Jan

16

Wedge Capital Management is a long-only value investor that I admire. Their quarterly newsletter (Wedge Watch) sometimes has some interesting tidbits. In this issue, there is a discussion on how the U.S. today might very well be compared to the UK of 1900 … the world's leading global power, stock market, etc. and how that changed over the next 100 years. U.S. growth continued, while the UK got bogged down in two immensely costly wars. The upshot, however, is that despite all this, the UK, too, gave investors 10% per year.

Read Wedge Watch

Stefan Jovanovich comments:

The comparison of the United States at present with the United Kingdom a century ago has been made by a number of very bright people. While I can understand its appeal, I do not see how it fits the known facts with regard to military power. It is simply not true to say that Britain was the world's dominant military power in 1900. The British Navy found itself being challenged in Atlantic waters by both Germany and the United States and in Asian waters by Japan (hence the appeal of Jackie Fisher's battle cruiser building program). On land, the German Army had been acknowledged to be preeminent since the Franco-Prussian War. Much of the appeal of Mahan's sea power thesis was that it offered consolation to Anglo-Saxon readers that the Hun could still be beaten even if its superiority on land could not be challenged. The present situation for the United States is far different. For better or worse, the world has never seen the combined arms military power that the American military now has. If, tomorrow, the United States decided that it wanted to take over and hold the entire Arabian Peninsula's oil reserves, there is no combination of forces on earth that could prevent them from doing so. The Chinese are working hard to build up their army and navy by abandoning conscription and having fewer professionally trained and paid soldiers and sailors; but their air and sealift capacity is still so weak that they cannot seriously threaten to invade Taiwan, let alone travel halfway round the world to challenge the Great Satan. Theoretically, the European armies of NATO represent a countervailing force to America's deciding to make "blood for oil" a reality. The armies of the European countries have 2/3rds of the troop strength of U.S. forces, but only Britain has the ability to send its soldiers to other parts of the world, and that capacity is - at most - 10% of what the United States has. The financial comparison between the U.S. now and Britain in 1900 may be more appropriate, but it should be noted that by then Great Britain was no longer the largest economy in Europe, let alone the world. It had been overtaken by Germany by 1885-90, and both Germany and the U.S. were significantly larger economies when measured by national income. The British market's total equity capitalization may have been 50% larger than the U.S., but it was only 20% larger than Germany's, and a great deal of the London market's valuation was in the shares of Canadian, South African and Asian companies. By 1907 there was sufficient uncertainty about the sovereign's real value that the pressure of claims from the San Francisco Earthquake and Fire on Britain's property and casualty insurers was enough to produce a near-panic in the London gold market while the German market remained largely unaffected.


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