The Brave New Investing World

The changing future is very much investable, and significant returns will be available for those who position themselves for it.

The Brave New Investing World paradigm is underpinned and propelled by the existence of a fading hegemon, the United States.  This does not mean the U.S. will collapse any time soon, indeed, the U.S. could continue to flourish for quite some time.  For instance, the U.K. did not sink into the sea after the sun finally did set on the British empire, though it is a shadow of its former self.

The transition from a worldwith a hegemon creating the conditions for globalization and integration to oneof polyarchy, regionalization, and disintegration, will not be smooth.  In many ways, the whole world is playing agame of Colonel Blottoagainst the U.S.  We will lose this game,the only question is, how fast?

In short, we are headed for amulti-polar world, where the U.S., China, and Russia, and to a lesser extentother nations, square off.  Bi-lateralagreements will be the rule and partners will almost certainly be rivals andcompetitors at the same time, but in different domains.

If the globalized world orderthat briefly flickered to life in 1989 and began fading in 2001 was a game ofcheckers, we are now playing chess, and will be playing three-dimensional chesssoon.

One of the big questions iswhether the U.S. will fall into the ThucydidesTrap, which posits that eventually a rising power like China will get intoa fight with the reigning power, the U.S., usually sparked by commitments tothird parties such as ArchdukeFerdinand.  This has happened 12 outof the 16 times the setup has occurred throughout history.  For a loose historical analogy you can thinkof the U.S. as Rome, China as Macedonia, and the EU as Carthage.

The threat of “mutuallyassured destruction” kept the Thucydides Trap at bay as the Soviet Union waschallenging the U.S.  However, the Sovietsdidn’t have TenCent and Alibaba, instead they brought the world the Moskvich 408 and all-daylines for toilet paper. 

The Environment

Separately, all state actorswill play against a common enemy, global warming.  The increasing costs of environmentaldegradation, destruction, and damage caused by the continuing Long Emergency willbe punctuated by extreme weather events and the shock of their remains.  If you think this is hyperbole, take a lookat the chart below, which shows how New Orleans never recovered from HurricaneKatrina in August 2005.

Chart 1: New Orleans RealPer-Capital GDP[1]

bantam inc jack duval multi-family office new york manhattan MFO - brave new investing world - new orleans real per-capital GDP chart

Many more cities will sufferthe fate of New Orleans, either from extreme weather events or other forms ofenvironmental stress, such as running out of water.  For instance, MexicoCity, CapeTown, and now 21cities in India are all experiencing extreme water stress.

These environmental stresseswill also effect entire regions, which is what is happening in CentralAmerica.  There is now what is called theDryCorridor that has engulfed Guatemala, Honduras, El Salvador, and Nicaragua.  The Dry Corridor is a combination of longperiods of extreme drought and short periods of extreme rain and has destroyed thegrowing conditions for coffee (the largest cash crop) and subsistence farmingof maize, beans, sugar cane, and rice.

The result?  Climate refuges heading north to Mexico andthe U.S.

Finance in the Brave New Investing World

As we continue through theearly stages of this transformation, the world finds itself in a precariousfinancial state.  In reaction to theGlobal Financial Crises, developed nations around the world issued unimaginedamounts of debt while their Central Banks purchased much of it along with,corporate debt, and even equities.

The record low (and now over$12 trillion of negative) interest rates on sovereign debt that resulted fromthese actions have spurred the inflation of financial assets, but only engenderedmoderate global growth, and, most damning, caused soaring wealthinequality.  Now the natives are restlessand populism is rising as strongmen the world over repeat a nationalist creedthat carries the unmistakably stale whiff of Bavarianbeer hall.

In their wisdom, globalCentral Banks have exhausted the traditional toolkit for addressing the nextcyclical economic decline.  This is why MMTand other extraordinary measures have been floated now, in order to manufactureconsent later.

Chart 2: Global Interest Rates[2]

bantam inc jack duval multi-family office new york manhattan MFO - brave new investing world - global interest rates

Corporations, not to beoutdone, have also embarked on a record debt binge, using the proceeds (eitherdirectly or indirectly) to buy back their own stock, adding to marketdistortions.

The Multi-Polar World

Finally, as the hegemonicworld disintegrates into a multi-polar free-for-all, the number of players isactually much larger than it appears. Giant multi-national corporations now walk the earth and exert tremendouspower on both state actors and their constituents in a virtualized manner.  That is, without having to field a military.

As the U.S. and U.K. havediscovered, the tools of some of these giant corporations can be used byadversaries, as Russia did with its social media election influencing campaigns.  Indeed, the election of Donald Trump and thepassing of the Brexit vote were both heavily influenced by “vote hacking”.  These quasi-active measures have helped throwboth countries into disarray, with each fighting internecine wars of extremeenmity, and neither focused on Russia. Mission accomplished.

Most will remember the bumblingpoliticians who couldn’t come up with one decent question for Mark Zuckerbergin his Congressional testimony.  Thosedays are gone.  Now even the most technologicallyilliterate among them have figured out that major elections can be bought for amodest ad spend on Facebook and Google and a few servers running Twitter bots.  Look for new fronts to be opened on the gianttech and media monopolies, with breakups on anti-trust grounds as the denouement.

The Brave New Investing World will look a lot like the feudal world, with many fiefdoms, fragmented power, militias, and strange bedfellows that come together and separate as exigencies dictate.  Big fights will be fought by small actors in proxy wars and multiple undeclared cold wars will be waged in cyberspace.

Infrastructure will be thetarget of many of these attacks and casualties will be counted in the billionsof dollars of business interruption costs.

Investments

The investment implications of the Brave New Investing World paradigm are profound.

While this may all sounddour, it is not.  It is just the realitythat the future will be a lot different than the recent past.  Is that such a radical proposition?

This changing future is verymuch investable, and significant returns will be available for those whoposition themselves for it.  However, manyof the strategies that worked over the past decade will almost certainly notwork over the next.

In future posts, I will examine some of the secular investment implications of the Brave New Investing World.

[1]      Source: Bloomberg.

[2]      Roubini Lives Up to “Dr. Doom” Alias With Global Recession Call; Bloomberg; Available at: https://www.bloomberg.com/news/articles/2019-07-02/roubini-lives-up-to-dr-doom-alias-with-global-recession-call; Accessed July 2, 2019.

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Jack Duval

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