roman, Ottoman and British Empires. The United States has owned the empire crown for many years, but she is subject to the same forces that have brought all others down before her. These forces include living in excess, the nanny state, attempting to spread and control other nations via imperialism, government seizing power from its citizens, politicians too involved in feeding at the trough and eventually the weakening of a nation’s ability to defend itself. The fall of most empires has proven to be politically agnostic, with a nation’s citizenry and elected officials equally contributing to the downfall, regardless of political ideals. Throughout history, a typical empire has begun decline a bit after 200 years.

It is my belief that we are in the early innings of a long-term, multi-decade, secular decline in the United States’ economic, political, social and military standing and influence in the world. I believe this to be the trend and it began long before George Bush and/or Barack Obama took office. The U.S. and her image are getting no better treatment from the “little psychotic men” that rule North Korea and Iran as a result of a change at the White House.

As it pertains to investing, the short to intermediate term (next 10 years) navigation of the financial markets “may” remain disconnected from the immense, long-term secular changes that will unfold over the next 50-100 years. The gigantic +60% bounce of the U.S. stock market since the spring of 2009 is currently masking the ever increasing headwinds America will be facing. I worry for my children and future grandchildren what the world will look like when they reach my age. That said, I have recently come to believe that those of us in our 50s today may live long enough to actually witness the full brunt of the economic calamity that has always been thought to land at the feet of future generations. This new thought is based upon the rapid acceleration of debt and uncontrolled spending in Washington.
We are faced with seismic shifts in the “economic plates” of the world. The world is rapidly evolving (or devolving) with the U.S. potentially becoming a secondary player to the rising “Pacific Tigers” of China, India, etc.

Let’s look at some facts. At the core of China’s purpose is to become “the” world super power, both economically and militarily. Most people simply are not aware of this and/or do not get the implications for the U.S. and the rest of the world.

Islam and Israel are locked in a dispute that goes back to the Old Testament in the Bible. They did not like each other then, have fought ever since and are still fighting. Politicians, commentators and the majority of Americans fail to understand this and thus better grasp why regardless of who is running the United States, these two will simply keep doing what they have always done - fight.

What’s most worrisome on a long-term, secular basis is that the number of legitimate and rogue countries that do/will possess the ability to wage nuclear war is rapidly increasing. On a short-term basis, a single nuclear bomb going off would crater the world financial markets and wreak fear across the world about what would happen next. Chances are, the situation would be contained and the world would get back to running at its normal pace at some time. That said, the financial and psychic damage that such an event would unload cannot be overstated. Of greatest concern, over the long haul, are the following:

1) China desires to rule the world.
2) Radical Islam also desires to rule the world.
3) The cold war between the U.S. and Russia is back on, with Russia back to its old ways of supplying “assistance” to rogue countries. This assistance is of a dangerous variety, including nuclear and other military assistance.
4) Pakistan is an ongoing accident, waiting to happen.

In the past year, the Taliban came within 60 miles of the Pakistan’s capital of Islamabad. Pakistan is essentially run by its military. Experts believe that Pakistan has 50-100 nuclear warheads dispersed across a country twice the size of California. Terrorism experts believe that Pakistan’s military and government structure have to an unknown degree been infiltrated by enemies of those who desire to maintain the current tenuous, but safe nonetheless, balance of world powers.

If Pakistan were to fall into the hands of a Taliban/Al Qaeda regime, they would then control the military and Pakistan’s nuclear weapons. The U.S. and the rest of the world would face the biggest security threat in the past 100 years. The Cuban missile crisis was certainly dangerous, but today we are dealing with not just one, but a multitude of madmen all over the world, hell bent on returning the world back to the way it worked 700 years ago. Maybe a new mutual fund invested in “camel futures” is not too far off!

Ditto the above regarding Iran. They do not currently possess the nuclear arsenal that Pakistan does, but they are hell bent on doing so. The G-10 and the United Nations are impotent at stopping Iran.

P.S. Both China and Russia have been instrumental in assisting Pakistan, North Korea and Iran in the development of their nuclear programs. China is also “taking over” the U.S. by becoming the largest buyer of U.S. Government debt and they are increasingly purchasing U.S. corporations.
The “peace” that Reagan and Gorbachav committed to has been dead now for years ever since the KGB and the “mob” starting running Russia. It’s back to Russia wanting to rebalance the world power equilibrium and tilt it away from democracy and towards dictatorships.

China is pushing for the creation of a new “world monetary currency” that would shift power and location from the decades old safe haven of the U.S. dollar. Within the next 10-20 years, we are likely to live in a world where the U.S. is no longer the hub of the world economy. China is on pace to grow into the biggest economy in the world. The Wall Street of the future may be located in Shanghai or Dubai. This may be one of numerous secular shifts that will likely take place over the next 50 years.

In addition to the aforementioned increasing nuclear risks, the U.S. and the world are woefully prepared to fight an enemy sneakier and just as dangerous-cyber warfare. China and Russia were believed to be behind the “Titan Rain” attacks on U.S. defense and other firms a few years ago. China just doesn’t go away, does it?

Experts believe that the U.S. is woefully prepared for the looming cyber threat. A recent report requested by President Obama outlined the poor state of the United State’s ability to deal with Cyber attacks. The president has appointed a new “White House Cybercop.” This new position names and acknowledges the threat, but beyond that, there is no new plan in the works.

Experts believe that it will take a or 9/ to force the U.S. government to get behind the billions/trillions that are needed to defend the U.S. from the threat of Cyber attacks. Such catastrophes could include the electronic shut down of Washington, the collapse of the Internet, an electronic 9/11 on Wall Street, disabling our power grid and pulse bombs that can send an invisible electronic wave that can disable all electronic devices within a 50 mile radius.

On a positive note, it is highly likely that during this same 50-100 year time frame that the following will take place: The discovery of a new, renewable source of energy and the colonization of space somewhere beyond earth. However, this will not matter if the free world is unable or unwilling to defend itself.

I began this piece on the rise and fall of empires. I have laid at least a basic foundation for how and why this may likely take place over the next 50-100 years. I have no clue as to the specific details.

As to the question of why a financial commentator is opining about world history, we live in an electronic, global marketplace. My wife and others felt that the topics of this writing might be too sensitive, offend or scare someone. While I respect these views, I chose to error on the side of allowing the reader to be the judge.

We all need to recognize that over the coming years the world as we know it will be rapidly evolving. The rise and fall of countries, war and peace and the related impact on your personal wealth and well being are all highly interconnected. As before and after the Great Depression, WW2, Cuban Missile Crisis and the horrific inflation in the 70s, what has and is going on all over the world matters greatly to how one should approach the management of wealth and the associated risk of investing.

You may be hearing the phrase, “The New Normal,” in various investment articles. A minority of economic commentators believes that Americans will need to adjust to an investment landscape that does not recover coming out of this recession in lockstep with what “usually happens.” I am in this camp. What this means in the way of influencing the way I manage wealth is as follows:

1) Expect lower returns from U.S. stocks over the next ten years than the magic 10% historical average. More like 4-6%.
2) Stocks outside of the U.S. may outperform the U.S., thus, a heavier allocation to markets outside the U.S. will be in order.
3) “Cash is not trash,” meaning it will be very important at almost all times to maintain a minimum of two-three years worth of living expenses in cash.
4) With the potential for inflation and/or dramatic world events, an increased allocation to precious metals, commodities, etc. may be in order.
5) Owning high quality stocks that have great balance sheets, low debt, great cash flow and a record of increasing their dividends should be at the core of the equity portion of all investment portfolios that contain individual stocks.
6) Investors working with financial advisors who are willing to “adjust to the new normal” will likely benefit from an approach that is more forward looking than rear view mirror.

In Closing
It is my hope that what I have written will at a minimum cause you to step back and ponder the trajectory the world is on. All of us possess the power to alter the trend. This opportunity is provided every two to four years with our privilege to vote.

In the mean time and all along the way, I will continue to rigorously assess what is going on in the world, distill this information and leverage it to assist me with the risk management aspects of the privilege bestowed upon me to assist in the management of the wealth of others.

Jerry B. Wade, CFP, CFS
CEO, Chief Investment Officer
Wade Financial Group, Inc.

The views expressed in this article are the views of Jerry B. Wade as an individual and do not represent the views of his employer, Wade Financial Group, Inc.