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What Does China Learn From The Russian Invasion Of Ukraine?

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A neat explanation for why Vladimir Putin has found the suppression of Ukraine harder than he thought came to me from a very clever friend, who described how in recent years Putin has committed a series of outrages (assassinations in Berlin and London), provocations (Russian troops bringing ‘peace’ to Kazakhstan) and incursions (Syria, refugee influx’ through Norway and Eastern Europe, Russian money into Western politics) as a means of testing the West’s reaction function.

In most cases, the West had not reacted strongly to these incursions and the theory is that Putin read this and other events such as the disorganised retreat from Afghanistan, as signalling that there might be little international opposition to an invasion of Ukraine. He was wrong (many Westerners also could not have imagined the European response).

That he miscalculated shows that different ‘tribes’ or cultures can look at the same set of events and draw very different conclusions, something that has often struck me when hearing the Russian view of international affairs.

China still close to Russia?

The question I now ask, is whether Beijing, given its cold, and apparently tone-deaf pronouncements on the invasion, have a view of international relations that is at odds with the Western view, and in detail, what lessons China is drawing from Ukraine.

I should preface my remarks by saying that really too few people in the ‘West’ have made enough of an effort to understand Chinese political culture and the forces that drive policy making. That is not made any easier by the veil of secrecy thrown up by the Chinese Communist Party, and the relative attractions for Westerners to live and study in China (I estimate that there are twenty times the number of Chinese students studying in Britain, as there are British students studying in China).

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To that end, cultural differences mean that Chinese policymakers may simply not ‘get’ things we see, but that they may well be more keenly attuned to other aspects, such as the response of the emerging world to the invasion. It is also worth emphasising that people around Xi Jinping may draw different conclusions to him, such as the way in which Vladimir Putin is demonstrating the shortcomings of autocracy.

Taiwan

As a final caveat, most people will watch China in the light of its repeated threats regarding the place of Taiwan as a sovereign country (that echo the views of Putin regarding Ukraine) and the repeated sorties of Chinese fighter jets and bombers into Taiwanese airspace.

Broadly, China may notice several things.

First the rapid cohesion of European foreign policy, the increasing singularity with which (coupled with the re-election of Emmanuel Macron) European foreign policy has reformed, and the emerging power of eastern European countries like Poland, not to mention the ‘foreign policy tigers’ in the Baltic states. The immediate, concrete implication for all of this is that the extension of China’s ‘belt and road’ initiative into Europe and its ’16&1’ partnership with eastern European countries is all but dead. Chinese investment into Europe will also face even greater scrutiny.

The Chinese reading of America is more complicated. American intelligence and diplomacy have in my view performed well – and much of the latter has been sufficiently discrete. America has notably paid more attention to the Chinese reaction than Europe has (France will be glad it is not part of AUKUS now). Whether China realises it or not, its international stance on the invasion can see it move from a ‘strategic competitor’ to the US to an outright adversary. A profound breakdown in relations with the US would damage the international economy and international institutions severely, so there is much at stake.

End of Belt and Road

One swing factor for China is the attitude of many emerging countries to the invasion. Several Asian countries – Bangladesh, Vietnam, Laos and Sri Lanka abstained from voting in the UN resolution on the invasion, while notably half of Africa did too (including South Africa) and India’s closeness to Russia is laid bare. To note, many of these countries – across Africa and Asia – have been targeted by Russian info ops.

The fact that the emerging world appears split on the question of Ukraine shows several things – the lure of the Chinese economy and the notion of a ‘managed democracy’ in many countries, and correspondingly the perception that the ideas of democracy and the liberal order may only be something for the West. Pessimistically, it suggests that the post-globalized world order will be a contest between the models of democracy and non or managed democracy.

If this is true, China is in a more comfortable geopolitical situation than it thinks. Equally, parts of Asia are now taking sides – Singapore’s move to condemn the invasion of Ukraine was brave.

China for peace?

Geopolitics apart, there is also much China can observe on how this war is waged. In recent years the Chinese military and navy has undertaken several large-scale exercises with Russia, and the Chinese military is organised in a similar way to the Russians. Given that the Chinese have effectively no battle experience, they must surely wonder if they have the right training partner granted the poor performance of the Russian army (for instance multiple war games by the US Marine Corps University suggested that the Russians would have wrapped up the invasion within three days). Financially, China might well regard Russian assets as opportunistic and cheap.

China will also worry about the ability of the West, the US in particular to detail Russia’s moves before they happened and should be concerned that the US and Japan’s Public Security Intelligence Agency, in addition to other intelligence configurations (Five Eyes) have the ability to read its moves.

The area where China has the greatest scope to learn is in information wars, where President Zelensky and Ukraine have excelled. Globalisation has spread social media, which still retains its Western cultural bias internationally. I can think of very few Chinese media or social media outlets that have penetrated beyond China in terms of creating engaging, trusted content. In short, this means that in an increasingly contested world, China will struggle to ‘tell its story’.

In that respect, I suspect that China feels much less sure of its position on Ukraine/Russia, and will most likely continue to watch and wait, hopefully suing for peace.

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“If I Ever Got Dementia, I’d Be Outta Here”

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Having heard this many times, I know it’s common for folks to say, “I’d off myself” or “I’d check out”. There seems to be a belief that if we ever did develop this sad disease, we would find a way to eliminate ourselves from it.

That we would never want to lose our minds is probably a universal desire. But is it realistic that we could just stop living if we did develop dementia? The truth is that dementia in any form, Alzheimer’s disease being the most common, has a gradual onset. People who are in the early stages of the disease often do not realize that they have any impairment at all. “I feel fine” they say. Physically, they may be otherwise fine, but their brains are not. And reasoning, planning, and looking ahead are functions of that brain that is losing ground. There is no clear marker for when one can definitely say, this is the moment I got dementia. It doesn’t work that way.

A frequent reason people seek advice at AgingParents.com, where we consult and strategize with families, is that they have an aging parent with dementia. The care and legal management of an impaired aging loved one presents a complex struggle. Those who have cared for a relative with dementia are often heard saying they’d never want to put their own families through this and they could not live with it. But in truth, there may be no realistic way to plan for what to do if any one of us actually does develop dementia.

Some people who show early signs of dementia in any form experience difficulty remembering simple things. They forget that you were coming to visit. Or they forget appointments even after being reminded. And the short-term memory loss issue grows progressively worse over time and begins to interfere with daily life. They don’t see this happening. The impaired person neglects grooming, hygiene, cooking, managing bills and other activities. Eventually the person is not able to remain independence. Many people are terrified of having to depend on anyone else to care for them on a daily basis. They don’t want to be that kind of burden. They don’t want what they see as humiliation. That is why we hear them say they’d end their life if they got dementia. But they can’t identify when they would know if they got it.

What Is The Risk Of Ending It All For Elders?

The subject of ending one’s own life is highly controversial, and fraught with religious, moral, ethical and legal considerations. Essentially, our society wants to prevent suicides. Elder suicide has been studied and is a matter of concern, often arising from a sense of hopelessness, grief, loneliness and depression. It’s not typically about dementia. However those with mild cognitive impairment are sometimes considered to be in the earliest stages of dementia. According to the National Council on Aging, this group is at higher risk than the already high risk group of elders likely to commit suicide. But that assumes that the person at risk is capable of looking ahead, planning and choosing an option. For many persons in the middle or later stages of dementia, the ability to carry out a plan has totally eroded.

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Couldn’t You Get Someone Else To Help You End It All?

Assisted suicide, legal in ten states, requires following strict legal rules. Among them, one must be declared by a physician to be terminally ill. There’s the dilemma with dementia. It can last 8-20 years. When is it “terminal”? And it is very critical to understand that where assisted suicide is legal, one must be fully mentally competent to have a physician prescribe a lethal drug cocktail. Dementia, by its very nature, means that in the terminal stage, one is definitely not fully mentally competent. The brain is too far gone by that time. Essentially, the idea that if you got dementia, you’d end our life may not be at all realistic. You certainly would not be able to do so legally with a physician’s assistance.

The Takeaways:

1. If you ever did develop dementia, there is certainly no guarantee that you would realize it at the earliest stages or that you would be able to form a plan as to what to do.

2. Elders do have a high risk of suicide compared with the general population most often from multiple factors that include grief, hopelessness, loneliness, depression, and loss. These can exist in anyone who does not have dementia. We simply do not know when, if at all, a person with these other factors would also realize they have developed dementia.

No one wants to lose independence later in life. Most people are very afraid of losing our minds. We are well served to consider that we are not helpless to prevent dementia, or to at least forestall the onset. The very same advice doctors give us about preventing heart disease is similar to the advice about dementia prevention. Every day-to-day decision we make to adopt or continue healthy habits contributes to prevention. We have more power to maintain our healthspan (the time we are in reasonably good health until the end) than many realize.

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With Democrats Gaining Legislative Momentum, Now Is The Time For Biden To Weigh In On Marijuana Legalization

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Last week Marijuana Moment broke the news that President Joe Biden’s daughter-in-law Melissa Cohen was spotted shopping at a cannabis dispensary in Malibu, California. This certainly raises ethical questions about an immediate family member of the President enjoying the convenience of legal cannabis sales while such behavior remains strictly illegal in the eyes of the federal government that her father-in-law oversees.

But for those who have been following cannabis policy development at the federal level, it raises a more pressing question: Why has President Biden been largely silent on the issue of cannabis policy reform when it has become a major policy priority for the Democratic Party this legislative session? After all, the President has been outspoken about the need to bring home WNBA star Brittney Griner for being unfairly detained and incarcerated in Russia. Yet he remains silent about the first consequential attempt at legislation that would impact tens of thousands of Americans currently languishing in American jails and prisons for the same offense.

Both House Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer have made passing marijuana reform a major priority. Speaker Pelosi’s House of Representatives has twice passed the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act that would federally legalize cannabis, and in July Leader Schumer introduced the long-awaited Cannabis Administration and Opportunity Act (CAOA), followed shortly by the first ever Senate hearings on federal legalization.

While their are no expectations that MORE or CAOA will become law in 2022, as there is virtually no path to either bill receiving the 60 votes needed to pass the Senate, both House and Senate champions on this issue have indicated that negotiations are underway for a more incremental compromise bill that could pass both chambers. The bill, being referred to as “SAFE Banking Plus” or the “cannabis omnibus,” is currently being negotiated by members of both parties who have been outspoken about the need for reform but have largely differed on their approach.

For the past year and a half this dispute has largely existed between members of the Democratic Party. Moderates and pragmatists like Rep. Ed Pearlmutter and Sen. Patty Murray have argued for the passage of the SAFE Banking Act, a bill that has passed the House five times with bipartisan support, while progressives like Rep. Alexandria Ocasio-Cortez and Sen. Cory Booker have argued that banking access should wait until more comprehensive reform that does more to repair communities that have been most negatively impacted by marijuana prohibition.

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As we near the end of the legislative session, the Democratic Party, and the activists and industry interests following along, finds itself at a critical juncture trying to piece together a bill that includes a handful of provisions that can garner 60 Senate votes. Discussions have reportedly included the language in the SAFE Banking Act, expungements for people with federal criminal records for cannabis offenses, Small Business Association loans for social equity cannabis licensees, and possibly revising the 280e provision of the IRS tax code that treats state licensed cannabis businesses the same as drug traffickers for the purposes of filing their taxes.

Yet throughout this process, arguably the most important voice in the Democratic Party, the President himself, has remained largely silent. Sure, his spokespeople have reiterated Biden’s campaign stance that he does not support legalization but instead favors decriminalization and allowing states to set their own policies. But none of this addresses the specific detailed and more nuanced proposals currently being negotiated as part of an incremental reform package.

Banking and tax reform, expungement, and SBA loans for equity businesses all fall short of full legalization, but go beyond decriminalization. Where does the President stand on these issues? Sure, he has historically been one of the Senate’s biggest supporters of marijuana prohibition, but Biden has also shown a willingness to change with the times, as evidenced by his political evolution on issues like same sex marriage and abortion. Would he sign a bill that includes all of these provisions and manages to pass both chambers of Congress? Would the President dare to veto something so universally popular among his party and base despite his long-documented opposition to marijuana reform? The answer is, we simply don’t know.

Senator Booker recently indicated that this compromise bill would likely be voted on during the lame duck session between the midterms in November and the new Congress being seated in January. That leaves precious little time to get the details right and pass the bill. Should Biden disapprove and veto, there may be no time left to make changes that would appease the administration. President Biden inserting himself into the process now, making clear what he supports and what he opposes, could avoid a disaster scenario in which nothing becomes law before the end of the session.

This is crucial, because if comprehensive reform doesn’t pass this year, and the Democrats lose one or both houses of Congress as is largely expected, it will be highly unlikely that a GOP controlled Congress will advance any of these measures. This makes it even more imperative that Biden chime in now, since under this scenario a president who clearly does not want to spend time on this issue will find himself faced with continued pressure and calls for action from his administration. After all, in a scenario in which Congress has failed to act on this issue with a new GOP controlled Congress unwilling to pass anything that could be seen as a win for Democrats, advocates and members of Congress alike will ramp up pressure on the Biden administration to take executive and administrative action to address these issues through the executive branch.

This could include seeking new guidance memos from the Department of Justice to replace the Obama-era Cole Memo, which was rescinded by then Trump appointed Attorney General Jeffrey Beauregard Sessions III, directives to the IRS to reinterpret the 280e provision of the IRS tax code to not apply to state licensed cannabis business, mass presidential pardons, commutations and expungements for those currently and previously convicted of cannabis offenses in federal court, guidance allowing for interstate commerce between states with legal cannabis laws, or instructions to the federal Small Business Association to consider making loans to social equity and mom and pop cannabis business owners.

If President Biden truly does not want this issue to be something he needs to address throughout his administration, it is in his interest to come out now and clearly state his position on which incremental changes he would sign into law before the end of the current session, rather than continuing to leave the discussion entirely to Congressional leaders. This could end nearly two years of intra-party fighting, allow Congress to pass a reform bill efficiently, and give the President a bill he can sign and move on to other issues that he would rather spend his time on. And hey, it might even add a little joy to the next Biden family gathering.

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Markdowns Are Coming To Private Equity, Highlighting The Wide Dispersion Among Managers

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Amid the soaring volatility in the public markets, investors continue to look for alpha, and many are turning to alternative investments. A recent survey conducted by With Intelligence found that while investors and allocators are bullish on both private equity and hedge funds, (private equity) PE is leading the way in investor intentions.

The survey found that 72% of institutional and private wealth investors planned on investing in private equity within the next 12 months, and a review of the asset class’ performance reveals why. However, a closer look at the performance data reveals why investors might also want to be selective about which PE manager they invest with.

Analyzing PE manager performance

Logan Henderson, founder and CEO of Gridline, a platform that enables investors to invest with top-tier fund managers, has been seeing average returns of 25% to 30% among private equity managers. In a recent interview with ValueWalk, he said investors who can get in with high-quality fund managers will significantly outperform the public markets over an extended period. In fact, the wide dispersion among PE managers can also mean a sizable outperformance within private equity when selecting only top-tier managers over lower-tier managers.

Of course, the public markets have done really well over the last four or five years, so they were evenly matched with PE returns. However, over the long term, private equity consistently outperforms public market returns, which average around 9%.

“Investors can see significant private market alpha, but they have to be involved and invested in top-tier managers to realize these returns,” Henderson explains. “I haven’t seen markdowns as big as we’ve been seeing in the public markets to date. Part of it is how private investments are marked in that they’re not market-based. It comes from a private funding round or some other financial event.”

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However, some PE fund managers had been marking their portfolios down to levels comparable to the markdowns in the public markets. He added that markdowns will undoubtedly come in the next six to 12 months, especially as portfolio companies don’t perform well due to the weakening economy.

Markdowns in private valuations

They will have to take down rounds, which means they will have to accept financing at lower valuations. As a result, PE managers will see the value of their portfolios decrease, even though most of them haven’t yet.

“I do think some private markdowns, some decrease in valuation, is healthy,” Henderson clarifies. “There needed to be a reset in valuation and a reset within the private as well as the public markets. Their forward multiples were close to historical highs, and normal valuations are more reasonable. We’re not seeing private companies valued at 100 times forward revenue, so it’s more reasonable, more tangible to achieve.”

He’s been looking at recent market commentary, especially what’s been coming out of the technology space. Logan states that what he’s been seeing suggests far more reasonable growth expectations with a focus on bottom-line profitability.

“This growth-at-all-cost mindset over the last four or five years has started to taper,” he said. “… A handful of companies are being rewarded for growth but with a clear line of sight to profitability. Someone who has a clear path to achieving a profitable and healthy, growing business will see continual valuation increases and large markups on funding rounds.”

Businesses growing in unscalable ways and pouring money into sales and marketing are feeling the pain of markdowns on their future valuations. He also noted that such businesses might not be able to survive over the next 24 to 36 months.

Benefits of investing in the private markets

Henderson highlights three advantages of investing in the private markets. Of course, one is the rate of return, especially among the top quartile of performers. He said the net investment rate of return averages 20% in the private markets. However, some outlooks for the S&P 500 over the next decade suggest 5% to 6% returns, depending on the analyst.

Another advantage of investing in the private markets is reduced volatility. Some of this is due to the way private portfolios are marked. It’s not through daily pricing of the asset like public equities are.

He said the private markets remove the human and psychological element of looking at their account balance every day to see the fluctuations in pricing. Investors aren’t trying to time the markets and sell at the right time, which no one has ever proven is possible in the public markets.

Henderson also points out that the private markets force investors to take a long-term mindset because they can’t just pull their money out at any time. In particular, venture capital and private equity are less liquid than public equities.

Staying invested throughout the cycle to combat volatility

Fund managers typically invest in seven- to 12-year horizons across market cycles. Logan uses the example of a fund manager deploying capital in the tech space now versus six months ago. He noted that the entry valuation is significantly lower today.

“It’s a great time because buying low is a sound investment policy,” he opines. “You can continue to find companies appreciating in value over next five to 10 years. The longevity and time horizon of the investment allow you to invest across short-term market fluctuations.”

Of course, no one can know how long the recent spate of volatility will last, but it’s clear why the volatility is happening. Corporate balance sheets and consumer spending are down, while interest rates are up. The war in Ukraine has resulted in significant geopolitical uncertainty while inflation is soaring, leaving investors wondering if or when it will taper. Energy prices are up as well, further contributing to the volatility.

“There’s a lot of volatility priced into the market already, but I do think we’ll start to see some normalization events happen,” Henderson states. “… There’s a number of factors at play, and one of the benefits of private market investing is when you’re focused on a particular asset class, you can monitor specific inputs that lead to changes in that market. They can be monitored, but clearly, external market factors still contribute to the health and growth of each asset class.”

What investors should know about investing in private equity

Investors who have only invested in the public equity or bond markets will have some things to learn before they dive into private equity. Logan believes the most important thing to understand is the asset class’ liquidity profile. He explained that private equity is an illiquid asset.

“That doesn’t mean there are not ways to exit a position in the private markets, but it’s not daily liquidity,” Henderson explains. “You can’t get out at any time… Make sure when you’re investing in the private markets, it’s money you’re comfortable being invested for a longer period of time, so you’re not investing your reserve account.”

He noted that investors should have other investments they can pull funds out of immediately if something happens. Another factor new investors are advised to consider is the lack of information on private companies. He noted that they don’t publish their financial information quarterly as public companies do, so there is more opacity with a private-market portfolio than with public-market holdings.

“I think some managers are doing a good job of providing updates and visibility into the health of their portfolio, but the level of information is not as readily available as you see on the public market side,” Henderson states. “One of the things we talk about with new entrants in the private markets and alternatives is looking at opportunities that come from a trusted source. A number of managers are raising capital right now, but it’s very significant to make sure you’re deploying capital with the highest-quality managers.”

He noted that with public-market options like exchange-traded funds, the differences between managers can be 1% to 3%. However, in the private market, the differences can be 20% or more, making it especially critical to select the best managers.

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