The Power of Propaganda

Richard Croft
April 1, 2013
10 minutes read

It must have been a slow week, or perhaps the news media was providing us with some much needed comic relief. When the long lines of depositors making a run on Cypriot banks never materialized, we were treated to pictures of Kim Jong Un, North Korea’s leader for life and close friend of Dennis Rodman, signing an order to put his missiles on standby to attack US military bases. Apparently that is the next “logical” step when threatening war on your neighbor to the south and by extension the worlds’ only super power.

I was particularly taken by the picture where Mr. Un, wearing a not-so-well-tailored suit and donning a military style haircut, was peering through a pair of binoculars presumably scanning targets for his missiles. Reminiscent in many ways to Sarah Palins’ attempt at relevancy when she informed the press that she was abreast of international issues because she could see Russia from her front door!
The US responded to Mr. Uns’ showboating by executing a flawless fly by using two of its stealth B2 bombers with the not-so-subtle implication that they could target the Palace’s bathroom without even a hint of retaliation from the North’s “million man” army. Mind you, all of this is posturing that will end when China tells Mr. Un to take a time out. The sad part is that it will rob comedians of material that could fill a two hour HBO special!

Hyperbole aside, what to me is most instructive about North Korea’s conduct is the power of propaganda. Whereas the West is keenly aware that Mr. Un is not just acting badly – he cannot act at all – to the average North Korean citizen I suspect his grandstanding may seem reasonable and even honorable. In North Korea, it is not about being fair and balanced, it is about positioning Mr. Un as a tough no-nonsense leader despite all visible attributes to the contrary. Classic tail wagging the dog stuff albeit inside a narrow sphere! The “no-spin” Fox news could take lessons.

What is germane to the message is that the enlightened world is not immune to the power of propaganda. Every day we witness spin from leaders who are working from a better script. They paint a rosy picture about the economy when what we are really witnessing is a social experiment in which governments inject enormous amounts of liquidity to make the numbers look better than they really are.

A case in point is the US weekly unemployment data. Certainly the numbers are improving but are nowhere near levels that one would expect at this stage of the business cycle. In a world where we are “enlightened” with perspective there are economists who take contrary positions positing that the lower unemployment rate has more to do with declining labor participation than with real job creation! If that’s true then the unemployment rate is nothing more than half-truths delivered by better actors.

The US so-called social experiment is yet another consideration. Last week President Obama was in Miami talking to his minority constituency about private / government partnerships. In this instance it was the joint venture to expand the Miami port authority to better serve South America.
These are not bad things, but many worry they are a harbinger of socialized interaction that could stifle private sponsored initiatives. Could we see more Keystone pipeline fiascoes? The bottom line is no one wants the private sector to execute with the same efficiency as Washington.

Then there is the interest rate debate. Rates are at or near zero, assuming you are in a position to borrow at the prime rate. While the largest companies within the S&P 500 index can access prime rates small, private companies trying to expand cannot. Nor can average citizens trying to muster a down
payment for a new home.

Having said that, low rates backstopped by Fed intervention – i.e. quantitative easing – is driving equity markets higher. Witness the recent performance of the S&P 500 composite index, which last week breeched its’ all-time closing high. And there will likely be more to come!

If inflation remains tame, there is no reason for the US Federal Reserve to take their foot off the printing presses, and as long as the Fed continues injecting liquidity equity markets remain the best investment within a bevy of bad choices.

The Eurozone Solution

Clearly the best spin architects reside in Europe, where the Cyprus end game that may or may not be a blueprint for future bailouts took another turn last week. Depositors with less than €100,000 in their account were spared from the sticky fingers of government. That, plus a series of exchange controls, most likely explains why Cypriots did not engage in a massive run on their banks.

In the Cyprus solution size mattered! Depositors with more than €100,000 took the biggest hit losing perhaps 40% of their capital. Maybe more when the dust settles! But those at risk were mostly foreigners taking advantage of Cyprus’s favorable tax rates… so who cares? Clearly no one expect maybe the odd politician who will assert the obvious slippery slope analogy.

The larger issue that Cyprus brought to the forefront is that Europe is shifting to a loose affiliation of have and have-not member states. Absent is any notion of there being a middle ground that can force member States to reform social policies in a way that is economically viable. Nor will the Eurozone be able to maintain a single currency in its current format.

Already we have two classes of euros; cash that can be spent freely and cash housed in bankrupt banking systems with limited access due to withdrawal limits and capital controls. Cypriots cannot take more than €3,000 out of the country, well down from the €10,000 limits for those residing in the elite European Member States.

Worse still are restrictions being imposed on credit and debit card transactions which are now limited to €5,000 per person per month. Not only do these controls snub European Union Treaties that make it illegal to restrict the free movement of capital, they were the raison d’être for a borderless free trade union. What we now know is that governments will ignore rules when they find it convenient to do so.

Look for more of the same in the coming months because the Eurozone – sans Germany and maybe France – is by and large in recession. With no possibility for growth from the have-not States and the real likelihood of an economic meltdown in Cyprus what will become of this great experiment? In the fullness of time we will bear witness to a Eurozone solution. Until then it will hang over the financial markets like a dark cloud of an impending tornado.

As events unfolded in Cyprus, we learned from those well versed in the ways of propaganda that the so-called blueprint or one-off – depending who among the member States is actually positing a point of view – will ultimately lay a foundation that will sustain the Eurozone experiment. In short, good actors telling us that nothing had fundamentally changed.

Unfortunately for the enlightened among us… we learned that everything changed.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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