“Don’t be one of those people who go through life pretending not to know what they know… Don’t waste time wishing the world is different than it is… Don’t expect people to be something they can’t.”

— Richard Russo

Hillary, Mitt, Barack or Mike… Who’s to say?

Americans turned to the Hawkeye State this week for a sign, an answer or at least a gentle reassurance of blue skies ahead.

“Assure us,” they say. “Make us believe. The ominous clouds billowing over the interminable American dream can’t open up, can they? Somebody…anybody…just make the subprime mess go away! Make the hangover stop.

“OK, OK, OK,” they confess. “The party crept a bit too far past midnight.”

It comes as no surprise. From Dutch tulips to dot-coms, people fool themselves into believing it’s “different” this time.

The first sip of wine is always better than the last. The more we drink, the better we feel…and the better we feel, the more we drink. But consumption, like most things, comes at a price. For the fourth glass of wine, you pay with a headache. For spending more than you make, you pay with interest.

Bankers and borrowers alike felt rising asset prices, much like the euphoric sensation that fourth glass magically bestows, would go on forever. They acted as if risk were not a four-letter word. At the very least, they believed others (the government) would pay for their sins.

It serves to reason. More often than not, people write checks with their hearts, instead of their heads. The government, the proverbial king of the jungle, has a heart, doesn’t it? It can write another check, can’t it?

So how did so many people make the same mistake? How did John Q. Public trick himself into believing his 2.5 bedroom house would fetch 20% annual returns forever?

Governments, people and even animals find comfort and solace in knowing lots of other entities, people or species have made the same choices…like votes at the U.N., fans in the stands or, if you prefer, sheep following the flock. The aforementioned naturally gravitate toward the crowd. And crowds cannot think. They can only feel and act. So mob mentality, the fundamental crux behind our cultural infatuation with asset inflation, naturally sets in.

So the sirens (benevolent benefactors of cheap credit) continue their ballroom ballad as the well-dressed children (bankers and borrowers) auspiciously circle the chairs. Each child is convinced he’s sharper than the rest. He, not me, will be the one standing when the music stops playing. Or so he, like me, believes.

But this charade had a twist. The chairs weren’t built to hold jubilant children endlessly jumping to and fro. Eventually, every spoiled child takes the fall.

But like good God-fearing Christians, these children were quick to repent. Their sins, they believed, would simply wash away.

“Just give us a pill, Dr. Ben. We’re truly sorry.”

But Ben hesitated. He’s seen this behavior before.

“Come on already,” they pleaded. “Please, please make this irascible little nuisance stop.”

Ben, for better or worse, has a heart. Reluctantly, he conceded. The Fed stepped in. But even the maximum dose couldn’t completely cure the pain. So the vanquished, true to their nature, demanded more. Fortunately, a few other ears were listening.

That’s where Hillary, Mitt, Barack and Mike come in.

In wanting a pill, they want a promise. They want politicians who push populist economic agendas. They yearn for Washington do-gooders who espouse more government intervention atop more cheap credit. What could be better?

So which well-wisher promises the most? That’s hard to say.

Regardless, any political production worth its salt has three main characters: the hero, the martyr and the villain. Heroes (politicians) need a martyr (America’s middle class) and a villain (foreigners and the rich) — and if they’re lucky, a super villain (rich foreigners).

Unfortunately, superhero crime fighting doesn’t come cheap. So to what do our saviors turn? History says they turn to the Treasury. Their bank, in turn, will reluctantly appropriate more imaginary debt. And let’s be honest. Who wouldn’t like a little more Monopoly money to clean up easy street? Who couldn’t stand a little more debt?

Well, homeowners, for one. The ratio of household debt to disposable income now rests at 130%, up from 80% in the early 1990s. Meaning the collateral cash cow fueling American consumption has most likely come and gone:

Meaning America’s appetite for more “stuff” may be waning. Surging fuel prices in the dead of winter certainly won’t help matters.

Should iPod holders beware? Maybe so, maybe not. We’re not so sure.

The feeble greenback kick started America’s waning export markets. The Economist reports that American export growth, currently 12% of GDP, should be able to offset the drag from weaker construction. Meaning foreigners may find iPods too cheap to pass up? We’ll see.

The only problem here: Exports rely on rich foreigners (Southeast Asian super villains). And heroes and super villains rarely play nice for long.

Eventually, all villains must die. All happy endings require punitive justice. So Hillary, Mitt, Barack or Mike must eventually step up.

They know the barricades (quotas and tariffs). They choose their weapons (taxes and legislation) wisely. But the price of war isn’t cheap. Trade wars precipitate more problems than they solve. More often that not, everything gets more expensive. So discretionary items (iPods) may become just that — discretionary.

Meanwhile, emerging markets (Asia, in particular) keep getting richer. They now account for more than 50% of the world’s GDP (using purchasing power parity), churn out 45% of the world’s exports and hold 75% of the world’s foreign exchange reserves.

And while real wages in the developed West are either flat or falling, wages among the up-and-coming nations of Southeast Asia continue growing.

But many in the West want to go through life pretending we’re still the greatest story never told.

If it makes you feel better, keep pretending.

Until next time,

Christopher Hancock
January 4, 2008

Christopher Hancock

Christopher Hancock lives and breathes emerging markets. He travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

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Guest Post: Biden Says “It’s a Depression For Millions of Americans” (naked capitalism, 10/21/09)

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