Mises vs. Marx

"Mr. Gorbachev, open this gate! Mr. Gorbachev, tear down
this wall!"
—President Ronald Reagan in a speech near the Berlin Wall
in 1987

When the Berlin wall came a-tumblin’ down in 1989, the
entire Western world celebrated the triumph of capitalism
over communism. Most of us in the West imagined that the
world would become a better place as the "Commies" become
capitalists, especially if they also decided to hold an
election from time to time. But very few of us imagined
that the world’s leading capitalists would veer toward a
subtle version of communism.

These two opposing trends will likely promote a re-pricing
of perceived risk in the global stock and bond markets.
Specifically, the valuations of emerging market stocks and
bonds should rise relative to stock and bond values here in
the "developed world." After all, if the former communists
are becoming even more capitalistic than us original
capitalists, shouldn’t Russian stocks and bonds gradually
command higher valuations? And if the world’s formerly
inept quasi-socialist nations, like Brazil and Argentina,
are also becoming exemplary capitalists, shouldn’t their
stocks and bonds deserve better treatment in the

"Less than seventy-five years after it officially began," a
New Yorker Magazine article from 1989 proudly declared,
"the contest between capitalism and socialism is over:
capitalism has won." Surprisingly however, some paragons of
capitalism simultaneously surrendered to communism – not
entirely, of course, just at the margin.

To illustrate this phenomenon, we turn once again to the
official Rude Awakening whipping boy: General Motors.
In 1916, General Motors became a U.S. corporation. Within
40 years, it became the first U.S. corporation to earn $1
billion in a single year. In 1917, the Bolsheviks overthrew
the Russian Czar, clearing the way for a new communist
regime. 40 years later, the "planned" Soviet economy had
become much more proficient at filling bunkers with
warheads than filling store shelves with bread. The Soviet
economy, in short, was a disaster.

But times have changed…to say the least. Today’s Russian
economy has amassed $145 billion of foreign exchange
reserves – the largest outside of Asia – and has become a
net creditor. GM, meanwhile, piles up $1 billon quarterly
LOSSES, while becoming a massive debtor. GM’s total long-
term debts and liabilities are more than DOUBLE Russia’s
foreign exchange reserves.

The comparison between GM and Russia may not fairly
represent America’s capitalistic muscle, but it does fairly
portray how that muscle is atrophying.

"GM is a car and truck company – for the 74th consecutive
year, the world’s largest – and has revenues greater than
Arizona’s gross state product," writes George Will in a
recent op-ed piece for the Washington Post. "But GM’s stock
price is down 45 percent since a year ago; its market
capitalization is smaller than Harley Davidson’s. This is
partly because GM is a welfare state."

"The cost of providing health coverage for 1.1 million GM
workers, retirees and dependents is estimated to be $5.6
billion this year," Will relates. "GM says health
expenditures – $1,525 per car produced; there is more
health care than steel in a GM vehicle’s price tag – are
one of the main reasons it lost $1.1 billion in the first
quarter of 2005…And health care for retirees and their
families – there are 2.6 of them for every active worker –
is 69 percent of GM’s health costs."

In short, the modern incarnation of General Motors, for
better or worse, fails to operate for the benefit of the
capitalists behind it – not for the shareholders, and
definitely not for the bondholders.

"It’s strange," GM’s CEO, Rick Wagoner, muses, "When I
joined GM 28 years ago, I did it because I love cars and
trucks. I had no idea I’d wind up working as a health-care

GM’s plight illustrates an important nuance of US-style
capitalism in 2005: It is hogtied.

Today’s American capitalism finds itself fettered by more
restraints than the Lilliputians strapped to Gulliver. It
is constrained by high wages, growing health care and
pension liabilities, a litigation-friendly judicial system
and an onerous regulatory framework.

At the same time, the U.S. economy is attempting to thrive
on the thin gruel of debt-financed consumer spending – a
gruel concocted from a toxic blend of asset-inflation and
foreign capital. (Thank goodness the communists in China
are so eager to lend us capitalists the money we need to
maintain our consumption). As we pile up foreign debts, we
are also piling up liabilities that must be "socialized"
away. We must all, collectively, satisfy the cost of our
excesses, either through taxation or currency-debasement or

In short, the U.S. economy is attempting the impossible.
America is still capable of great things, but not
impossible things.

Meanwhile, the one-time Bolsheviks are becoming more likely
to quote Ludwig von Mises than Karl Marx. "With varying
degrees of enthusiasm," Hernando de Soto declared in The
Mystery of Capital, "Third World and former communist
nations have balanced their budgets, cut subsidies,
welcomed foreign investment, and dropped their tariff

As a result, the terms "emerging market" and "developed
market" are becoming anachronistic, if not utterly
deceptive. We think it is reasonable to ask, therefore, if
"blue chip" emerging market stocks are still much more
risky than "blue chip" developed market stocks? Or if
emerging market government bonds are still much more risky
that US high-yield bonds?

The global bond market has already answered the second
question for us…and the answer is "No." The bond market
might change its mind, of course. But for the moment, the
yield of emerging market "sovereigns," as they are called,
have "traded through" US junk yields. In other words, bond
investors now consider emerging market government bonds to
be less risky than US junk bonds.

Emerging market stock values are also climbing relative to
their developed world counterparts. The chart below
portrays emerging market PE ratios relative to the S&P
500’s. For most of the last two years, the ratio has been
climbing. Recently, however, the spread between the two
widened out again, such that the S&P’s PE ratio of 20 is
nearly double the 11 PE of the Morgan Stanley Emerging
Market Index. Net-net, emerging market valuations have
improved somewhat, but they continue to carry a very steep
discount relative to the S&P 500.

We sense a buying opportunity…relatively speaking.

Last month, Indian Prime Minister Manmohan Singh declared
that his country and China "could together reshape the
world order." The re-shaping has already begun. The two
countries have singed dozens of bilateral agreements to
enhance their mutual cooperation economically and

"Burgeoning economic ties are driving much of the
goodwill," the Wall Street Journal reports. "Two-way trade
reached $13.6 billion last year. Up from $3 billion in
2000. Russian, Brazil, South Korea and numerous other
nations have been busily establishing bi-lateral and multi-
lateral economic agreements of various types.
The one conspicuous feature of almost every trade agreement
is the absence of an American signature. A new world order
seems to be unfolding all around us. The simple, bi-polar
world we used to know – pitched between powerful Western
economies and feeble developing world economies – no longer

Sooner or later, the global securities markets will begin
to reflect these changing realities.

America is still the most prosperous nation in the world,
but our securities markets already reflect that reality.
The emerging prosperity of the world’s "emerging" economies
does not carry such a rich price tag in the global
securities markets.

Maybe, therefore, we should begin investing in the new
world order, rather than its predecessor.

Did You Notice…?
By Eric J. Fry

A corporate culture of well-mannered avarice also restrains
the mighty American economy. Many public companies labor
under a Soviet-style central planning – the sort of
planning that arranges things very nicely for the planners
themselves, but much less well for the proletariat.

Many American boardrooms promote a type of short-term,
"shareholder-friendly" strategic planning that tends to
enrich corporate officers at the expense of the voiceless
minority capitalists who own the company’s stocks or bonds.

"In 2003, the ratio between CEO pay and worker pay reached
301 to 1, up from 282 to 1 in 2002," according to a report
from United for a Fair Economy. "If the minimum wage had
increased as quickly as CEO pay has since 1990, it would
today be $15.76 per hour, rather than the current $5.15 per

"By any standard, many of today’s executive compensation
packages are excessive," BusinessWeek asserts. "Too often,
directors have awarded compensation packages that go well
beyond what is required to attract and retain executives
and have rewarded even poorly performing CEOs…The problem
is that excessive CEO pay takes dollars out of families.
Moreover, a poorly designed executive compensation package
can reward decisions that are not in the long-term
interests of a company, its shareholders and employees."

Corporate avarice, as enshrined in America corporate
culture, is no less counterproductive for being legal. If
America wishes to improve its "productivity," it could
begin the process by firing every CEO who draws a paycheck
over $10,000,000 a year. And if we really want to get
serious about improving our productivity, we could also
fire every CEO who draws a paycheck over $5,000,000.

India’s highest paid CEO, Vivek Paul, earns $1,100,000 per
year to oversee Wipro, India’s largest information
technology company. The average American CEO earns more
than $8 million per year…Maybe its time to begin
outsourcing CEOs to India.

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