Benjamin Butler
Fragility is aversion to disorder. Things that are fragile do not like variability, volatility, stress, chaos, and random events, which cause them to either gain little or suffer. A teacup, for example, will not benefit from any form of shock. It wants peace and predictability, something that is not possible in the long run, which is why time is an enemy to the fragile. What’s more, things that are fragile respond to shock in a nonlinear fashion. With humans, for example, the harm from a ten-foot fall in no way equals ten times as much harm as from a one-foot fall. In political and economic terms, a $30 drop in the price of a barrel of oil is much more than twice as harmful to Saudi Arabia as a $15 drop.
For countries, fragility has five principal sources: a centralized governing system, an undiversified economy, excessive debt and leverage, a lack of political variability, and no history of surviving past shocks. Applying these criteria, the world map looks a lot different. Disorderly regimes come out as safer bets than commonly thought—and seemingly placid states turn out to be ticking time bombs.
Nassim Taleb and Gregory Treverton, "The Calm Before the Storm," Foreign Affairs (Jan/Feb Edition)
Yesterday I said to a client of mine that -- Yes the Greek deal would probably mean a short term bounce in risk assets, but it just means we will have a little more of a wait until the inevitable global crisis hits – whilst there has been negative news and market reactions in Greece and China in recent weeks, I said we are in the calm before the storm, in terms of the global system. It feels a little like a car accident when the world goes into slow motion. Many people account that they know they are about to make impact but everything becomes very vivid and slow. This is how I feel about the world.
In an article earlier in the year, well known author Nassim Taleb and Gregory Treverton wrote a piece called “The Calm Before the Storm" that did the rounds again today. I think it's very apt. Also being a fan of complexity theory and systemic approaches to markets, I think the focus on the fragility of the system is very useful. Although Taleb refers a lot to emerging markets in his article, many of the major economies in the Western world are showing these characteristics of a fragile system, noted above – “a centralized governing system, an undiversified economy, excessive debt and leverage, a lack of political variability, and no history of surviving past shocks.”
Many countries are seeing a rise in centralization; debt and leverage have risen since the last crisis; and political variability seems to be rising to me. One of my friends who was a successful entrepreneur in Silicon Valley moved to Thailand on the basis of all this. His argument is that Thailand is quite used to chaos – people get along pretty well in the midst of it. So when a global crisis hits, they will probably figure things out better than other countries. It really goes to what Taleb was saying: that “fragility is aversion to disorder.”
Greece
To me the Greek situation was bizarre – "the twilight zone" as one veteran fund manager and friend said to me. The government “won” the referendum with the “no” vote and then Tsipras turned around and got rid of his Finance Minister and proceeded to accept a deal that was worse than the one the people had rejected! It almost seemed that Tsipras didn’t really want to win the referendum in the first place. The other "twilight zone" angle was the US market bouncing off its 200-day moving average as the Greek and China drama unfolded, and even in the face of the very strange seizure in the NYSE. I see this as another warning of systemic risks.
Although quite frankly I got a little sucked into the noise flow in the last two weeks on Greece, I did say from the outset that the European elites want Greece firmly in the EU and certainly the US doesn’t want Greece to fall into the arms of Russia. The intention of the founders of the EU and the top policymakers has been to use each crisis to move the EU to a United States of Europe. So one should not confuse apparent chaos with the end game. Let's see how much tear gas now has to be applied to the population to get through any resultant anger.
Leaving Hong Kong
Today is a slightly shorter letter as I have spent the last few days moving out of my Hong Kong home and getting all of my affairs in order. It is said that people tend to make major decisions every seven years - in fact many of the wisdom traditions refer to it as well. The most common one we hear of is the seven year itch in marriage, but it is much more than that. I tend to have large themes to all of my seven year phases.
The one in Hong Kong would probably be best referred to as "transition." I had my Dark Night of the Soul here and I also discovered inner peace. I have no idea whether I will be back to live full time here again. Hong Kong itself has gone through a major transition. When I first came to Hong Kong it was a truly international city, but now it feels increasingly like an International Chinese city. The level of English has been dropping and the economy focuses on selling to the Chinese consumer.
But with more visitors coming from China to the city of Hong Kong each year than the TOTAL number of visitors to the country of Japan, the world's third largest economy, no wonder the switch is in focus. In recent years I have seen a lot of expatriates move back to London, New York and the West Coast of the US. I wonder whether Hong Kong will become just the Monaco of China – it's a lovely Island with lots to offer, and the rich will always want to come here for vacations and to keep their money, but I am really not able to see much dynamism or innovation from the Hong Kong locals.
The economy is doing so well on the back of real estate, financial services and then selling products to Chinese tourists. I spoke to someone senior at a Hong Kong bank just this afternoon and he said the same thing – that the mainland Chinese youth are much hungrier and smarter than the youth of Hong Kong. I have seen a number of Hong Kong Chinese friends in recent months take up lucrative jobs on the Chinese mainland working for dynamic companies. One is now running the investments of a conglomerate that just bought the UK's House of Fraser, and they have more things on their shopping list.
Hong Kong has been written off many times. I saw magazine front pages predict the end of Hong Kong around the time of the Handover from the UK back to China, and around the time of SARs, when real estate plummeted. Perhaps the new mainland Chinese will drive future innovation. And perhaps Hong Kong will also play an important part of China's internationalization of its financial system. The new bank, the AIIB (Asian Infrastructure Investment Bank), might put its regional HQ here. And when I walk around Hong Kong I see so many Eurasian kids with mixed Chinese and Western parents. They have the benefit of being bilingual and educated in good international schools. What role will they play in the future, I often wonder?
For now, I am just going to be grateful that I had front row seats to one of the most amazing economic shows in the last 100 years as the Middle Kingdom, or Sleeping Dragon, rejoined the global economy. And I got to live in Hong Kong, or "Fragrant Harbour," a bustling and energetic city that never fails to stimulate ones senses and imagination. My next stop is Jeju Island Korea, where I will be meeting with some of the Island's government and key local figures. Then I am off to London and the English Countryside for the summer. It will be my longest summer there since the mid 1990s, and will be both a great family event but also interesting to observe events there. Although the UK's importance in the world has diminished since WWII, London has had a massive resurgence in recent years. Many of my American friends regard London as the only true global city in the world, even if the UK is definitely not a USA.
Deep down I am hoping, though, that I will land in a country that is not too "fragile" when the "big one" hits us – I still think the crescendo will be at the end of the summer, most likely September/October.
