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Philip Mause
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My name is Phil Mause. I am a Senior Advisor with the Pacific Economics Group, focusing on energy, regulatory and valuation issues. I retired from 40 years of law practice earlier this year. I am a yield oriented investor and in the last two years, I have done reasonably well in junk bonds,... More
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  • Reflections On The Middle East

    I think that there are lessons to be learned from the events of the last few years and, if we learn them, it is possible that our relationship with the Middle East will improve and become more constructive. Here are a few.

    1. Be Humble - I voted for Bush in 2000 because he promised a "humble" foreign policy. Unfortunately, his presidency was captured by the neocons who had definite and inflexible ideas about what they wanted to do and how it would work out. I still think that we should be humble in the sense of being aware that we cannot have a very high sense of confidence about the ultimate results of any policy initiative. In other words, it is possible to make a bad situation worse and we should always be aware of that.

    2. No Matter How Bad a Regime May Be It Is Always Possible That It Will Be Replaced With Something Considerably Worse - I generally supported the Iraq war partly because I could not imagine that Saddam Hussein could be replaced by anything or anyone worse. ISIS has just proven that my problem was failure of imagination. Even a very bad state can be replaced by a worse "failed state" - Libya may be an example of this. Recently a US military officer suggested that Hamas could be replaced in Gaza with something worse; I am not sure whether I can conjure up exactly how that would be possible but one of the important lessons of the past few years is that he is probably right.

    3. If you have a chance to negotiate with someone who is at least initially reasonable, take advantage of it because it may not last - For a number of years, Iran was led by Khatami who was reasonable, intelligent and seemed to have a concern for the well being of his constituents. Khatami was not perfect and it is very easy to point to defects and even atrocities in Iran during his tenure in office. However, he provided was with a counterparty with whom we might be able to deal. This was a golden opportunity for the United States to attempt to normalize relations, create a constituency in Iran for continued normalization and improve communications. A lack of strategic thinking on our part led to a neglect of this opportunity and the events since suggest that it is an opportunity which may not return quickly. In the investment world we often talk about "counterparty risk" but such risk exists in foreign policy as well. If we have a counterparty we can negotiate with, we should constantly be exploring for opportunities to improve relations.

    4. Monarchies Are Actually Pretty Good - If one looks at the Middle East today, some of the most stable countries are Morocco, Jordan, and Saudi Arabia - all of them monarchies. Americans probably think of monarchy as a "step backwards" based on our own history but, in fact, the development of representative government in the West has involved a gradual evolution in the direction of democracy and away from absolute monarchy rather than an abrupt change in many, many successful democracies, including the United Kingdom. It is probably too late to restore the monarchies in Libya and Iraq, but the relative success of monarchies suggests that we should be flexible in our thinking about what constituents an appropriate regime which will provide its people with stability and reasonable public policy.

    5. Some Boundary Revision May Be Inevitable - At the end of WW2, the thinking was that appeasement and territorial concessions simply led to aggression and war and that therefore national boundaries should be respected. While this is generally true, some of the boundaries in the Middle East are legacies from negotiations between European colonial powers and the end of WW1 and, like the boundaries established at the same time in the Balkans, may have to be reconsidered. Should the Kurds have a national state? Would it be better to separate Sunnis and Shiites in Iraq and Syria? These are not simple questions but we should approach them with humility and a willingness to entertain the arguments and commitments of the people in the area who will be directly affected.

    6. It is cheaper to spend money on economic development than on war - To the extent that there are regimes in the area which - while not perfect - are reasonably representative of their people and which - while not following our foreign policy direction to a tee, are generally committed to a peaceful resolution of disputes and to a process in which corruption is reduced, economic growth occurs, and political freedoms are enhanced, we should try to provide the economic assistance necessary to show that there is a promising path forward that is much preferable to the path backward. Even dictatorial regimes should be engaged in order to determine whether they are willing to evolve in constructive directions.

    7. Be Humble - I said it before, but it is the most important lesson. We do not have all the answers. Our own history involves a brutal civil war and periods of nasty politics and insurrection. The people of the Middle East are entitled to our respect and commitment if they are willing to commit to a future of peace, economic prosperity and respect for human rights. Their path in this direction may be unpredictable and will ultimately be of their own choosing. We cannot dictate; all we can do is encourage and incentivize.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jul 28 4:07 PM | Link | 4 Comments
  • The Four Republican Parties

    Recent events have made it clear that the Republican party really contains four distinct groups increasingly at war with one another. It is possible for an individual to be a member of more than one of the four groups but the four groups tend to have very different thematic agendas. The four groups are listed below.

    1. Libertarians - This group generally wants to reduce the size of government and reduce the intrusiveness of government regulations. It is epitomized by Ron and Rand Paul but includes many other Republicans. It generally advocates legalization of marijuana and generally supports what could be called an isolationist foreign policy. It is a group which can garner a great deal of support among young voters.

    2. Social Conservatives - This group - led by Rick Santorum and to a lesser extent Mike Hukabee - focuses on moral values issues. It would oppose the legalization of marijuana, gay marriage, abortion, perhaps some forms of birth control, gay rights in general, legalized gambling, and other measures viewed as encouraging immorality. It implicitly supports a greater role for the government in supervising matters which the libertarians consider to be "nobody else's business." Some elements of this group are strong supporters of Israel based on scenarios drawn from the Book of Revelations.

    3. Foreign Policy Hawks - This group generally supports a "tall in the saddle" foreign policy and a robust national security apparatus. McCain and Bush 2 were probably in this group. It tends to support increased defense spending and intervention in foreign disputes. Together with the libertarians, the inclusion of this group in the Republican party oddly puts the most dovish (libertarians) and the most hawkish Americans together in the same political party.

    4. Pro-Business Republicans - Calvin Coolidge once said that "the business of America is business." This is the Chamber of Commerce, Wall Street, retirees who invest in the stock market, etc. Romney is in this group. So too, Boehner, Steve Forbes, Trump, Bloomberg, and many Republicans from Blue states. Coolidge won be one of the largest majorities of any Republican in history. This group generally favors policies that help American business. This can sometimes mean less big government and it can sometimes mean more big government. Similarly, in foreign policy, it can sometimes mean more intervention aboard but it usually means less. The group would generally support things like the legalization of gambling at the state level because this would bring business to the state and reduce the need for taxes. It is now beginning to be skeptical about the national security state because that may make it harder for some US companies to do business abroad.

    There are more and more issues on which these four groups tend to come into conflict. Immigrations cuts across the different groups. Issues like the Export Import Bank pit libertarians against business Republicans. Getting tough with Russia tends to pit foreign policy hawks against business Republicans and libertarians. The four groups have created a public policy minefield for Republican politicians who must constantly be wary of taking positions which may offend one or more of the groups. In some situations, it is impossible to find a position which does not offend at least one of the groups. Immigration is probably such an issue.

    The Democrats should try to emphasize "wedge" issues which divide these various groups but are more likely to stumble into positions which allow the groups to unite. For example, providing federal funding for sex change operations is one of the few issues on which social conservatives and libertarians are likely to be able to unite in opposition. Republicans can also likely unite in opposition to bureaucratic bungles (the VA situation, possibly Bergdahl, Benghazi, etc.) and so we will hear more about these things going forward.

    On foreign policy, the Democrats are generally reactive. Ever since LBJ replaced JFK, Democrats prefer domestic policy and see foreign policy issues as distractions. They tend to follow an "evening news" approach, being forced to focus on issues highlighted by the media without having any overall strategy. They also are terrified that foreign policy hawks will depict them as "wimps" and so they tend to stumble into things like Vietnam, the Soviet grain embargo, support for the Arab Spring, voting in favor of the Iraq War, etc. without having any strategic vision of how such measures fit into some definition of the national interest and without a clear plan for ultimate resolution. This allows Democrats to be simultaneously attacked by hawks and doves (as happened in Vietnam) because the basic problem is one of competence.

    The Republicans have to hope that their internal fissures are papered over by the Democrats delivering them on a silver platter some issues which they can use to unite the troops. The Democrats will probably be up to the task but the fissures among Republican groups are becoming so wide that we may begin to see them become irreconcilable.

    What does this mean for financial markets? First of all, I would not count on the ability of the Republicans to come running if there is need for another "bail out." Libertarians and probably social issue conservatives would not likely support such action. Try to stay away from companies with too much leverage. Secondly, government contracting may become a tricky area as the Republicans (in search of issues on which they can unite) will focus more and more on "oversight" of government agency action in the hopes of uncovering bureaucratic corruption or bungling.

    The Republican party is evolving in new directions and the next couple of cycles will be of critical importance. We have seen this evolution in the past (from Lincoln to the pro-business gilded age Republicans to the Progressives to the anti-New Deal Republicans to the Eisenhower Republicans, etc., etc.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jun 15 7:44 PM | Link | 8 Comments
  • One Big Issue Ignored By Piketty - Technological Obsolescence Or The Tendency Of Capital To Destroy Capital

    As I have been reading Piketty, I have tried to understand his thesis by examining my own experience. He argues that the ratio of capital to national income (GDP minus depreciation) will increase and that returns on capital will remain relatively constant. As a result, capital returns will command a higher percentage of GDP over time and wages will command lower and lower percentages. This will tend to feed on itself because capital is concentrated in the hands of the wealthy so that the wealthy's share of total income (capital plus wages) will increase leading to the reinvestment of ever higher percentages of GDP each year which will lead the ratio to increase to ever higher levels.

    Piketty correctly measures capital by current fair market value (use of original cost would create all sorts of problems). As I think through my own experiences, I have begun to realize that a major factor in businesses I have been involved with has been technological obsolescence. While Piketty takes account of traditional depreciation in the form of wear and tear on equipment and other forms of capital, he does not seem to come to grips with technological obsolescence. In my lifetime, I have seen entire businesses - like video cassette rentals and dial up internet - emerge, expand and disappear. My wife worked for a video production company whose major problem was that the equipment it bought lost virtually all of its value after three or four years due to the availability of better and less expensive new products. Law firms I worked for replaced word processing equipment and computers on a regular basis. We are all familiar with Moore's Law and the tremendous advances in computer technology it has permitted. The dark side of this trend is that there has been enormous turnover and lots of equipment has to be scrapped shortly after it is unpacked.

    I don't think Piketty includes this dynamic in his analysis. And - using his model - increases in capital investment may not increase the ratio of total capital to GDP as predicted. This is because new capital is likely to be deployed in R&D and new product development and deployment. The more new capital that is invested, the faster the rate of technological obsolescence. If we calculate total capital by estimating fair market value, then new capital will tend to destroy old capital through technological obsolescence and an equilibrium may be attained.

    I have to think this through some more but it is definitely one possible hole in Piketty's analysis. It may not invalidate his conclusions but it may temper some of the impacts.

    Apr 30 9:10 PM | Link | Comment!
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