Independent hedge fund managers, e.g. Raptor last week, are following me out of the business. In a market in which the government tells everyone what things are worth, the fine judgement of bond analysts is worthless. I used to manage a department with dozens of high-paid credit analysts trying to figure out the price of seniority or subordination down to the last basis point. After Chrysler and GM, the issue is moot. But there is money to be made, and it will be made by money managers tied to the federal government, through TALF and similar subsidies. As a matter of fact, the only sort of money that anyone will make in the US economy will come from things that the government subsidizes, or approves, or funds, or otherwise sponsors.

An enormous drop in economic efficiency is inevitable, along with a vast increase in the power of incumbents, starting with the federal government. Obama out-spent McCain by an enormous margin in the last election, and he is almost certain to outspend any conceivable Republican opponent by a much wider margin in the next election. The independent base of Republican financial support has disappeared during the past few months. Local boosters, in particular the local banks and real estate developers, are now in the pocket of the federal government, or out of business. Independent finance is finished. The independent broker-dealers (like the staunchly Republican Bear, Stearns) as well as the independent fund managers are flattened. What will flourish amidst the general destruction of wealth will be parasites on the federal treasury.

That cannot be a good story for the United States. President Obama is accumulating power, not promoting economic welfare. If, as I believe, the administration is optimizing its own position rather than economic efficiency, then it has little interest in high rates of economic growth. Rapid growth and the animal spirits that attend it are grist for the Republican mill. When Americans feel bumptious and risk-friendly, they are more likely to vote to get government out of their hair. It is when they feel beaten, weak, and dependent that they will sacrifice economic freedom for government backing.

Emblematic of the change in the character of the American economy is the arrival on the scene of Carlos Slim, now the largest shareholder in the New York Times and the subject of an adulatory profile in the New Yorker. Slim’s telephone monopoly in Mexico is the reason that a phone call costs five or ten times as much there than here, and why the third richest man in the world hails from one of the world’s poorer countries. Slim artfully ingratiated himself into the Mexican body politic through the judicious use of what we euphemistically might call diplomacy and public relations, such that his telephone monopoly became unbreakable. Very little in Mexican business goes past him. Mexico’s economy failed of its promise, and twenty million Mexicans have left their homes to seek work in the United States. The fact that Slim now finds the United States a hospitable place in which to do business speaks volumes.

What worries me more than anything else is that America’s young people, who offered such overwhelming support for Obama, may continue to huddle underneath the federal umbrella as times get tough. A self-feeding problem may ensue as Asia decouples from the American economy and opportunities for wealth creation in the United States shrink. Americans are facing a degree of competition from Asian university graduates on a scale they never before encountered, and cannot possibly imagine. One example: China has 40 million primary and secondary school students studying classical piano, a hallmark of the hot-housed, tutored, overachieving character of Chinese youth. America has just 30 million primary and secondary school students.

During the next generation, talented young Asians won’t start their businesses in the United States. They still will learn computer science at Stanford and international law at Yale, but unlike the 1980s and 1990s, they will not leave their families behind to put roots down in the US. Asian capital markets are sufficiently developed to provide them an adequate platform at home. Young Americans, who used to think that a business or law degree was a ticket to prosperity, will find the pickings all the slimmer in the new global competitive environment. They may look to the federal government for protection, much like their European counterparts.

America’s economic decline relative to Asia is not baked in the cake — yet — but the cake batter is in the pan, and the pan is en route to the oven. And the administration is more concerned about consolidating its own power than promoting economic efficiency. In third world countries, economic weakness increases the power of the comprador elite, because it leaves economic factors all the more dependent on the combination of government and oligopoly. It is possible to foresee a long and self-inflicted American economic decline.

I expect global commodity stocks, especially agribusiness, to outperform, along with Asian equity markets.

This entry was posted on Sunday, June 7th, 2009 at 11:32 pm and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.