September 18, 2020
The American Death Watch
Sometimes, one man’s heartbeat is all that matters…
In countries where a single individual holds outsized political influence, death can be a big driver of asset prices, up or down.
The “Death Watch” investment strategy doesn’t usually matter in the United States… but it does today.
Anticipating death, though, is the passing gas of the investment world. It’s bad manners and something that polite people don’t do. But the demise of a key leader in power can create enormous uncertainty – and opportunity.
Take Russia in the mid- to late-90s – investors in the Russian stock market cared about one thing… (This was when Russia was the next hot emerging market, and any share with a vaguely Russian-sounding name went through the roof.)
Daily share-price action, valuations, economic growth data, the price of oil (the blood of the Russian economy), inflation… the usual market meat and potatoes were more like soggy broccoli.
What mattered more than anything on any given day was whether Russian President Boris Yeltsin was upright and could fog a mirror.
A few years before, Yeltsin was a fearless revolutionary who’d led Russia through the dissolution of the Soviet Union. At his best, he was the guy standing on the tank in front of the country’s White House, rallying Russians through some very dark years in the post-Soviet era.
But Yeltsin had a long history of alcoholic binges, heart attacks, and erratic behavior. (“Drunk Boris Yeltsin” is potential meme gold, as this helpful compilation demonstrates.) Yeltsin’s problems with coordination make Donald Trump – issues with lifting glasses of water and walking down ramps notwithstanding – look like a cross between Usain Bolt and Nadia Comăneci by comparison. At a time when the average Russian male lived to be 60 years old, Yeltsin was already pushing the limits of the actuarial tables.
So no one would have been surprised if a Yeltsin lie-in one morning had turned into a permanent one… But no one would have been prepared, either.
With no democratic tradition, it was unlikely that Russia’s rudimentary succession plan – having the prime minister take office until presidential elections were to happen a few months later – would keep the leaky rowboat of Russian democracy afloat.
Trying to figure out what would happen if Yeltsin died was (to borrow Winston Churchill’s 1939 words when describing Russia) “a riddle, wrapped in a mystery, inside an enigma.” Which insiders would bum rush the seat of power? Would the communists come back? Would Russia’s intelligence agency, the KGB, put their man in power? Would the reformers get the upper hand?
For Russia’s markets, Yeltsin’s health was like Jerome Powell’s latest testimony, Trump’s tweets, and all of last month’s economic data rolled into one… It was everything and the only thing that mattered. Yeltsin’s death could represent a massive risk for investors… or a monumental opportunity.
Just like coronavirus has spawned a global subculture of amateur epidemiologists, at the time anyone with an interest in Russia was an enthusiastic cardiologist. I was a stock market analyst in Moscow then, and I probably talked more about Yeltsin’s health than about any of the stocks I covered… because that mattered a whole lot more than earnings, corporate strategy, or price-to-earnings ratios.
As it happened, the Yeltsin Death Watch in the late 1990s was borscht with no beets. Yeltsin wound up quitting on his own terms in late 1999. And as per Russia’s constitution, the prime minister – a gentleman named Vladimir Putin – took over. Elections were held a few months later, and Putin won handily.
Over the next eight years, thanks to strong commodities prices, and the relatively seamless departure of Yeltsin, the Russian stock market rose 1,300%.
It was different in Uzbekistan, a California-sized, former Soviet republic in Central Asia with 33 million people – and a GDP that’s just 2% that of California. For about a quarter of a century after the end of the Soviet Union, Uzbekistan was a global pariah of near North Korea-caliber, under the repressive dictatorship of Islam Karimov.
Uzbekistan rivaled Somalia as one of the worst human rights abusers in the world, and had a lower score than Saudi Arabia in Reporters Without Borders’ Press Freedom Index. The economy was crippled by a dual foreign exchange system and a tightly controlled currency. Investment in Uzbekistan was almost nonexistent.
(I first visited Uzbekistan in 1996. It was grey and felt like a big Intourist hotel – Soviet-style non-service and inhospitable manner that was designed to make you feel unwelcome.)
After Karimov finally died in September 2016 (to the great relief of nearly all of his countrymen), his prime minister took over. Everyone figured that Shavkat Mirziyoyev, who’d also come of age in the Soviet era and had spent his career advancing Karimov’s agenda, would serve up more of the same… aggressive xenophobia, brainless brutality, and retrograde policies focused on keeping Uzbekistan as isolated as possible.
But that’s not what happened. Against all expectations, Mirziyoyev took a U-turn that makes Bruce Jenner’s life trajectory seem obvious and predictable by comparison. He pushed through an Uzbek “glasnost” – the openness policy favored by the Soviets’ final leader, Mikhail Gorbachev – of economic liberalization and political transparency. He kneecapped the monster-under-the-bed security services. He started talking to the neighbors rather than only threatening them. Uzbekistan joined the club of the rest of the world.
In one sign of just how much things had changed since Karimov’s death, the country last year raised $1 billion in an oversubscribed sovereign bond issuance. (Now you can even invest in a hedge fund that buys the shares of Uzbek companies listed on the local stock exchange.) Another clue was the Financial Times running a long “visit Uzbekistan before it’s spoiled” piece… (I had gone back the year before… and when the FT is telling its readers to go, you know it’s almost too late.)
An American friend who’s been living in Tashkent for the past few decades told me recently, “It’s been as complete a turnaround as you can imagine since Karimov died.” His business went from a few hundred thousand dollars a year, to 10 times that. Multinationals that two years ago couldn’t pronounce the name of the country are falling over themselves to get a foothold… That’s what death can do.
The Death Watch investment strategy doesn’t work in many developed democracies. German Chancellor Angela Merkel getting run over by a Mercedes, or French President Emmanuel Macron choking on his frog legs, would be tragic. But in each country, the business of government would carry on with little disruption. Post-death, the direction of each country might only change a few degrees.
That’s what happened when Japanese Prime Minister Shinzo Abe resigned late last month because of a recurrence of ulcerative colitis. He said that he quit rather than have the illness “create a sudden vacancy.” His party elected a new leader, who was subsequently voted in by parliament as the new prime minister. It was as straightforward as kappamaki.
In these countries, institutions – like the presidency, the judiciary, and the parliament – are strong and stable. They operate based on a clear set of rules that are universally respected, regardless of political party, economic circumstances, or individual. If the leader dies (or his nasty intestinal problem flares up), there’s an established and unquestioned process that dictates what happens next. The rules of the game don’t change, regardless of who’s in power.
However, in many countries, individuals (rather than institutions) are the cradles of power. Highly personalized governments operate at the whim and will of one person. In these countries, the abrupt departure of this individual can throw a country’s entire government structure – and markets – into chaos.
Like North Korea, for example… And we’ve already had a preview.
For several weeks of April and well into May, the baby-faced leader of North Korea vanished. Kim Jong-Un is just 36 years old. For most authoritarian dictators in their 30s, a natural explanation for an extended absence might be nothing more than a champagne and cognac bender (he reportedly prefers Cristal and Hennessey, respectively)… with a hefty side of Emmental cheese (another one of KJU’s many culinary weaknesses).
But KJU has a body mass index estimated by South Korean intelligence – yes, they track this – of around 45. That’s well past the “obese” marker at 30, and deep into “walking heart attack” territory. He’s reportedly a four-pack-a-day smoker, and has a family history of diabetes and heart disease. Six years (and 50 pounds) ago, one health and fitness website called him “the world’s unhealthiest leader.”
So when KJU disappeared, the global media went on full-bore Death Watch. In late April, the normally stone-cold-sober Economist speculated…
He is dead, or brain-dead, or in a coma following botched heart surgery. He has been deposed in a coup. Maybe he has simply had a chin-lift or a tummy-tuck. Or he might just be hiding from the coronavirus at his seaside villa.
That’s because North Korea isn’t any old developing world hellhole… It’s got nuclear weapons, and a leader crazy enough to use them. The border with South Korea, home to around 28,000 American troops, bristles with armaments like an angry armadillo. And President Trump made cozying up to KJU one of the centerpieces of his administration’s foreign policy.
(I was at the media center in Singapore for the first of their so-called summits… an event so pre-digested and minutely orchestrated that it makes Brad Pitt and George Clooney’s heist of a Las Vegas casino in Ocean’s Eleven look slapdash by comparison.)
And if KJU had in fact had his ticket punched, it opened up the potential for a “full-blown Game of Thrones dynastic crisis,” business magazine Nikkei Asian Review wrote at the time. Even by North Korean standards, pushing KJU’s five-year-old son into power might have been a bowl of kimchi too far. KJU’s younger sister could have made a power play to keep it in the family – though 80-year-old generals might have balked at taking orders from a young woman.
In a completely opaque society where one guy holds all the power, the reality is that no one knows what might have happened… or what will happen. And that creates enormous uncertainty for markets around the world…
But the biggest Death Watch risk right now might be very close to home… the United States.
For one thing, Joe Biden (77 years old) and Trump (74) are the oldest candidates ever to lead their respective presidential tickets. They have anticipated remaining life expectancies of 10 and 12 years, respectively. Trump has bragged about his score on a cognitive test that’s used to test for dementia. His campaign has repeatedly questioned Biden’s mental and physical acuity. Actuarial science suggests that there’s a good chance that the next American president could die in office… That is, if he doesn’t pull an Abe and resign before then.
On paper, there’s no question about what happens if the American president dies… Power passes on to the vice president. The U.S. Constitution allows for an orderly transfer of power. It’s happened before, and the script is clear.
But the first step is to get past the November 3 presidential elections.
My colleague Trish Regan has noted how the Democrats are preparing America for a constitutional challenge… Trump has openly mused about a third term (“We should get a redo,” Trump said in August)… And As I wrote in April, there are a lot of ways that state legislatures could throw a hammer in the works.
What this means is that the chances are high the U.S. election will be contested, with no clear victor – and even if there is, the losing side might be unwilling to concede. And the level of polarization that follows the election might make what we’ve seen the past few years seem like kids playing happily in a sandbox by comparison.
So in that context, there’s no telling what might happen if the future American president passes away in office. Markets hate uncertainty, and there’s no greater uncertainty than what happens when an American president dies.
The United States isn’t late 1990s Russia… or May 2020 North Korea. But it’s getting there, and Death Watch is on.
Now here are some of the stories we’re reading…
Hong Kong Is a Troubling Case Study in the Death of Democracy
A free press suppressed. A vote postponed. Dissent criminalized. China’s insidious reengineering of the region marches on, but not without a fight…
How Golf Won a Bet the Coronavirus Would Not Squelch Its U.S. Open
It took talks among golf’s governing bodies, state and local officials, and even the N.F.L. to keep the tournament in New York’s Westchester County, one of the country’s earliest coronavirus hot spots.
Even Fidelity’s $230 Billion Star Manager Has Robinhood Anxiety
Will Danoff has been wondering why billions of dollars keep flowing out of the Contrafund, the giant mutual fund he manages at Fidelity Investments. Performance isn’t the problem… “Today’s kids want something sexier.”
The mystery of why some vaccines are doubly beneficial
Vaccines have been providing a kind of hidden, unintended protection for over a century. Now scientists are racing to find out how it works.
And let us know what you’re reading at [email protected].
Chaos Chronicles Editor, American Consequences
With P.J. O’Rourke and the Editorial Staff
September 18, 2020