Thursday, September 24, 2009

Bremmer on Obama and the Rest of the World

I promised I would come back to Ian Bremmer’s morning comments at a breakfast I attended recently. So here it is. Part II of the talk was about what is currently going on in America under its new president and challenges investors will face around the world.

According to Bremmer, the situation in America remains difficult but President Obama has an advantage (over George W. Bush) that serves him well: He is quick to admit his mistakes. For instance, an early first mistake was to express outrage at Wall Street bonuses in the mist of the financial crisis. Rumours would have it that Obama almost lost Geithner as Treasury secretary over the comments he made. Moreover, Obama openly expressed outrage gave licence to some members of Congress which then went overboard and, at one point, seemed ready to enact all sorts of punitive, yet senseless, legislation restricting bonuses. Obama quickly realised that he had a problem and dodged the bullet by backing down.

The same thing happened with healthcare reforms. By letting Congress take control of the legislation process, Obama eventually realized that the reforms would get nowhere. When he came back from his August vacation, the fish had rotten significantly and the outlook for a healthcare bill clearing both the House and the senate seemed quite bleak. Again, Obama realized his mistake and took control of the process, announcing his intention in his recent speech. By backing down on many issues, he thus greatly improved the probability of passing health care reforms before the end of the year. The political pragmatism of the new President will probably save healthcare reforms according to Bremmer, avoiding irreparable damage.

Yet, some things are not going as well. Afghanistan is currently being the one difficult issue with which Obama will be confronted with pretty soon. Ian Bremmer thinks that it is going to be the first real crisis of his presidency and that it is going to be a BIG crisis. The fact that Karzai is no longer in arms with the Americans will also complicate things.

The decision to nominate Robert Gates as Secretary of Defence indicates that the President is leaning towards letting the generals do their job in the Middle East. However, while the Iraq situation improved significantly after the surge (at least enough to pull out on schedule), Afghanistan is now falling apart. The generals would like to have 400,000 soldiers on the ground in the country to stabilize the situation. If not possible, they claim that at least 60,000 more are needed to avoid a complete disaster. Another surge is what the generals are recommending today. The proponents of a second “surge” include David Petraeus. Against this view, the President’s political advisors are recommending a pull out based on the notion that this war is unwinnable. This group includes Hillary Clinton, Joe Bidden and John Kerry.

The political pragmatism of Obama is dictating him that he must find a way to make everybody happy. He is thus looking for a compromise, a middle ground. But, according to Ian Bremmer, there is no middle ground in Afghanistan. And the place is going to fall apart pretty soon without the commitment of more American and Coalition soldiers. The outlook for now is only going to be more terrorism.

The fact that many Republicans will lean against the surge option for purely capital gain (even if some will remain hawkish -read Only Decisive Force Can Prevail in Afghanistan) will only make it more difficult for Obama to follow the recommendations of his generals.

Another problem of the current administration is the very slow appointment process. Ever since Tom Daschle did not get appointed as Health Secretary following some allegations of inappropriate ethical behavior (tax issues), Obama wanted to ensure that there would not be any such problems in the future. He thus also ensured that he would only have half of the appointments he should have had by now. The positions which remain unfilled today are part of the problem. You cannot have such an ambitious agenda and nobody at work to deliver the goods. For this reason, among others, financial regulation will have to wait until 2010; maybe later. The same for climate change. Nothing concrete on this issue will happen before 2010.

Don't worry about Trade. It is going in the right direction. The same for oil sands. There is no significant risks here given their strategic importance.

Other World Issues and Outlook for Investors

A lot has happened in Iran. The Twitter revolution was exciting. Then it was not so exciting anymore. What needs to be understood is that Iran has a lot of money. It is not like Georgia or other countries with newly formed government. It’s repressive regime is well oiled (my pun).

The clerics lost the election, according to Bremmer, but 30% of the population supports the government. There are also lots of apolitical people in the country. When the average guy got less interested in suffering the consequences of the repression, only the progressive elite was left to fight the regime. And the revolution hopes fell apart.

Depending on what happens to gas prices, The regime could have a hard time remaining in power. The country, according to some analysts, does not have the money to finance gasoline subsidies beyond Christmas. Bremmer thinks that in spite of the political instability which will persist, it will be years before the Iran Clerics loose power.

In the meantime Iran is going nuclear. Negotiations with the West will lead to sanctions on trade and on the central bank. It will hurt Iran but it won't stop the regime from trying to acquire nuclear bombs. The Gulf States will have to react. The fact that Israel has the same concerns as the Saudis regarding Iran’s nuclear ambitions is a big plus. It maybe counter-intuitive but the crisis will focus the minds of the players in the regions and force collaboration. Already Israel has opened commercial representations in Oman and Qatar. This is a story to follow but I take from this discussion that the world is not ripe for big investments in the Middle East.

What about India? The consolidation of the political parties is a significant event. The Congress party is not a reform party but the fact that India now has a single party in power, rather than a coalition, means that the country will benefit from a more effective bureaucracy. Implementation of whatever timid reforms the Congress Party might propose will thus be easier and certainly better than ambitious reforms without any chance of being implemented. Bremmer does not believe that the Indian story will be one without problems; the problems will keep on growing in India. However, in the end, it won't affect the security. Therefore, India should remain a very attractive country for investors.

Moving on to Latin America, Mexico is crushed economically because 80% of its exports go to the US. Tourism is also down, the drug cartels are powerful and the country was hard hit by the swine flu last winter. Yet, president Calderon has an approval rating of 70% because he is seen as the only clean act in town. Calderon is fighting the good fights and the Left is down. Obrador, who almost won the last elections, is destroyed politically as he has no credibility. Mexico is pretty stable. It should bounce back strongly as the US economy recovers. It is therefore probably a good place to invest. Personally, I think that Mexico’s dwindling oil and gas reserves probably dictates that investors should remain cautious about Mexico’s economic prospects; at least more than Bremmer suggested that morning.

Bremmer is still Bullish on Brazil. Things are going well in that country; maybe too well. Oil reforms, for instance, will probably not go through because things are going so well. There is a push back, a “let's take our time” attitude. Recent giant deep water oil discoveries have encouraged the return of resource nationalism. This political reversal likely means that Exxon and Chevron will be disappointed by the progress they will make on their oil projects there within the next few years. The election could change the outlook but it is unlikely. Yet, the place is stable and should provide very lucrative opportunities for investors as the country grows.

Finally, Venezuela. Recent natural gas finds only increase Chavez’s bragging power. The country already has the world second or third world energy reserves. Since it is technologically easier to invest in gas than in oil, Chavez (on Larry King Live tonight) will likely put foreign investment restrictions on gas as well. The Venezuelans will thus cut their nose which means that until Chavez is gone, there is very little upside for investors in that country.

I hope that this was useful.

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