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Friedman: Turkey Attractive, Skeptical On India

18 Jun
GEORGE FRIEDMAN
Friedman: Turkey Attractive, Skeptical On India
George Friedman is one of the leading geopolitical strategists of our time. He founded Strategic Forecasting Inc. (Stratfor), an intelligence and consulting firm, in 1996, and serves as the company’s CEO and chief intelligence officer. Dr. Friedman is highly sought out by various organizations from around the globe for his geopolitical analysis and advice. He is the author of “The Next 100 Years” and “The Next Decade,” both New York Times best-sellers.Dr. Friedman recently sat down with ETF.com to discuss the ongoing tensions in Asia between China, Japan and Vietnam, and highlights which Southeast Asian nations are poised for a growth spurt. He also spells out what a Modi-led election win in India means for its market, how fracking will impact geopolitics in the future, and tells us which country he favors the most economically in the coming decade.
ETF.com: Last quarter, you said the markets were overreacting to the situation in Ukraine. Has anything surprised you regarding the renewed tensions between the West and Russia since?
George Friedman: Nothing like the Cold War where there were really massive tensions. And the markets weren’t necessarily affected by much of what went on in the Cold War. We had massive rallies. We had busts. We had the entire range of things.So from the standpoint of the international system, what’s happening in Ukraine is causing a realignment of the West. It’s very complicated. The Russians are still being extremely cautious. But its impact on the markets is dubious; it’s just not that significant on that level.
ETF.com: Do you also hold that view with Eastern European peripheral nations?
Friedman: That has a different dimension. When you take a look at these countries—Poland, Slovakia, Hungary, Romania, Bulgaria, but particularly Poland and Romania, which has taken a leading position with the Americans—this is simply another fracture point in the European Union.We already have the fracture point in the European Union between southern Europe and northern Europe. We have a fracture point developing between France and Germany. We have fracture points developing politically, as we saw with the right wing success during the European parliamentary elections.Now we have another one, which is where Poland and Romania and these other countries have a vested interest in what happens in Ukraine. Portugal and Italy and even Germany have much lower stakes, where the effect is not where you might expect it. It is in another dimension of disunification of Europe, and a much stronger presence of the United States in western and central Europe in its alignment with the Poles and Romanians.

So when everything was done here—and these countries in the eastern frontier certainly had concerns about what Russia was going to do—it wasn’t the European Union, it wasn’t the European countries that took a leading position, it was President Obama going to Poland, Vice President Biden going to Romania, endless diplomacy going back and forth that was key.

ETF.com: Last quarter, you referred to the friction between Japan and China as saber rattling. China is now having territorial disputes with Vietnam, causing a plunge in Vietnamese equities. There’s a sense of increased nationalism throughout Asia. Do you see confrontations in Asia escalating? How will that impact economic growth in the region?
Friedman: Divide them between two parts, between those where the confrontation has to be naval, such as between Japan and China. Those are less likely to happen simply because of the limits on the navies in the region. It takes a lot to have a naval confrontation.

Vietnam is a special case because it borders China. Although China went to war with Vietnam in the 1970s, and was pretty badly defeated by the Vietnamese, there’s always the possibility of it escalating to a conflict.

In this particular case, the Chinese are really not itching to have another go at the Vietnamese. They badly miscalculated last time, and in many ways, the Vietnamese are as strong as they were then. The Vietnamese are certainly not looking for a battle with the Chinese.

So my argument is that the Vietnamese/Chinese relationship is qualitatively different from the Chinese/Japanese relationship at this point in time, because one is a ground conflict between two countries and borders, and the other is a naval conflict that neither is in a position to engage in.

ETF.com: Are you optimistic about Vietnam’s economic growth prospects?

Friedman: Vietnam has had a growth spurt. If it’s unlucky, it’ll grow like China and wind up in an impossible situation. If it’s lucky, it’ll slow down, consolidate, have a business cycle, cull the inefficient businesses and move forward. So my view of potential growth is that it’s probably the worst thing a country can have, because eventually, as with Japan in 1991, that ends, and ends badly.

So my argument is that Vietnam should have a cyclical downturn; it’s probably having one. But there are other countries emerging in Southeast Asia—including Laos, Cambodia, Myanmar, the eastern parts of southeast Asia, the Philippines—that are also due, at least some of them, to have a growth spurt.

Ecologically, there are only so many low-wage, high-growth countries that can fit into the box. Vietnam may not have made as much of its growth spurt as it could have—I rather think it has—but it could also wind up in a much more crowded atmosphere.

ETF.com: Of those Southeast Asian countries, Laos and Cambodia still only have a handful of securities listed on their exchanges. Myanmar is currently working on creating a stock exchange. Are there any investable markets in Southeast Asia in which you share that same optimism?

Friedman: First of all, all these markets are sketchy in some ways, including the Chinese, I might add. These are debt-driven, not equity-driven economies. That is, if you want to start a business, you don’t normally go do an IPO; you normally go to a bank and do a financing and the bank president sits on your board, and so on.

Looking at these countries’ level of economic development in terms of the viability of the equities market is kind of a mismatch. Their equity market grows far later than their economies do.

So what you do here is, when you make investments, you can’t treat it as a Western equity-driven country. You go in—as many have done very successfully—and you actually invest in various projects and companies. It’s a direct investment play at this point. Most Western investors aren’t comfortable doing that, so they miss on the first major growth spurt—except for those who do make this investment; they come out quite happy to have participated.

So in these countries in Asia, given their structure, the very fact that they’re beginning to grow but there’s no equity market is the opportunity. But it’s a harder opportunity to take.

ETF.com: What do you make of Abe and his political agenda? Will his attempts to rewrite Article 9 of the Constitution and rebuild Japan’s military, hinder alliances in the region, possibly affecting the country’s growth?

Friedman: Japan is the third-largest economy in Asia, if you buy the Chinese numbers. It is also a country, unlike China, without a billion impoverished people. It’s highly unified. It has disregarded Article 9 of the Constitution for decades, having a military of substantial size, having a naval force and an air force, designating it all as a Self Defense Force and twisting it.

So Japan is already a major power, and I would argue that in East Asia, it is a far more significant major power than China, because the Chinese military, the armed ground forces—the People’s Revolutionary Army—is primarily a domestic security force, not a conventional army. Its naval power is emerging, but has not yet reached a point where it could challenge the United States, and I think would have a great deal of trouble challenging the Japanese.

Abe is not an ultranationalist, he’s a nationalist. He is coming out, as was inevitable, as unabashedly acting in the interests of Japan. Now, the Japanese always acted in the interests of Japan; they just had a little pretense that they had no national interests. But they did; everybody in Asia knew they did, and they worked in tandem with the United States.

The important question is not whether Japan is a great power; it is. Or whether it has national interests; it does. It’s about what its relationship to the United States is. Japan has chosen to shape its strategic outlook for close to 70 years based on alignment with the United States. The question to ask about Abe is, Is he prepared to simply continue this alignment, or is Japan going to go out on its own?

I think the answer is that he’s certainly not going to dramatically shift that alignment, but he is going to make clear his alignment between two equal nations—at least in principle—and that on occasion, it will pursue its own interests independent of the United States. So it’s simply an obvious thing happening. What else would the third-largest power country in the world do but act like the third-largest country?

ETF.com: Moving on to India, Indian equities have been surging for the past six months in anticipation of a BJP/Modi win. Now that he’s prime minister, have the markets gotten ahead of themselves with regard to what Modi can accomplish at the national level?

Friedman: Oh, way ahead of themselves. The markets excited themselves over Modi without realizing that in the end, as prime minister, there are limits to what he can do. First, the national government is surrounded by these states that have tremendous influence on what can be done. Second, the Indian bureaucracy is enormously inefficient, and simply shouting orders at a ship that doesn’t hear you doesn’t do much.

He said all the things that the markets wanted to hear. Markets have a strange belief that the nature of the leader can magically transform a country. There are institutional realities in India that cannot easily be overcome. Now that he’s in office, disappointment will come in very quickly.

ETF.com: Fracking and new extraction methods have unexpectedly tilted the world’s energy riches toward the U/S/ and away from the Middle East. How will this shift affect geopolitics in the coming years, and what is your view on the price of oil in the coming years?

Friedman: It’s changed the geometry of supply and demand dramatically. At the time that Europe and China are slowing and new powers have not emerged, the United States has come on the market with a source of energy nobody calculated. As that technology spreads to other countries, you will also see even more energy being produced.

There are legal limitations in some places, environmental limitations. But in the end, this technology is going to change things. It is very difficult for me to see how the price of oil is maintained at current levels. But it’s hard for me to see why they’re contained there at current levels in the first place. That shows the limits of my knowledge; I don’t pretend to be an oil trader.

But it seems to me that the pressures—particularly if the United States starts to legalize exports, which I suspect it will—that these structural shifts are going to create a very different dynamic for 20 or 30 years in energy.

ETF.com: Looking out into the coming decade, what region or country are you most optimistic about economically?

Friedman: The United States. The United States, unlike Europe, is not fragmented into tiny pieces. Unlike China, it isn’t suffering with a billion impoverished people. I see some lesser countries emerging—Poland, Turkey. I see Japan, which has done remarkably well over the past 20 years in maintaining its status as a major economic power, all of which are attractive.

But far and away, the most attractive remains the United States. It has a low population density. It has a great deal of land available. It has all the things that you’d want to see geopolitically in a country rising.

ETF.com: How does Turkey look at the moment? Is it out of the woods politically, and can it now move ahead with reforms?

Friedman: They don’t have to move onto reforms; they’ve done extremely well in the past 10 years without those reforms. They had some riots. Other countries have riots; the United States had riots in the 1960s and ’70s. There’s a tendency to see every large-scale demonstration in the country as being a major upheaval. What’s interesting is how meekly they contained it and moved on. So having just been in Turkey, this country has maintained an extraordinary growth rate, aside from 2009. It’s not an accident.

ETF.com: Thanks for your time.

ETF.com INSIGHTS
Vanguard Total Stock Market (VTI | A-100)
Looking out over the coming decade, Friedman still finds the U.S. more attractive—economically and geopolitically—than any other country on the planet. While he gives no opinion on current U.S. stock valuations, for a cheap and efficient long-term bet on the U.S. economy, it doesn’t get any better than VTI. Holding more than 3,500 companies of all sizes, the cap-weighted VTI delivers total market coverage of U.S. equities at a shockingly low 0.05% cost. Even better, the fund has phenomenal tracking history, with little to no slippage from its index, making it practically free to hold the fund. Trading more than $170 million at pennywide spreads daily, VTI is the poster child for what makes ETFs such an efficient, long-term investment vehicle.
iShares MSCI Turkey (TUR | B-99)
Friedman sees Turkey as a country well positioned for growth. For the past decade, it has been growing at a phenomenal rate—the country went from a 2002 GDP of $196 billion to a 2013 GDP of $789 billion. In regard to Turkey’s tremendous growth, Friedman notes, “It’s not an accident”—suggesting that the country has a political and economic foundation built for growth. To access this growth theme, consider TUR, which tracks a market-cap-weighted index of more than 80 Turkish companies. If Friedman proves correct about the country’s growth prospects, its equities are selling at a discount—TUR’s 11.09 P/E is a fraction of the richer valuations seen in some emerging markets.
ETF.com Alpha Think Tank ETF Tracker
Methodology: ETF selections are made solely by ETF.com. They are neither selected by, nor are they investment recommendations from, Alpha Think Tank strategists. ETF selections are made by the ETF.com Analytics team based on the themes highlighted in each weekly interview with Alpha Think Tank strategists.We implement a stop-loss of 10% from the ETF.com Pick Date, whereby any funds triggered by that stop will drop off the tracker. The tracker data is updated weekly and is subject to change, according to our ongoing interviews with our strategists.
Ticker Fund Name ETF.com
Pick Date
TR %
(Since Pick Date)
TR %
(1 Yr)
Closing Price $ (6/12/14) Inspired By
INDA iShares MSCI India 2/24/14 25.11 29.11 30.24 Roubini
EWI iShares MSCI Italy Capped 1/27/14 15.28 44.01 17.96 Luskin
EWP iShares MSCI Spain Capped 1/27/14 15.22 49.81 43.46 Luskin
EWW iShares MSCI Mexico Capped 3/3/14 13.76 7.68 67.69 Friedman
CCXE WisdomTree Commodity Country Equity 3/14/14 12.94 17.22 32.49 Schiff
PXH PowerShares FTSE RAFI Emerging Markets 2/17/14 12.33 12.95 21.56 Arnott
AMU ETRACS Alerian MLP ETN 1/27/14 12.05 18.93 31.52 Luskin
INDA iShares MSCI India 4/9/14 11.67 29.11 30.24 Kotok
EWP iShares MSCI Spain Capped 2/24/14 9.11 49.81 43.46 Roubini
EWY iShares MSCI South Korea Capped 2/24/14 7.92 20.59 65 Roubini
GXC SPDR S&P China 2/3/14 7.91 14.61 75.03 Rogers
RSX Market Vectors Russia 2/3/14 7.70 10.15 26.29 Rogers
EWW iShares MSCI Mexico Capped 2/11/14 7.16 7.68 67.69 Fitzsimmons
EWP iShares MSCI Spain Capped 3/10/14 7.12 49.81 43.46 Dorsey
ELD WisdomTree Emerging Markets Local Debt 2/17/14 6.15 0.47 47.26 Arnott
EPOL iShares MSCI Poland Capped 3/3/14 5.86 14.90 30.52 Friedman
IEMG iShares Core MSCI Emerging Markets 4/28/14 5.62 13.27 52.1 Luskin
GULF WisdomTree Middle East Dividend 3/10/14 5.61 31.26 23.07 Dorsey
VCLT Vanguard Long-Term Corporate Bond 3/17/14 5.25 8.90 89.28 Yardeni
NKY Maxis Nikkei 225 2/3/14 4.95 9.15 17.39 Rogers
FXA CurrencyShares Australian Dollar 3/14/14 4.83 1.35 94.27 Schiff
MCHI iShares MSCI China 4/15/14 4.58 12.03 46.79 Faber
GMF SPDR S&P Emerging Asia Pacific 4/9/14 4.19 14.94 82.455 Kotok
EWJ iShares MSCI Japan 3/3/14 3.79 8.74 11.77 Friedman
VTI Vanguard Total Stock Market 4/28/14 3.72 22.74 100.29 Luskin
RSP Guggenheim S&P 500 Equal Weight 3/10/14 3.10 24.65 75.36 Dorsey
BKF iShares MSCI BRIC 5/22/14 2.76 12.93 39.09 Arnott
BAB PowerShares Build America Bond 4/9/14 2.63 7.24 29.3 Kotok
FXC CurrencyShares Canadian Dollar Trust 3/14/14 2.28 -5.69 91.6 Schiff
ERUS iShares MSCI Russia Capped 5/22/14 2.23 7.15 20.16 Arnott
GDX Market Vectors Gold Miners 3/31/14 1.80 -14.44 24.03 Merk
DBGR db X-trackers MSCI Germany Hedged Equity 2/24/14 1.70 21.72 26.58 Roubini
EWS iShares MSCI Singapore 5/5/14 1.47 10.32 13.81 Bremmer
FXY CurrencyShares Japanese Yen Trust 3/31/14 1.46 -5.94 95.91 Merk
DBC PowerShares DB Commodity Tracking 3/14/14 1.38 1.42 26.39 Schiff
EWH iShares MSCI Hong Kong 4/15/14 1.34 15.94 21.1 Faber
DBC PowerShares DB Commodity Tracking 3/31/14 1.03 1.42 26.39 Merk
DBB PowerShares DB Base Metals 5/8/14 1.01 -4.57 16.08 Gartman
XLU Utilities Select SPDR 4/9/14 0.93 17.68 42.28 Kotok
SCPB SPDR Barclays Short Term Corporate Bond 3/17/14 0.41 1.57 30.79 Yardeni
ITA iShares U.S. Aerospace & Defense 5/5/14 0.34 39.41 110.72 Bremmer
KOL Market Vectors Coal 5/8/14 -0.11 -0.86 18.5 Gartman
USDU WisdomTree Bloomberg US Dollar Bullish 4/15/14 -0.12 N/A 24.771 Faber
VNM Market Vectors Vietnam 4/15/14 -0.17 5.58 20.7 Faber
ROBO Robo-Stox Global Robotics and Automation 3/3/14 -0.18 N/A 26.91 Friedman
AFK Market Vectors Africa 5/5/14 -0.79 18.15 32.86 Bremmer
CHIQ Global X China Consumer 3/17/14 -1.40 2.41 14.04 Yardeni
FXE CurrencyShares Euro 3/31/14 -1.58 1.37 133.88 Merk
XRT SPDR S&P Retail 3/17/14 -1.99 10.71 84.41 Yardeni
EIDO iShares MSCI Indonesia 5/28/14 -3.82 -8.51 27.22 Fitzsimmons
CHIQ Global X China Consumer 2/11/14 -5.20 2.41 14.04 Fitzsimmons
PEJ PowerShares Dynamic Leisure and Entertainment 3/17/14 -5.98 19.66 33.19 Yardeni
IAU iShares Gold Trust 3/14/14 -7.84 -8.45 12.35 Schiff
Data as of 6/12/14
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