Collapse in Kabul (Finance Friday)
Fund manager who can't form complete sentences assures us that there is no bubble
Other than that, how was the play, Mrs. Lincoln? News of the week was dominated by the collapse of the U.S. position in Kabul, and with it the credibility of U.S. power globally. The reign of progressive Baby Boomers that began so optimistically with Bill Clinton and Fleetwood Mac singing “Don’t stop thinking about tomorrow,” ends with Joe Biden and congressional Democrats bankrupting the country they divided and relying on the mercy of the victorious Taliban not to take hostage the thousands of Americans they inexplicably left behind in Afghanistan. As Barack Obama reportedly said last year, “Don’t underestimate Joe’s ability to f--- things up.”
The markets didn’t react to the fiasco, a reminder that Afghanistan doesn’t have oil or much of anything else in terms of international economic activity. Officially, top exports are fruits, gums, and vegetables. Unofficially, Afghanistan’s greatest contribution to the global economy has long been heroin. The United States spent $8 billion dollars over the years trying to eradicate the industry and the beautiful opium poppies that produce the key ingredient of heroin. Naturally, the industry has seldom been better, with production reaching $1.4 billion in 2017, nearly a tenth of Afghanistan’s GDP.
As then-president Hamid Karzai explained politely to a visiting U.S. official friend in the mid-2000s after patiently listening to a demur about the trade, “This is Afghanistan. If I throw poppy seeds in the wind, come spring, there will be poppies.”
Selling heroin is a brilliant business model, especially if one doesn’t have to worry about the fuzz, which the Taliban does not. The product sells itself without advertising and has extremely loyal consumers. Demand is inelastic, as the fancy economists say. But there are clouds on the horizon: China is disrupting this global industry too. Fentanyl, much of which comes from China, is increasingly the opiate of choice for those who consume with aplomb. Uptake on the U.S. East Coast was fast, but West Coast users—those sticklers for aesthetics in Hollywood—were skeptical to switch from the brownish product they knew to something that is usually a white powder or pill. But thanks to word of mouth (free advertising!), the transition is under way and fentanyl usage, overdoses, and deaths have radically supplanted those from heroin, which is in decline. Summer in Afghanistan may never be the same.
The collapse in U.S. foreign policy should lead to some introspection and reform in Washington. It probably won’t. Reform for the better just isn’t in the DNA of our elite institutions, which is why they aren’t really elite anymore. So far, the Biden administration refuses even to apologize or concede that it erred, with the president concluding any pullout from Afghanistan would have looked like this disaster, and even thinking himself grand for getting it done. The only silver lining is that foreign humiliation, inflation, and asset bubbles that will pop sooner or later could, for the first time since the late 1970s, set the stage for a transition to proper right-wing government. At times, it feels like we are one spoken-word love song from Telly Savalas away from recreating that catalyst of a decade.
One person making a lot of sense this week is Dimitri K. Simes, president of the Center for the National Interest, who writes about “Dangerous Illusions” driving our recent foreign policy failures and the way out through strategic realism, which is the Center’s forte. We quoted him earlier this week in arguing that the USA should stop trying to export woke democracy.
In the meantime, the Biden administration seems unable to contemplate a change in course. That is a shame. Even Jimmy Carter’s administration toughened up after the disasters like the taking of American diplomats hostage. Late in his administration, Carter reversed the decline in the defense budget and ordered covert action to bleed the Soviets (coincidentally in Afghanistan). Today’s more ideological Democrats lack this ability. No one knows where Biden’s disaster will lead, but history tells us that American weakness is provocative and that our adversaries will take advantage. Globally, political risk is on the rise. Japan and Taiwan in particular face immediately elevated risk from China. If Biden can’t restore American resolve and credibility, then maybe Congress can, ideally by forcing the administration to shift focus to the Pacific.
Sell sell sell!
One way to convince yourself that you are an investing genius is to only check your brokerage account on days when the market is up. Similarly, when one has had a market run-up as we have over the past year, pretty much every money manager looks good except those shorting the market.
One of the golden children of late has been a certain Cathie Wood, who manages ARKK, an ETF that is heavy on tech and various overpriced flavors of the month. (Disclosure: we are short ARKK.) A recent regulatory filing revealed that Michael Burry, who predicted the 2008 collapse and, more importantly, was played by Christian Bale in the The Big Short, bought a large quantity of put options of ARKK, meaning he expected a decline. Wood’s response to this unpleasant news went far to vindicate Burry. She tweeted:
“In our view, the seeds for the innovation explosion that @ARKInvest is dedicated to researching were planted during the 20 years ending with the tech and telecom bust. Having gestated for more than 20 years, these technologies should transform the world during the next 10 years.”
And then:
“If we are correct, GDP and revenue growth will diminish until the opportunities in nascent technologies begin to move macro needles. In this environment, innovation based strategies should distinguish themselves.”
But wait, there’s more. Perhaps thinking she hadn’t made the strongest case on Twitter, Wood took to CNBC on Thursday and said:
“I don’t think we’re in a bubble which is what I think many bears think we are. In a bubble, and I remember the late ’90s, our strategies would have been cheered on. You remember the leap frogging of analysts making estimates one higher than the other, price targets one higher than the other. We have nothing like that right now. In fact, you see a lot of IPOs or [special purpose acquisition companies] coming out and falling to earth. We couldn’t be further away from a bubble.”
Well golly. We wonder if she has buzz phrases on flash cards and just assembles them randomly when needed for exercises like these. At any rate, she is on to something about equity analysts. There are fewer grabbing headlines (and fewer in general). Of course, equity analysts were pushed out of the business of flogging pump-and-dump equity while wetting their beaks on the very deals they were analyzing after the dotcom meltdown. But knowing that means knowing history instead of buzz words. And history is just the white male patriarchy or something.
God Probably Hates Polar Bears Anyway
Our delicate Supreme Court chief justice John Roberts scolded former president Trump for ascribing partisanship to federal judges or even characterizing their persuasion. But the reality is they are partisan and ideological, especially the progressives, and deserve accountability like the rest of us.
In that spirit, Obama-appointed Democrat judge Share Gleason decided on her own this week to take over energy policy in Alaska. Even the anti-oil Biden administration had approved a plan by ConocoPhillips to proceed with a $6 billion drilling project in the giant wastelands of the state. But the Obama Democrat judge halted the project because of climate change risks and because the environmental assessment “failed to adequately analyze a reasonable range of alternatives.” None of those matters are required by the law that the judge is expected to enforce, not manufacture. Both matters are values-based and involve economic tradeoffs that are the province of the state legislature and Congress. But perhaps the Obama Democrat judge was inspired by a recent Dutch court decision basically instructing Shell to commit suicide. Shell is appealing the decision—suicide being not as painless as the M*A*S*H* song suggests—and let’s hope Conoco and related agencies that signed off on its plan do the same. Perhaps the Supreme Court, with its five Republicans, three Democrats and one androgynous nonbinary chief justice who identifies as independent will do right and let us peon voters decide our nation’s energy policy.
However, ‘tis the season for climate change alarmism ahead of the annual diplo-tourism gathering of people on the climate change gravy train, occurring in Glasgow this November. In the weeks ahead, Finance Friday will be looking at ways to profit from people making bad decisions based on the secular religion of climate change rather than economic reality.
An early taste: anyone who sees China’s government with eyes wide open knows that it will not comply with any carbon-emission targets. The signs are already there, and we know from broken promises to respect freedoms in Hong Kong that China views solemn international agreements more like vague suggestions. Beijing can talk the talk but will never walk the wok. Climate alarmists forced Australia’s BHP (formerly BHP Billiton) to begin divesting its considerable coal-producing assets, consistent with the commands of the sun god as prophesied by Saint Al Gore, and, less handsomely, by Saint Greta Thunberg. Australian companies less enthralled by the new religion are taking advantage and raising capital to buy BHP’s assets on the cheap. They know China’s demand for imported coal will be massive for a very long time.
Finally, there is other good news on the climate change front. Alarmism over the prospect of climate change and the amount of evil carbon that a human produces is causing some progressives not to have children. And others are choosing not to fly. The future is bright.
Have a great weekend.