Cumberland Advisors Market Commentary –  Defense Expenditures

Most Americans have never heard of the Stockholm International Peace Research Institute, www.sipri.org. A few minutes surfing their website might just inspire you to add it to your list of independent research sources.

Market Commentary - Cumberland Advisors - Defense Expenditures

You can check out the role of the military in Venezuela and how it is supporting Maduro as a result of the financial support the military has enjoyed. This mutually beneficial relationship helps to explain the difficulty of regime change in that country.

One can also check out many other informative research pieces.

Try the report “Trends in World Military Expenditure, 2018” (https://www.sipri.org/publications/2019/sipri-fact-sheets/trends-world-military-expenditure-2018). Take a look at Table 1 on page two for a summary of the 40 highest military expenditures, listed by country. The US tops the list. China is second. The economic data in this report helps to identify some macro themes. Worldwide military spending is estimated at about 2.1% of global output (GDP). America accounts for more than one-third of the world’s military expenditures. France spends more than Germany does. South Korea spends more than Brazil or Italy or Australia or Canada does. Macro data helps put things into perspective when that data is combined with geography.

One takeaway for us is critical.

We know the world is a dangerous place, and it seems that it is becoming more so. Traditional diplomacy seems to be failing. The latest North Korean missile firing is an example of this failure as Dictator Kim has demonstrated after two summits with President Trump. Let me be clear. Kim is a really bad guy. This next comment is about tactics and strategies and not in any way offered to protect or defend a strongman/dictator. Whether its Kim or Maduro or others, ruthless despotic dictators are the enemy, always and every time.

Note that a physical “walking out” of a meeting can occur only once in diplomacy and then the rules of engagement are forever changed. Ending a meeting without a joint statement used to be the way to message the world and the other side about discontent. No dictator/strongman leader can tolerate a direct insult since it raises risk to him from those at his home government who want to remove him or kill him. This is particularly so with dictators and strongmen who do not need to face elections.

So all the negotiations needed to deal with dictators and strongmen have now changed. The second summit with Kim was a victim of a real estate negotiating tactic. I’ve seen that tactic personally and used it on occasion. Negotiations can be tough and hard. So, you get up in the middle of a meeting to send a message that you are serious. You walk out. You also leave a channel open to resume if that is what you want to do. But in a business transaction, you do not have to proceed. That is why merger talks and transactional negotiations get broken off and then resumed.

In diplomacy, the reopening of a negotiation can happen but the methods used now have to be changed. The change occurs in the back channels and we do not see them in the public domain.

One side cannot take any risk or insult by the other side. Once you walk out the first time, you need to rewrite the rules. Unlike a real estate transaction, the “walking out” card can be played only one time. We shall see how the US deals with that principle in its global geopolitics. Negotiations between Trump and Xi are now subject to these new rules. The world’s two largest economies are also the world’s two largest military expenditures listed in the SIPRI report.

Meanwhile, the aggregate of military expenditures worldwide is heading higher and doing so from a record level.

We also know that the technology of war is intensifying at lightning speed. Check out: https://www.sipri.org/media/press-release/2019/emerging-technologies-pose-challenges-control-biological-weapons-new-sipri-report . Destructive capacity grows and is now expanded into the cyber realm. Here is another report to digest: https://www.sipri.org/research/armament-and-disarmament/emerging-military-and-security-technologies/cybersecurity . Nothing appears on the horizon to stem this accelerating trend.

At Cumberland, we continue to hold the defense sector ETF in our US ETF accounts. We rebalance it on weakness.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


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Venezuela Poses Health Risk in the Americas

The economic and political dimensions of Venezuela’s collapse have dominated headlines, but the country is also being undermined by a healthcare crisis that could spread to all of Latin America. The situation in Venezuela demonstrates how failed government and economic collapse can lead to the unchecked spread of infectious disease, creating headaches across a region and beyond.

Bandera_de_Venezuela_en_el_Waraira_Repano by Jonathan Alvarez C

In a report published in the journal Lancet Infectious Diseases, lead author Dr. Martin Llewellyn of the University of Glasgow and colleagues size up the problem:

“The re-emergence of diseases such as malaria in Venezuela has set in place an epidemic of unprecedented proportions, not only in the country but across the whole region….

“Based on the data we have collected we would urge national, regional and global authorities to take immediate action to address these worsening epidemics and prevent their expansion beyond Venezuelan borders….

“These diseases have already extended into neighboring Brazil and Colombia, and with increasing air travel and human migration, most of the Latin American and Caribbean region (as well as some US cities hosting the Venezuelan diaspora, including Miami and Houston) is at heightened risk for disease re-emergence.”

Malaria is the leading disease threat, but cases of Chagas disease and dengue fever have also risen drastically in Venezuela and the surrounding region in recent years. There is also the potential for epidemics of Chikungunya and Zika, the report’s authors say. In 2014 there were an estimated 2 million suspected cases of chikungunya in Venezuela, more than 12 times the official estimate.

Chagas disease is a leading cause of heart failure in regions where it occurs, and malaria and dengue can lead to death if left untreated. Zika can cause health complications such as nerve damage and spinal cord inflammation. During pregnancy, it can cause congenital abnormalities in the developing fetus. The most recent study estimated that there now over 2,000 cases of Zika virus per 100,000 people in Venezuela (2% of the population). (Source: “Life-threatening, insect-borne diseases spike in Venezuela, report says,” ABC News, Feb. 21, 2019,” https://www.nbcnews.com/news/latino/life-threatening-insect-borne-diseases-spike-venezuela-report-says-n974216)

(For the recommendations of the Centers for Disease Control and Prevention (CDC) on travel to Venezuela, see “Health Infrastructure Breakdown in Venezuela, https://wwwnc.cdc.gov/travel/notices/warning/health-infrastructure-breakdown-venezuela.)

The Llewellyn report also conveys a sense of the desperate lengths to which the failed Maduro government will go to stifle efforts to right the situation in the country:

“Venezuelan clinicians involved in this study have also been threatened with jail, while laboratories have been robbed by militias, hard drives removed from computers, microscopes and other medical equipment smashed.”

Venezuela used to be one of the wealthiest nations in Latin America and was a leader in the public-health arena – so much so that in 1961 the World Health Organization certified it as the first country to eradicate malaria.

However, from 2010 to 2015, cases of malaria rose by 359%, from 29,736 to 136,402. By the close of 2017 they had grown to 411,586, as mosquito control efforts went by the wayside, a shortage of antimalarial drugs became chronic, and there was a mass exodus of healthcare workers from the country. (Source: “Venezuela crisis threatens disease epidemic across continent – experts,” The Guardian, Feb. 21, 2019, https://www.theguardian.com/global-development/2019/feb/21/venezuela-crisis-threatens-disease-epidemic-across-continent-experts)

The malaria outbreak is a sobering example of how political and economic dislocation can trigger a public-health crisis. As the Venezuelan economy collapsed, people flocked to the region near the southern border with Brazil, in order to dig for gold in wildcat mines. Unfortunately, pockets of malaria had survived in the jungle there, despite its official elimination nationwide.

The mining camps, with their pits of stagnant water, were an ideal breeding ground for mosquitos, and malaria soon ran rampant at many of the mines. And because work in the mines was transitory, workers returned home with malaria, and wide areas of the country were reinfected with malaria.

If you’d like to read my personal accounts investigating the spread and threat of the Zika virus which includes visits to Cuba and Argentina’s three-country border region of Argentina, Brazil, and Paraguay, please download the the free monograph pamphlet, “Zika,” here: https://www.cumber.com/zika/

The Llewellyn report concludes with this call to action:

“We call on the members of the Organisation of American States and other international political bodies to apply more pressure to the Venezuelan government to accept the humanitarian assistance offered by the international community in order to strengthen the buckling health system. Without such efforts, the public health gains achieved over the past 18 years could soon be reversed.”

We still don’t know whether the Maduro government, with its military and bureaucratic backing, will continue to cling to power and take the country deeper into chaos, or whether Juan Guaidó, leader of the democratically elected National Assembly and “interim president,” will prevail. For a good backgrounder on the crisis in Venezuela and the options available to the international community to address it, read or view the testimony of Marcela Escobari, senior fellow of the Brookings Institute Center for Universal Education, before the US House of Representatives Committee on Foreign Affairs on Feb. 26, 2018, available here: https://www.brookings.edu/testimonies/made-by-maduro-the-humanitarian-crisis-in-venezuela-and-us-policy-responses/.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cuba-Venezuela-Maduro

Bandera_de_Venezuela_en_el_Waraira_Repano by Jonathan Alvarez C

This video below is a 1 minute clip of the border of Venezuela in case you missed it. We originally discovered the clip at the Guardian’s website: https://www.theguardian.com/world/2019/feb/23/venezuela-border-latest-maduro-guaido


 

“Maduro is holding on to power through corruption, blackmail, ruthless repression – and assistance from other states. Cuban advisors have micromanaged the destruction of the private economy and creation of a police state backed by armed gangs. Russian weapons and Chinese financing bolster the regime’s anti-democratic agenda. Colombian narco-terrorists and Hezbollah operate in Venezuela with the regime’s complicity.” (https://www.aei.org/publication/trump-is-getting-it-right-on-venezuela-in-fact-he-needs-to-double-down/)

Most observers believe Maduro’s dictatorship collapses soon. Millions of Venezuelan expatriates eagerly hope for his demise. Millions in the country starve or face military oppression and death. For a brief history of popular opposition to Maduro in the years 2014 to present, see https://en.wikipedia.org/wiki/Venezuelan_protests_(2014%E2%80%93present).

Attempted theft of national treasures and central bank gold by Maduro’s thugs has been underway. This plundering has been gradually stymied by a growing alliance of countries like the members of the Lima Group. (See https://www.miamiherald.com/news/nation-world/world/americas/venezuela/article223932475.html.)

US policy is clearly focused on full regime change. On the Maduro issue, most people support the policy decision of the Trump administration. I’m one of those.

What worries me most is the new Cuban government under president Miguel Díaz-Canel. The newer generation in Havana wants to open up and develop peaceful economic and social exchanges with Americans. I’ve seen this with my own eyes on two trips to Cuba. The younger, welcoming Cuban entrepreneurs carefully avoid clashing with their Castro-era elders. Those younger folks are vibrant, multilingual, friendly, and vigilant. I’ve met hundreds of them. I like the folks I’ve met in Cuba, and not just in Havana but also in other, smaller cities and the countryside.

So what lies ahead for Cuba is very dependent now on decisions made at the top of the Cuban government. On the negative side, a Cuban alliance with Maduro is devastating for Cuba. If they give him asylum, it gets worse. If they continue to support him, the consequences also worsen.

Can Cuban leaders bring themselves to cut the Maduro link and abandon his dictatorship? They don’t have to abandon the Cuba-Venezuela country-to-country alliance. It is the snake at the top in Venezuela who will see his own head cut off. Cuba can leave the snake alone.

If it does, strong pro-Cuba support will come from those Americans who promote peaceful opening up of relations with Cubans and the new government. But if that government continues to stand with Maduro, it invites the wrath of the Lima Group, and the leadership of the anti-Cuba movement will start in Washington and be enhanced in Miami by the old-guard Rubio-led political forces. (See https://www.miamiherald.com/news/nation-world/world/americas/venezuela/article223932475.html.

So what will it be? Either Cuba has a wake-up call and quits Maduro and 11 million Cubans benefit while Cuba-US relations can thaw and flourish, or Cuba stays with Maduro and condemns itself to another “special period” akin to what happened when Soviet support for Cuba collapsed. (See https://en.wikipedia.org/wiki/Special_Periodakin.)

The choice is in Havana’s hands. Time is fleeting.

For an excellent photo essay about the recent Global Interdependence Center (GIC) delegation’s visit to Cuba, see this link and appreciate the marvelous efforts of Barry Shapiro: https://www.interdependence.org/blog/global-interdependence-center-havana-cuba-initiative/. See also GIC Executive Director Jill Fornito’s account of our visit: https://www.interdependence.org/blog/mi-casa-es-su-casa-exploring-havanas-paladares/.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Venezuela Implodes, Neighbors Suffer

Last week Venezuela devalued its currency, the bolivar, by 95%, cutting five zeros off the exchange rate. This measure was a desperate response to hyperinflation that reached an astonishing rate of 83,000% YoY in July, with prices doubling every 26 days.

Bandera_de_Venezuela_en_el_Waraira_Repano by Jonathan Alvarez C

The IMF has projected the rate could reach one million percent this year. Cash transactions had become almost impossible, with even restaurant tips being done as bank transfers. The new currency, the “sovereign bolivar,” is linked to the petro, a state-run cryptocurrency that can be manipulated. In other words there is no constraint on the ability of the government to issue this cryptocurrency and print further sovereign bolivars.

Despite Venezuela’s having the world’s largest proven oil reserves, the country’s economy is in a shambles due to the mismanagement since 1999 by the socialist governments of Presidents Hugo Chavez and Nicolás Maduro. The economy dropped by more than a third since 2013 and is now in freefall. Unwise price controls and exchange controls had unintended consequences. Expropriations, corruption, and serious mismanagement of the state-owned oil company further depressed the economy. The government goes on printing money, and the budget deficit now exceeds 30% of GDP. A further increase in the minimum wage to 34 times its previous level, another element of the government’s “magic formula” to counter the economy’s dire state, will likely add to that deficit, since the government will cover the greatly increased cost to private firms for 90 days.  Government borrowing to fill the financing gap has led to the issuance of some $60 billion in sovereign bonds and perhaps double that amount in loans.

Life in the country has become difficult, unbearable for many, with 2.3 million of the country’s population of 31.3 million leaving the country since 2014. There are major shortages of food, and child malnutrition is at a record high. In some cities there are water shortages and power cuts, which have been particularly hard for public hospitals, which also face serious shortages of medicine. It is not surprising that Venezuelans are voting with their feet.

The Venezuelan exodus, estimated to be one of the largest forced displacements ever in the Western Hemisphere, is creating increasingly difficult problems for Venezuela’s neighbors, Colombia, Ecuador, Peru, Chile, and Brazil. The first waves of migrants were largely middle class and met no resistance in the neighboring countries, which generally have relaxed immigration policies and governments that saw these migrants as a welcome rebuke to the Maduro regime. However, the flows have surged, and the more recent migrants have tended to be poor. Many exhaust their limited resources as they flee, and they often arrive on foot. Tensions have risen in Brazil, which had been handling the influx well, with some attacks by locals on migrant border camps, leading to extra security forces being sent to the border. Brazilian authorities indicate they have no intention of closing the border.

Both Ecuador and Peru will soon require Venezuelans who wish to enter their countries to have passports. Reportedly, getting a Venezuelan passport can take two years unless a substantial bribe is paid. Most migrants entering Ecuador have been heading to Peru, where the recent influx of Venezuelans has been 5000 a day. In contrast, Colombia continues to welcome Venezuelan migrants, recalling that Venezuela took in more than 700,000 Colombians during that country’s war with FARC guerrillas. In 2017 Colombia was the destination for 600,000 Venezuelan migrants, by far the largest volume among South American destinations. It is notable that the second largest number, 290,224, was taken in not by another South American country but by the United States.

The economic costs to neighboring countries of these inflows of migrants seem to be manageable. However, as the flows continue to increase, which seems likely, tensions could well increase, and the risk of political instability could grow. Rising risks would have negative effects on the region’s economies, raising investors’ concerns.

The economic situation in Venezuela does not look likely to improve under the present government’s policies. While the devaluation was inevitable, major changes in course are needed, including freeing up price controls, adopting responsible fiscal policies, and probably moving to a currency board or accepting dollarization, following the examples of Zimbabwe and Ecuador. Dealing with the external debt problem would require negotiating an adjustment agreement with the IMF and restructuring that debt. President Maduro appears unlikely to take such actions, and his government has already defaulted on some bonds. Maduro’s “Magic Formula” has little chance of ending the economy’s slide. International assistance from the United States and other wealthy countries could make a difference and be justified on humanitarian and regional-stability grounds but is unlikely as long as there is no change in the pro-Cuban, anti-democratic government.

Venezuela’s troubles have not yet had a significant effect on other financial markets in South America. Should the migrant flows eventually lead to political instability in one or more South American countries, investor attitudes toward the countries concerned and possibly toward the region would deteriorate. This is a medium-term risk that we will keep in mind as we adjust our investment strategies.

Bill Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
Email | Bio

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Sources:  Financial Times, The Economist, BBC.com

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Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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