Investors should “Viva!” the revolutions

February 22, 2011

Rather than fear the spread of people power revolutions, investors should welcome them.

Just don’t expect an easy ride in the near term.

Lots of people have made lots of money out of dictatorships, but you, dear reader, are probably not one of them and are likely to do better, in the long run, as they fall.

A spreading revolt in Libya, following closely on the overthrow of the Egyptian and Tunisian governments, sent a scare into global financial markets on Monday, hitting share prices and prompting a near six percent spike in the price of oil.

First the bad news: risk markets, already in a bullish delirium prompted by easy monetary policy, are ripe for a correction, and the threat of higher energy prices could easily be the catalyst.

Economist Nouriel Roubini points out that spikes in energy prices related to wars or conflict in the Middle East preceded three of the last five global recessions.

True enough, and a bout of stagflation, as rising energy prices drives inflation and suppresses growth, is not out of the question. There can be no assurances that whatever follows if Gaddafi falls will be more peaceful, less aggressive or even more democratic. Periods of transition are risky, and when they happen where energy is concentrated the risks are both global and economic. To the extent that unrest spreads to other states with or near oil, it is reasonable for markets to adjust for these risks and sell off.

It is also fair to draw a line between the very loose monetary policy of the U.S. and the rising food and commodity costs which may have increased discontent.

It is also reasonable, though, to assume that whomever controls Libya will want to export oil, just as whomever controls Egypt will wish to make as much as they can from ships transiting the Suez Canal.

In the long run, you can’t help but believe that investors, especially small ones, will do better out of a world where there are fewer dictators or authoritarian governments diverting resources to their families, supporters and friends.

Less corruption and more respect for property rights, combined with a population that has better reason to believe that it will get a fairer share in the fruits of their labor means more growth and a better distribution of growth.

This is deeper than extrapolating from the market capitalization tied to the countries involved. While there may be many companies traded on the London or Milan stock exchanges which are making money out of Libya and which will feel the impact if Gadaffi falls, the amount is a heck of a lot less than it would be if he was gone and the tax of corruption was lower.

SOCIAL MEDIA FOR SAVERS
The same forces which are making these revolutions possible – decentralized communications and increased transparency will also tend to level the playing field between investors and the companies they invest in and, crucially, through.

Investors, as a class, do well when property rights are protected, when information moves freely and when the share of economic growth commanded by intermediaries falls. Think of a dictator as just another intermediary taking his fat cut of the profits and directing capital in ways which benefits him and his kin to the detriment of both citizens and investors. Kind of like a bank with a bad board of directors.

In the same way in which the internet will tend to drive down fees charged by investment funds or companies, it has also made it possible, via Facebook or Twitter, for people more easily make easier comparisons between their government and others.

The internet is really bad for people who profit from a huge positional and information advantage. Just as life insurance companies saw premiums plummet in the light of the internet, so it is for dictators.

None of this, of course, is inevitable. China has had both an authoritarian government and a high rate of economic growth. It has to be said though, that China has proved dangerous for outside investors, many of whom are unable to work the system and find their capital working hard for someone else.

Nor is it inevitable that things work out benignly, in Egypt, Libya or any place else. Wars, embargoes and strife may come and if they do will hit markets very hard.

Better returns, over the long haul, will tend to be where there is more transparency and democracy.

Thinking about the Middle East as a source of oil and natural resources rather than as a market and a fund of human capital is not just wrong, it is ultimately profitless.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.)

6 comments

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Now if we could just get America off the road to oligarchy…
We have similar corruption in the U.S., it’s just less obvious than dictators in the Middle East who openly kill their opposition.
The same greed is weakening our own country by siphoning all the wealth away from workers and into a nobility class of millionaires.

Posted by rtgunlimited | Report as abusive

@rtgunlimited

You hit the nail right on the head.

Wall Street is reaping easy profits with free money from the Fed and big businesses are exporting your jobs instead of goods.

But the worst thing is the Admininstration is condoning all these because they don’t have a clue what’s going on.

They still get to live in the White House and their mansions regardless of what’s going on elsewhere.

So much for the greatest democracy on earth.

Posted by doctorjay317 | Report as abusive

Oh, I think that they have a clue alright. I believe that those in power are a lot smarter than you think.

Posted by Missinginaction | Report as abusive

History does not support your idealism. People have the right of self determination, but the idea that their right of self determination is good for world markets is disingenuous. By the time the revolutionary effects of democracy exert themselves on world markets, Los Angeles will have burned.

Posted by orangerock | Report as abusive

Yes, rtgunlimited did nail the truth about American greed and corruption, and the mildly covert but strong efforts by the wealthy, such as the Koch Bros., to eviscerate the middle class of any power at all to be a guiding force of society. The goal of the Koch’s and those in kind is, not so obviously to everyone in the middle class, to turn the USA, or all the western world, into a society of the ultra wealthy and their uneducated serfs/slaves. In their short-sightedness, greed and arrogance, they want no middle class, and believe a middle class of educated thinkers is not necessary to their life style.

It is also true that the strategy and tactics of the American ultra wealthy ultra right wing is not so obvious, but they may not be all that far from the use of violence, even if in a posed way.

As for the current Pres. and his admin., I think they are acting in a reasonable, if not humanly imperfect, way toward the situation in Libya, Egypt, and the rest.
It may not be the best thing for them to start rattling the sabers in the first days of an uprising. On the other hand, as you can read on this site, they have spoken up already against Gaddafi and taking measures against him.

Posted by ayesee | Report as abusive

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