November 23, 2015
In astronomy, there’s an important concept known as ‘parallax’, which refers to how a star’s position appears to change based on the position and motion of the observer.
The earth is constantly moving along its orbit around the sun. And as this happens, the position of a star in the night’s sky will appear to change slowly, gradually over time.
There’s a great view of the Southern Cross constellation from our farms in the south of Chile. But as the seasons change, the constellation appears to move very slightly, even though the stars themselves haven’t budged an inch.
Small children discover an earthly example of parallax when they find that the position of an object appears to change slightly as they alternate closing their left and right eyes.
The idea is that the exact same object can appear to be different, even though neither you nor the object has moved an inch.
Examples of parallax are everywhere-- just look at China.
If you close your left eye, China appears to be in a massive financial crisis thanks to a bursting credit bubble that has the potential to drag most of Asia, and possibly the world, into an era of massively depressed trade and asset prices.
But if you close your right eye, China has already become the world’s second largest economy (and by some measurements the largest), and has accumulated more savings than every other nation on the planet.
Plus the Chinese renminbi’s acceptance in foreign reserves, global payments, and international trade settlement is growing rapidly, and it even looks likely that the renminbi will be be anointed soon by the IMF.
These are two completely conflicting views of China. And yet they’re both accurate.
Or you can look at the US.
If you close your left eye, the US dollar is strong. The labor market has recovered to its pre-crisis levels. The US is affluent and free.
But if you close your right eye, the dollar is astonishingly overvalued based on nearly every objective metric that exists, and the Federal Reserve is nearly insolvent on a mark-to-market basis.
The labor market has been completely hollowed out as the US work force now constitutes the lowest percentage of the American population since Jimmy Carter was President.
The US government itself is flat broke, based on its own financial statements.
Nearly every major program and institution, from Social Security to the Pension Benefit Guarantee Corporation, to the FDIC, is either insolvent or precariously underfunded.
The government cranks out 75,000+ pages of new laws, rules, regulations each year, many of which carry severe criminal penalties and govern the most private details of our lives, including how we are allowed to raise our own children and what we can/cannot put in our own bodies.
Police forces have turned into federally-funded paramilitary units, and a grand surveillance state now dominates over the citizens.
Civil Asset Forfeiture, the deliberate theft of citizens’ private property by the government with absolutely zero due process, is on an alarming rise.
And many of the basic freedoms guaranteed by the Constitution have become watered-down aphorisms rather than inalienable rights.
Again, two completely opposite views that are both accurate. And there are more examples everywhere.
Financial markets are on a knife’s edge. Yet there are some absolutely incredible investments out there-- high quality, profitable companies that are trading for less than cash, and beautiful properties that are selling for less than the cost of construction.
Terrorism abounds. Risk abounds. But so does opportunity.
That’s our world. It is simultaneously full of risk AND reward. The important thing is to look with BOTH eyes.
Know the risks. Be guided by objective data to understand them, and take action to minimize them.
But don’t be overwhelmed by negativity. Don’t panic. Instead, take simple, sensible steps to ensure your livelihood doesn’t become a victim to someone else’s stupidity.
Only then, with both eyes open, will you be able to see all the incredible opportunity that awaits, and be able to seize it from a position of strength.
PS. Today my colleague Tim Price writes about this same phenomenon in financial markets. If the US stock market looks dangerously overpriced, here's where equity investors should be looking instead.