Friday, June 22, 2012

The Unabomber Manifesto

Recently I stumbled upon a brilliant essay from Ted Kaczynski, better known as the 'Unabomber' - A name that doesn't do justice to what he stood for. If it were up to me, I would call him the Waldo  of our times although that parallel stops where the bombings begin.

From Wikipedia -

"Kaczynski was born in Chicago, Illinois, where, as an intellectual child prodigy, he excelled academically from an early age. Kaczynski was accepted into Harvard University at the age of 16, where he earned an undergraduate degree, and later earned a PhD in mathematics from the University of Michigan. He became an assistant professor at the University of California, Berkeley at age 25, but resigned two years later.

In 1971, he moved to a remote cabin without electricity or running water, in Lincoln, Montana, where he lived as a recluse while learning survival skills in an attempt to become self-sufficient. He decided to start a bombing campaign after watching the wilderness around his home being destroyed by development.From 1978 to 1995, Kaczynski sent 16 bombs to targets including universities and airlines, killing 3 people and injuring 23. Kaczynski sent a letter to The New York Times on April 24, 1995 and promised "to desist from terrorism" if the Times or The Washington Post published his manifesto, Industrial Society and Its Future (also called the "Unabomber Manifesto"), in which he argued that his bombings were extreme but necessary to attract attention to the erosion of human freedom necessitated by modern technologies requiring large-scale organization."

His manifesto can be found here . It is a pretty long read for a manifesto but thoroughly enjoyable for most parts. His world view is completely objective analysis of the consequences of being part of a industrialist society. I do not agree though with his view that we need a revolution and complete dismantling of the system.

The most interesting part for me was his psychoanalysis of the Leftist mind. Examining the case of Indian Naxal movement- It is my opinion that people who are oppressed and part of any Leftist movement are actually yearning for Freedom and their plight is hijacked by the leftist activist coming from middle class backgrounds. The oppressed want to revolt because their freedom are being compromised but if they were aware of the fact that any leftist movement turns into a totalitarian regime which actually causes more suffering and oppression, they would hardly opt for the path they have chosen. The poor and the illiterate whose sufferings are showcased by the activist types, are in it because of the political ignorance. Part of the blame lies in lack of pro Freedom Humanitarian organizations in India as well.

And the Activists are mostly people of a certain kind. 'The two psychological tendencies that underlie modern leftism we call "feelings of inferiority" and "oversocialization." Feelings of inferiority are characteristic of modern leftism as a whole, while oversocialization is characteristic only of a certain segment of modern leftism; but this segment is highly influential.'

I found that what Ted wrote in 90s perfectly describes what personalities like Arundhati Roy have been doing since then. My understanding of the Leftist brain is considerably enriched after reading the manifesto.

Tuesday, June 5, 2012

Euro crisis

Euro crisis was misjudged by most market participants and even the authorities as a fiscal crisis. It was the prevalent opinion in 2010 and 2011. The dominant theme emerging now is that it has more characteristics of a balance of payment crisis rather than a fiscal one.

After the advent of the common currency, Germany became highly competitive compared to the peripheral nations. Germany was the major exporter of goods to rest of the Europe and it enjoyed a period of low unemployment and high growth coupled with low and stable inflation. Trade surpluses surged and prosperity increased. Policymakers couldn't have hoped for better outcome.

Peripheral countries had a period of high deficits financed by external debt. Loose monetary policy created a credit fueled real asset bubbles most notably housing in Spain. Wages increased while competitiveness declined compared to core Europe.  When the credit crisis hit, value of the collateral on bank balance sheets collapsed. Both banks and governments were in a precarious situation at the same time nursing an over leveraged balance sheet. Bank needed to bailed out causing accelerated increase in debt to GDP ratios. With sovereigns being unable to print their own currency, much needed liquidation of debt through monetization and inflation could not happen.

 The current situation in Europe is certainly not a stable state. The Fiscal and structural imbalances need to be fixed. It is very difficult to predict the dynamics of the situation, because that depends on how the politicians act. Politicians try to move in the direction of the consensus to limit collateral damage. There is tremendous activity in European countries towards manufacturing of consent on some articles while politicians are busy preparing there own road maps, which in itself is not a simple exercise.

But somethings can be deduced regarding the final outcome of the situation with more clarity than the dynamics. At this time, there seem to be two possibilities.

 First is the path of political disintegration which leads to breakup of the Euro. Peripheral countries have a reason to resent German stubbornness with austerity. But first major step in this direction will probably come from Germany because of its creditor status. Just like in the Soviet disintegration where the process of disintegration was started by the disenchanted beneficiary, Russia. This will lead to separate currency blocs or a situation similar to pre Euro era, but with heightened acrimony between nations. Trade will not be as free as it is today. Target 2 imbalances would have to be restructured to be settled in a future date. Peripheral countries will have capital controls before the breakup to prevent the flight of capital. The new Lira, Peseta and Franc would devalue after the issue while the Deutschmark and Guilder will appreciate in value. Germany will lose its competitiveness and suffer a recession while peripheral countries will re surge.

The second solution is the path that leads to political integration in Europe. Some sort of compromise is reached regarding the structural reforms and the fiscal compact. If the problem has to be addressed at its root  it should lead to a competitive periphery compared to Germany.  In a common currency framework this can happen through relative inflation in Germany compared to the periphery. Since peripheral deflation is not an option, we can only expect stable prices in the periphery and 4 to 5% inflation in Germany(despite the Bundesbank mandate). Wage inflation in turn will lead to real asset inflation.

Consequently, I am pretty bullish on German real assets- real estate, commercial property, inflation linkers etc for the next decade. In both the cases above- the asset classes stand to gain - either through re denomination or inflation. The risk to the view is how well the imminent German recession is managed.