The antidote for global cynicism

The antidote for global cynicism

One of the world’s most highly regarded investment strategists, Kiril Sokoloff is CEO of 13D Research, an independent investment strategy firm….


One of the world’s most highly regarded investment strategists, Kiril Sokoloff is CEO of 13D Research, an independent investment strategy firm. He is also the author of What I Learned This Week (WILTW), an investment newsletter with a global readership of more than 100,000 and considered top-priority reading at the most significant professional investment houses. Sokoloff has been involved in every aspect of finance, from commercial to investment banking and hedge fund management, to commodity and currency trading, venture capital and private equity. He has been an advisor to many of the largest pools of global capital for more than 30 years. I recently caught up with Sokoloff in Geneva, Switzerland—not an easy matter, as he divides his time between residences in Lugano, London, Hong Kong, Nassau and Rio de Janeiro. He spoke to us about the tectonic shifts that are happening in Asia, the Middle East, Russia and Europe, particularly in the area of sovereign debt defaults. Among other topics, he reflected on the Occupy Wall Street movement and the disaffected youth throughout the world, and the role of boards and CEOs and what they must do to win back trust from the societies they serve. Finally, he pronounced the end of the old American dream and the rise of a new dream with far-flung global policy implications.

Is Occupy Wall Street a passing fad, or does it suggest something larger happening in the public arena?

A group of 20- to 30-year-olds in various places of the world were interviewed by the International Herald Tribune, which quoted one person as saying, “We’ve just given up on trying to use our votes, it just doesn’t make sense.” If you have a whole swath of the population not believing in democracy anymore, it can lead to the failure of democracy. This is very serious, very dangerous for stability and global economic growth.

What do you think is behind these vague misgivings?

In June 2007, I coined the expression “inhuman volatility.” My thinking was that we were going to have an inflationary shock and that governments would try to deal with it and disrupt markets. Then came the financial crisis, and it was clear it would lead to a sovereign debt crisis. As governments tried to navigate these several orbits, capital flowed from country to country and place to place, leading to debilitating volatility, great disparities in regions and countries. Closer to home, despite America’s great resources and global dominance, it has had a trade deficit for 30 years, a fiscal deficit for 40 years, and a foreign oil dependency since the 1970s. The inability to solve these issues is not due to a lack of possible solutions; it’s just that the system doesn’t allow it to get fixed. The average American looks at this and is enormously frustrated, and the average European looks at the ongoing crisis with Greece, Spain, Italy and Portugal, and is equally frustrated. So it’s a lack of execution by governments that’s causing mass frustration, and the risk is that democracy itself is not working.

Does that negative sentiment run counter to the Arab Spring in the Middle East? Does the U.S. end up a winner there?

Our historian, Dr. Rufus Fears, who happens to be the David Ross Boyd Professor of Classics at the University of Oklahoma, tells me that what we are seeing is classic Middle Eastern politics—first they rebel and then they exchange one autocrat for another. So the Arab Spring, in his view, is a nonevent. I think the danger for America, as occurred with the Shah of Iran, is that there is a perception that America is not supporting its friends. I find it hard to see that this could be a positive development for America. If I were running Saudi Arabia, I’d be looking around for new friends.

When you examine the role of Pakistan and the troubles we’ve been having, what are the implications for the U.S.?

One way of looking at this is the Metternich perspective of the 19th century and the balance-of-power issue in Europe. On one hand, you have the rise of China, which creates insecurity among other nations. When I visited Far East Russia in 2002, to study whether it could solve China’s land and water issues, I found on the Chinese border tens of millions of unemployed, and on the Russian border— which is equal to the size of China and was in fact once part of China—fertile black soil and huge amounts of water. China could joint venture with Russia in developing this area or gradually move in on its own. This vulnerability of Far East Russia is one reason why relations between Russia and America are improving. On the subcontinent, there’s no question that it’s a smart strategic move on the part of China to support Pakistan, and I think that makes India and America natural allies. When you look at non-China Asia, while they are trading more and more with China, they want an American presence in the Pacific for balance-of-power reasons.

America veers between global and isolationist foreign policy. Which will serve us best in this environment?

In the new biography of George Washington, it was clear the nation’s first president was totally against any overseas military involvement. There was a great desire by many leading Americans to get involved in the Napoleonic wars at the time and Washington squashed that. America did best when it was not intervening. Of course, when America became isolationist in the 1930s, Stalin and Hitler came to power. So I think American foreign policy has to be delicately balanced and never isolationist. One idea that needs greater debate is the concept that everyone wants freedom. Again, our historian, Dr. Fears, points out that much of the world didn’t grow up in a world of freedom and doesn’t really care about it. The Middle East doesn’t, China doesn’t, so when we’re insisting on human rights and freedoms, we’re pushing a dogma that is antagonizing many people and countries.

Do you see the European Union solving its problems through fiscal discipline, or will it take the international banking sector and a big stick to fix things?

The problems with the euro were well known at its founding in 1999. Those of us who discussed it then foresaw this problem of disparity—what if one country is growing too fast and what if one country is growing too slow and you have the same monetary policy? I think that it’s very important to remember why the EU was founded. Europe had had 2,000 years of wars. Two horrific wars in the last century, which destroyed the European empires and can only be described as a mass suicide. So the euro was an attempt to bring Europe together. There is more than just economics and politics at stake here. One client suggested to me that Greece and Portugal will leave the euro, and Italy, which has basically been ungovernable for hundreds of years, could live with oversight from EU institutions. Ultimately, the [European Central Bank] will have to buy large quantities of EU government bonds.

How do you feel about American corporate governance, and is our tendency to over-regulate the result of mistrust of business? What should boards be doing differently?

I don’t want to sound like I am giving moral advice, but I have to start with the counsel I would give CEOs and their boards: we live in an atmosphere of extreme cynicism, surrounded by evidence of gross deception and a lot of betrayals and fraud. The antidote is to be consistently, reliably, unwaveringly honest in all communication. When your entire reputation as well as compensation are based on performance, there is a great temptation to spin….You want your stock to go up, you want attention, so you promise a lot. And if you disappoint or step over the line, the cycle of cynicism sets in—more regulation, more investigations and more negative confirmation. It’s better to promise less and deliver more consistently. When a promise is made, whoever the spokesperson is, that promise must be kept. And don’t make promises that can’t be kept, and don’t promise so much that expectations are raised too high. And if circumstances change, then you immediately need to communicate it. One reason Lee Kuan Yew of Singapore was so successful in winning people’s confidence was that you always knew that he would tell you the truth. A blunt truth maybe, but always the truth.

What are your thoughts on the Internet valuations of companies like Facebook?

I have studied social networking as an amateur for years. With no disrespect for the founders of these networks and the hundreds of millions of people who derive pleasure from them, there are negative consequences from their use, in my opinion. Social networking teaches you to multitask and focus on sound bites. It makes you an addict to distraction, but it’s not teaching anybody how to analyze, how to think. I would liken it to learning a street patois, and then finding you need a more formal expression once you get into business and the greater society. For that reason, I think as the young people age and they find they need to make important and significant decisions, they’re not going to get help from Facebook, and they will find they’re going to have to develop the analytical capabilities they lack.

The question about American exceptionalism came up at the end of the Bush administration. Is that still a worthy goal?

I think that America needs to retrench and look internally again and solve its own problems, rather than venture into the world to try and make the world a better place. This came home to me when I was traveling with my wife during the financial crisis—literally traveling for 40 straight days around the world, meeting with people in India, the Middle East, China and Asia. It came to me that one of the most lasting things that was to happen from this crisis was a withdrawal of American military power due to strained finances. America spends too much on its military presence all over the world. As America withdraws, what may follow will be a vacuum, and we have no idea what will fill that vacuum.

Is the American dream achievable for today’s younger generation?

One of the most important economic data points to me is that the real American wage has been flat since 1969. It’s a terrible thing and, of course, this exacerbated the wealth divide. In many ways, this was a cause of the housing crisis, because people weren’t creating any real wealth to maintain their standard of living and they took out home equity loans to keep up financially. Certainly, there was a lot of speculation, but there also was a lot of economic need. So outsourcing had a part in this, and I was very in favor of outsourcing and downsizing in the 1980s and 1990s, but since then I’ve done a revamp on my thinking. America would have been better off to take an area where it could maintain dominance or could create dominance—like Germany has done—and create a fabulous export market in niche products where there is no real competitor. Was it a mistake to sacrifice our manufacturing heartland to lower our costs? I don’t know what different people will say on that, but had we not done that, we would have had a much higher wage and we wouldn’t have this chronic unemployment that we now have and families who haven’t had any sort of real standard- of-living increase. So, to come around to your direct question, until we change that, I do think that the old American dream is dead, and part of that, of course, was rising expectations, and that was a wonderful thing when it started. The expression “rising expectations” probably began somewhere in the ’40s or ’50s. There was a desire after the Depression and World War II to spend, to borrow and buy. It had been so long and so hard with the Depression and the war, so it was a good thing that there were rising expectations. What has happened is that Americans’ expectations have gone way beyond what reality is, and there has to be a retrenchment—and, of course, this is what a lot of the political impasse and disunity is about. No one wants to give up their entitlements, no one wants to have their taxes raised, and no one thinks that pension benefits should be reduced. So the new American dream may depend on whether America wants to be the center of the most exciting innovations in the world. Peter Brimelow, who has written about social and business issues for Forbes, published a book in the 1990s called Alien Nation about how immigration had changed from where the best and the brightest were welcome in America to only those who had a relative already here. And if you contrast that with what Singapore did, which was to focus only on excellence, America should attract the best and brightest from the world, bring them here and incentivize them to stay here. They will create the jobs, they will create the new businesses, they will create the new industries, and it doesn’t necessarily mean that it’s going to be taking away jobs from Americans, it means getting jobs for everybody. So my idea is, any way you can, get the best and brightest here. The question we should be asking ourselves is, what will change the world? That’s what we should be focused on in America, and investing in both human capital and our enormous resources. America has been a courageous force in the world, and I fear that America is losing that and somehow must get it back. I believe America can be the modern version of Florence or Athens, a country of enlightenment and learning. I have thought about it almost my entire adult life, and my conclusion is that everybody has this incredible human talent that remains dormant until you’re in a place like Florence in the 15th century, where everybody is an artistic genius, and that unleashes this enormous potential of the human spirit. So what we need is someone who knows how to unleash that, because it’s still here in America, we just need the will and capability along with the power of ideas that will unleash it.