Are Dictatorships Bullish For the Markets?

Dictatorships are bullish for the markets, David Kotok of Cumberland Advisers says so, (bold highlights mine)

In the reality check currently underway, the seats of power (Sultans-Kings-Sheiks-or their sons) do not easily yield that power to kids with stones and Facebook. The king must either be outgunned (Libya) or he wins and the kids are punished harshly. In Saudi Arabia, Bahrain and elsewhere in MENA we are witnessing an outcome that is a blend of policy discussed in two classics. For details, see Metternich and what is called “Realpolitik.” For profiles of the victors in MENA, visit Machiavelli’s “The Prince.” In MENA, bullets triumph over ballots.

Okay, freedom loses. Kids die. It is a sad day for those of us who wish it were otherwise.

But for markets, it becomes a bullish outcome. Markets like stability and predictability. Markets know that kings with armies are stable and reliable. The players in these markets would not like to be born to the common class in those countries. These players like their life in freedom.

First of all, it’s rather sad and unfortunate to hear the hue of schadenfreude undergird such seemingly ‘prejudiced’ statements. These are what give capitalism a bad reputation. [Actually what Mr. Kotok cheers for is a crony based capitalism-dancing with dictators]

Second, is Mr. Kotok suggesting that “kings with armies” represent as stable political economic arrangements? If so, then why the chain of revolts?

Below is an interactive graph from the Economist of some possible factors that may have influenced the MENA revolts

Where dictators corner the resources of a nation at the expense of the majority, does Mr. Kotok honestly expect their constituents to remain forever docilely repressed?

You guys are so fortunate NOT to be on their places!

Three, markets have not been as cooperative with the Cumberland team, since they declared that they went to raise cash holdings from the emergence of MENA’s political uncertainties.

Yet it’s more of Japan’s natural disaster issues that have rocked the boat more than the MENA issues.

Thus seeing the market’s uncooperativeness, the Cumberland shifts from bearish to fully invested.

Fourth, the issue of “Realpolitik” have not been resolved.

The Saudi-led intervention in Bahrain has not entirely quelled dissent.

Politics represents an ongoing process. Thus, whatever short-term gains achieved by the present coercive actions of the consortium of dictators may or may not last.

Today’s defection of Yemen’s key army commanders partially rebuts the idea that incumbents “do not easily yield that power to kids with stones and Facebook”. Maybe not easily, but this only shows that “facebook and kids with stones” have the power to turn the army on their sides.

Don’t forget armies are composite of people---who can be swayed by influences (like networks-families, friends or culture-religion).

As a saying goes... It’s not over till the fat lady sings.

Like it or not, “Kids with stones and Facebook” will play a far crucial role in shaping the geopolitical context than most experts would expect.