My Friend, The President Of The United States, George W. Bush

By Yiannis G. Mostrous

ATHENS, Greece–When my colleagues Elliott Gue, Ivan Martchev and I were offered the opportunity to write a book on the economic rise of Asia and the changes it would bring to the world, I insisted that a chapter on how geopolitical developments could affect economic growth and investing be included.

Aside from our editor at FT Prentice Hall, most of those with whom I discussed the idea found it bizarre; some of them are still puzzled. But as work on the manuscript progressed, my confidence in the concept grew. And in the weeks since The Silk Road To Riches was published, the interconnectedness of politics and investing has become even more evident, validating our decision to address the topic in depth.

Oil dominates that intersection where politics and investing meet; ignorance of global relationships where petroleum is concerned can be costly. Investors have either been unwilling or unable to see that wars in oil-rich areas, particularly during times of global economic growth, can take the per barrel crude price to the moon. I can’t count how many times it’s been brought to my attention that big oil companies assume $25 per barrel for their long-term projections, and that prices would therefore decline, and “soon.” It’s been five years now and those folks are still waiting for the drop.

It’s easy and popular to discount oil’s importance and to say that the developed Western economies, in particular, don’t suffer the same effects from its price movements. At the same time, the Group of Seven (G-7) countries account for 44 percent of the world’s daily consumption of oil and 41 percent of its gas usage, but talking heads in these particular countries have made people believe that this somehow doesn’t matter.

Many market observers advanced especially forceful arguments in December 2005 that oil would come down. Charts were marshaled to show why this was so, and if not imminently, then surely during the first quarter of 2006.

And when it didn’t happen (and it still hasn’t), they said that oil prices are high due to a “geopolitical premium” because all other calculations give a much lower price. Really?

This is precisely the point. The risk was always there, but the majority refused to see it, and hence shorted oil. When the idea gained currency, a lot of people figured the price couldn’t stay at such elevated levels for long and again shorted oil. Humans, although they eventually embrace it, are initially reluctant to see change. This failing extends to investment decisions.

I don’t mean to suggest that fundamental analysis of the oil business is without merit. My point is that a holistic approach to investing is usually more profitable. Investors who refuse to see the whole picture and fail to plan for the long term are doomed. There’s no other way.

Although I can’t hear it or see it (except, like the rest of the world, on TV), my present location places me 700 miles from the latest Middle East catastrophe and provides a different perspective on it all. There are many visitors from all over Europe in Greece this summer; they seem to be particularly disturbed by recent events and feel the continent is more vulnerable than ever. They’re watching with dismay the total destruction of Lebanon. They know it’s not a good thing, no matter where your sympathies lie.

Observing the reaction of simple summer visitors to Athens has firmed up my conviction that understanding geopolitics is essential to successful investing. And as the Middle East is further destabilized (Afghanistan, Iraq, Gaza, Lebanon, and now Iran), it’s beginning to look like the world economy needs a solid recession to drive down the price of oil–even then it won’t get anywhere near the $25 neighborhood.

Many have come to SRI, with its emphasis on global markets–emerging markets in particular–to understand the argument that Asia will be a very important economic region in coming years. The next step is to contemplate that evolution and then act in a long-term fashion. A lot of investors have tried the “smart” way of trading Asian markets or tried to find the latest hot story to make a quick profit. These people ignore the big picture, and if they do profit it’s relatively small.

Long-term readers know that I haven’t positioned SRI that way, and that I didn’t work like that when I was responsible for stock selection and sector allocation for another financial advisory.

That said, I make every effort to alert investors when I see moves to the upside or the downside or any other special situations (see SRI, 15 May 2006, Silk Road Investor-Flash).

As the geopolitical scene evolves, countries that until recently (for reasons beyond our present scope) weren’t important are starting to matter again. Russia, as I discussed last month, is a prime example (see SRI, 28 June 2006, Speaking Of Bears).

Russia hosted, with relative success, the Group of Eight (G-8) meeting in St. Petersburg. In the process, it made substantial progress toward securing its own economic development. Regardless of personal views on the specific issues raised during the summit, Russian President Vladimir Putin came to the negotiating table with an energy deal the rest of the G-8 leaders–no matter how much they wanted to–couldn’t refuse. This demonstrated that not only is the geopolitical situation more dire than many of us want to admit, but also that Russia, warts identified by many of the world’s politicians and all, remains a source of stability and therefore a more desirable energy partner than, say, Saudi Arabia or Venezuela.

President Putin may have employed his now-famous wit to describe at least the US posture toward his country when he referred to his counterpart during a joint press conference as, “My friend, the President of the United States, George W. Bush.”

Look no further than the joint US/Russia announcement of a deal to cooperate on civil nuclear programs. The statement addressed, among other things, the creation of  “a system of international centers to provide nuclear fuel services, including uranium enrichment, under IAEA (International Atomic Energy Agency) safeguards.” President Putin said the idea was to create a system giving all states access to nuclear power while guarding against the proliferation of nuclear weapons. The first center would be in Eastern Siberia.

It goes without saying that it will take time for such a deal to come through. But note that this is a groundbreaking idea. If successful, such a system would bring the US and Russia closer together and could help defuse some of the world’s problems.

Based on recent appearances before the cameras, it could be that the new chairman of the US Federal Reserve is practicing his speeches to maximize market movement. But aim a couple of missiles at the right targets and markets will be moved harder and faster. This is, unfortunately, the investment world we currently live in.

Ignore it at your peril.