In the past week there were three pieces published by highly respected investors and analysts about how Russia’s invasion of Ukraine will portend the end of globalization. Adam Posen, Larry Fink and Howard Markets all outlined the rollback of globalization as the use of sanctions could lead to the need to shrink supply lines and repatriate capital in an effort to shift foreign production back onshore.
Marks is more cautious in his analysis, but Fink needs to rethink his views on ESG if he believes in his newest musings. If globalization is rolled back what difference would efforts at greening investment make if nations were to seek the cheapest energy in a quest for gaining a competitive advantage over their rivals?
China and other emerging countries will restart coal burning electricity plants for what good would a Paris or Glasgow agreement be when the developed world was curtailing it foreign direct investment, and lessening the spread of advanced low/non carbon technologies? There has been a move to push for a GLOBAL green initiative financed by large corporations, NGOS (and probably central banks if we are to believe Christine Lagarde, Isabel Schnabel and most recently, the Federal Reserve’s Jerome Powell).
Fink’s Blackrock has been a major promoter of ESG-based investment guidelines but if globalization is over the ESG initiative would be a huge competitive disadvantage for U.S. and European businesses as they compete with a technologically-advancing China. What gain would India receive from investing in high-cost green technology in its desire to become a more prosperous, middle-class nation? The end of globalization would certainly raise WAGE levels in the advanced economies as the pressure of global labor arbitrage that has defined the last 30 years would come to an end ensuring that inflation is even more robust then the FED‘s models currently predict.
It has been the benefit of global capital chasing billions of low paid workers that have worked to keep pressure on wages throughout the developed world. If Russia’s invasion and NATO‘s response leads to the to a suppression of global capital flows then interest rates, and especially EQUITY MARKETS, are in for some periods of great volatility. It has been the combination of “cheap” capital coupled with low-wage labor that has driven up equity values around the world. In 2013, Thomas Piketty captured this in his simplistic equation: R>G, meaning that return was greater than growth.
If Posen, Marks and Fink are correct the coming years will experience a dramatic repricing of P/E ratios as global capital loses it mojo. While there’s some glory in the use of sanctions, I advise holding off on popping the champagne corks. When will capital feel the pain of lower returns and higher interest rates? I have timetable but it is something to be concerned about. It certainly makes the FED‘s task of a neutral interest rate very difficult, especially as it also attempts to SHRINK its balance sheet in an effort to deleverage the financial system. Globalization has been great for equity capital, but I wonder if Daleep Singh has factored this into his sanctions formula. The world as seen from NOTES FROM UNDERGROUND rests on the premise that 2+2=5. Any answers for there certainly are a plethora of questions.
***On Tuesday, the Financial Repression Authority’s Richard Bonugli will host a podcast with Credit Suisse analyst Zoltan Pozsar and myself. Check in with FRA because it may wind up being interactive. Two weeks ago, Pozsar wrote a piece on the end of the petrodollar, which we will probably discuss, as well as his recurring theme for Powell to find his inner Volcker.
Most importantly, we will makes sure to discuss his definition of the FED‘s newest word “NEUTRAL” as the appropriate level of interest rates in an effort to calm the rising headline inflation. To quote from Larry Summers’s blog post published on March 23:
The central principle of anti-inflationary monetary policy is that to reduce inflation it is necessary to raise REAL RATES. Equivalently, it is necessary to raise interest rates by more than the inflation being counteracted and above a neutral level that neither speeds nor slows growth. I had thought this was universally accepted following the work of former George W. Bush administration official John Taylor and former Obama administration Council of Economic Advisers chair Christina Romer and her husband, David Romer.
As long as the FED has coalesced around NEUTRAL it is our task to define it as an effort to seek the most profitable investments.
Tags: Adam Posen, ESG, Federal Reserve, Howard Marks, Larry Fink, neutral rate
March 27, 2022 at 10:33 pm |
Yra, I found this chart and posted it last week, https://twitter.com/skylanetk/status/1503225714459308032?s=20&t=pZKji95Zz2PQqQkBVdJNbQ
https://ourworldindata.org/trade-and-globalization
Although governments may try to temporarily “rollback the growth in Globalization” it is like trying to pour back 5 gallons of water into a one liter jar.(use of gallons vs liters intentional) In a world where the largest companies are truly global, Putin is bad for business and for everyone.
The real growth in trade is only just beginning to manifest itself. Individuals are, with the advent of the internet, collaborating in so many ventures that it is truly impossible to stop without shutting down the system that is enabling it. Inexpensive access to education and information is changing the world in ways that no government has the power to stop. The world is becoming more interdependent on trade and that is a good thing, everyone benefits from it. Individuals around the world now communicate and collaborate and trade. Intellectual property trade, research, knowledge, information etc is growing at rates and in ways no government can or should stop. The largest global corporations that build the infrastructure are not going to suddenly stop and tear down what has been built, just the opposite. And it makes life better for everyone on the planet.
So while some may be talking about rolling back globalization, the only ones that will be promoting it are people trying to exploit the current situation for their own gain. Putin will be gone someday, not because a bunch of politicians are going to to anything, but because he is bad for business in a Global economy.
March 28, 2022 at 6:15 am |
Sky–thank you for the input.I believe this blog represents the best efforts to be constructive in the approach to investment—partisan politics does not enter here as we are about qualitative discourse and not the search for validation.Your post is indeed a tribute to this continuing endeavor—you join the Arthur,Asherz ,Temple,Green AB ,Dave Richards —-so many more who have helped over the last 12+ years—and of course the Professor from Uof I,Waspi.
March 28, 2022 at 6:46 am
Yra, I am a good example for how the world is changing. I am so bullish for what is taking place. I would love to talk to you about it.
I don’t know if you remember me from the floor (RMIL). Let’s talk.
March 27, 2022 at 10:49 pm |
Yra
Really excellent update
March 28, 2022 at 7:04 am |
The Economist’s call three years ago “Slowbalisation” or “Deglobalisation” + great power competition
https://www.economist.com/leaders/2019/01/24/the-steam-has-gone-out-of-globalisation
March 28, 2022 at 11:12 am |
Sky brings up some good points about prospects and outcomes of the ‘rollback’ of globalization. I can see all the good that free trade has brought about over the past 30 years, but we all must acknowledge that practiced free trade is seldom the textbook defined free trade. If “profit maximization” is your only goal, the cheapest input will be chosen at a contingent expense, sometimes at great cost. As they say, the devil is in the details.
With respect to necessities such as food, fuel, and primary minerals, history is littered with wars fought over one or more of them. I am not against free trade, but would suggest that not maximizing the inherent benefits of domestic based labor, capital, and natural resources makes any nation vulnerable to very nasty characters who will eventually make you pay a very high price for your short term gains.
I have advocated a corporate income tax structure that rewards domestic content over foreign sourced inputs with a sliding scale of rates inversely related to domestic content. I believe the logic behind this is that minimizing corporate costs by offshoring only redirects those costs onto the domestic society through lower employment, lower wages, and more domestic societal safety nets.
As for ESG, don’t get me started. Until we can suspend the physics of energy and mass, wind and solar will not advance mankind’s standard of living, and developing nations will suffer the most, and hence, not adopt these on any large scale basis.
Only the rich can afford such fantasies.
March 28, 2022 at 11:41 am |
Yra,
A couple of points:
1. Completely agree that deglobalisation has inflationary consequences.
2. Do not agree that deglobalisation necessarily has retrograde implications for the greening of energy or that China has no incentive to lead the way in this technology and its application. Like everyone else, the Chinese are affected by climate change and to the extent that China aspires to global hegemony, it is the perfect vehicle to demonstrate its global leadership in a way that is perceived to be in the interest for all. Will they be a climate change free rider? Possibly, but there are incentives not to let this technology be controlled by the West.
3. Lastly, it is true that deglobalisation is economically harmful, even beyond inflation and so it can be argued that it is unlikely to gain traction. But isn’t this notion similar to case made by Norman Angell in the Great Illusion in 1909, where he argued that the economic costs of war were simply far, far greater than any possible benefits and therefore was very unlikely?
Well, we all know how that turned out…
March 28, 2022 at 12:07 pm |
Yes KJM but it may all just be a Grand Illusion and the great game may be on in a sense of competition with a beggar thy neighbor when it comes for seeking beneficial global outcomes especially if the cost is beyond 60% of the global population—always hope and believe better outcomes will be achieved but I know the outcomes have disillusioned me over so many years—but I stop stop believing and more importantly trying to attain better results
March 28, 2022 at 3:44 pm |
Sky…I totally agree, “the real growth in trade is only just beginning to manifest itself”, now that we have a global internet and a blockchain ledger system, all they have to do is come up with a universal currency that everyone “respects.” Something that is a good store of value, recognizable, durable, fungible and lasts forever. Some call it God’s money, I call it a currency with no country….yes GOLD. Maybe a crypto gold bond that is accepted and redeemable anywhere in the world, right from your cell phone? If the global “powers that be” could just keep politics out of it, integrating the internet with gold would make for a sound global trading sytem. The sad part is, as history teaches us, that governments never pay off their debt, they instead go to needless wars to destroy each others economies and then offer to “build back better”.
March 31, 2022 at 3:38 am |
BRIDGEWATER Greg Jensen on the War in Ukraine, Stagflation, and Investing in a Changing World
https://www.bridgewater.com/research-and-insights/greg-jensen-on-the-war-in-ukraine-stagflation-and-investing-in-a-changing-world
March 31, 2022 at 9:23 am |
Is this another investable moment? Biden considering releasing million barrels of oil per day from the strategic oil reserve for up to 180 days (let’s see 180 days-takes right up to the November election- just saying..). When he released oil in November 2021 price was 78.50. That dropped oil to $65/barrel but 7 weeks later it was back over $80/barrel. today it is $103.50 I guess the first release worked so well he is doing it again. so Yra last time you did well buying oil. Is there any reason not to make the same trade again?
March 31, 2022 at 10:59 am |
The Bigman—it is always different but let’s see where this drops to —maybe 78.50 will be the floor but I don’t believe we have heard the last from Putin or the Saudis yet —–are you pricing this in roubles?The world is far more complicated then the modelers residing in the WH wish to believe —-waiting for the response and Pelosi is already piecing together a stipend program to cover increased energy costs—-and still they desire the 30 year bond