2022 – What’s Next?

For anyone who writes on the state of the world, the approach of Christmas brings with it the near obligation to sketch out the events and happenings of the year ahead. Last year, I took a traditional though cynical approach when I wrote Drinking with Dickens, the aim of which was to imagine what a vision of the year ahead would look like, whilst under the influence of some of Charles Dickens favourite drinks (i.e. ‘Smoking Bishop’). In the end, some of my comments (‘higher inflation’, ‘tension in Asia’ and ‘Boris resigns’) came close to the mark.

The Folly of Forecasting

This year, I have a less weary approach, partly because there are so many new, emerging trends, partly because the world is opening up travel wise and partly because there is so much at stake. The real world remains stranger than fiction, though to join the two I have added some book recommendations.

JK Galbraith wrote that the only role of forecasting is to make astrology look respectable, and to a large extent he was right. Rather than throwing darts at imaginary future events, my sense is that the best way to proceed is to extend trends and where possible, to try to spot turning points.

To recap on the year, the topics that grabbed my attention were China’s difficult relations with the outside world, ‘the democratisation of risk’ (note that the share price of brokerage Robinhood is down over 60%) and the rise of cryptocurrencies, threats to democracy, rare places and materials, emerging economic models, strategic autonomy, the possibility of new world institutions, identity politics and inflation. Most of these trends will likely persist into 2022.

Looking ahead, let me start with financial markets. The dominant theme will be the slow rationing of liquidity by central banks in the context of the normalisation of the business cycle. Regular readers will know that I am not overly impressed with this crop of central bankers and their reading of ‘transitory’ inflation is a policy error which could be compounded into 2022.

To an extent, markets are ahead of this – in the US a large number of high growth stocks have corrected. At the same time of writing over 50% of stocks in the Nasdaq index are 40% lower from their highs for 2021 though the index itself is only 4% off its high. This illustrates that a small number of mega cap stocks like Apple are propping indices up. This has maybe three implications.

The Tech Pendulum

The first is that for portfolio managers the large tech stocks are the swing factor in performance. The second is that at the index level, very high multiples mean that future returns (on the S&P 500 for instance) will be low. Thirdly, in this context asset and wealth managers who hug index benchmarks will likely produce lower returns for investors than potentially, active, small to mid-cap managers.

Two recurring themes in 2021 were the PitchBook Economy or the rise of private capital (e.g. venture) investments. This will continue apace, with Europe leading the momentum. There will be more activity in exclusive ‘co-investment’ networks and in co-branded proprietary investment funds.

At the other end of the financial industry spectrum, my prediction is that the ‘democratization of risk’ as a trend continues but that retail investors will discover new instruments – put options, credit default swaps and will generally be more attuned to credit and fixed income risk.

Across asset classes, for the first time in a decade emerging market assets are classified as ‘value’ plays, while my expectation is that Europe becomes the focus for growth oriented investors. This backdrop will be conditioned by the normalisation of the business cycle, whose trajectory has been muddied by slower growth in China, supply chain complications and the lingering effect of COVID related government fiscal supports.

My reckoning is that only by summer 2022, will we  get a true picture of the world economy and its important drivers such as productivity (recovering in the US, weak in China). The outlier scenario is that from then on, growth begins to slow as the effects of monetary/fiscal/COVID support wear off, and central banks are forced to reappraise tightening policies.

The Red Curtain

This will also give better colour on the process of deglobalization, or better, the replacing of globalization with a multipolar world. As China becomes more insular (see Desmond Shum’s book Red Roulette on disappearing Chinese billionaires) and Europe slightly better organised, this trend will be reinforced. In particular, there is great potential in Europe with three progressive, capable leaders (and governments) in Italy/Germany and France. I don’t expect elections in France (Macron to stay in power in my view) or Italy to change this much.

The other element of the post globalization world that is becoming interesting is that while globalization meant greater connectivity across countries, the rampant digitalization we are witnessing means greater competition and connectivity within industry structures or ‘verticals’. The industry I am most familiar with is financials and here for example, the process of setting up a bank/platform has been quickly commoditised, to the extent that brands, products, and quality of service (areas where in my view many financials are weak) will become more important.

This digitization of industry verticals is in my view one of the key elements of the ‘new’ or ‘what’s next?’ economy. I have already lost the ability to key tabs on all of the new technologies that are coming into view, and when a friend mentioned developments like glass batteries, ammonia based fuels and spacial computing I felt even less informed.


That said, perhaps the most revolutionary aspect of technology is the way it is changing humanity and sociability. There is mounting evidence that for perhaps the first time in millennia, human sociability is changing in that we are increasingly socialising through and with machines. I worry about the broad side-effects of this (mental health, political, population growth and human development), and suspect that the arrival of the MetaVerse  will compound this. In a recent note I flagged the rising number of Japanese virgins as a side-effect of technologically captured societies and in that regard strongly recommend Aifric Campbell’s The Love Makers as a development of the broad theme.

How The World Ends

To delve more specifically into the geopolitics of the post-globalized world, commentary is dominated by prospect of a confrontation between China and the US in the South China Sea, or of a conflict around Ukraine, dominate, though I don’t have much to add here (but for a different take on diplomacy am reading Claude martin’s ‘La diplomatie n’est pas un diner de gala’ and may follow this with Martin Indyck’s book on Kissinger).

If we must play the ‘where is the next war’ game, you should look no further than Nicole Perlroth’s book ‘This is how they tell me the world ends’ which sets out the depth and detail of the international cyber arms race and is truly terrifying. Granted that there have already been multiple cyber wars (Estonia, Israel, Syria and Ukraine for example) I think it is not long before we see a visible demonstration of cyber power by the USA, and in turn that there are loud calls for a rules of the road of cyber war/security.

More conventionally, I feel that the complex, tense relationship between Turkey and Russia bears scrutiny. They face off in about four different theatres, have large, capable conventional armies and in some cases are at the forefront of new weapons development (markedly so in the case of Turkish drones). One has a leader who is too calculating, and the other a leader who does not calculate at all.

I also think that in the near-term Bosnia needs to be kept an eye on, as an example of the toxic politics that Russia encourages, and the risk that a rupturing of that country could have implications that spread all the way back to Switzerland.

One broad trend to watch is that since the COVID crisis started, the emerging world has dropped behind the developed, in terms of growth momentum, scientific advancement, technological prowess and in cases financial stability. The risk is that this creates tension both within emerging countries (watch the current Presidential election in Chile) but more importantly between the emerging and developed world.

Riddle of Genius?

Another contrarian twist on this is that in 2022 it is possible that economic growth momentum will be healthy in the democratic world and weaker in less democratic ones (Turkey and China spring to mind). While that might prompt some recalibration of the argument (for many emerging countries) that economic growth is best fostered through ‘managed democracy’, neither should it lessen the need to curb the behaviour of those who devalue the rule of law (i.e. I won’t be recommending the forthcoming ‘Shakespeare – Riddle of the Genius by B Johnson).

This note was a bit longer than usual – twice as long in fact, which means two things. First it will take time to digest and might be a good excuse for readers to break away from families and friends to ‘do risk assessments’ or ‘important forecasting exercises’ over the Christmas break. Second, it is the last note of the year – thank you for reading patiently during 2021 and I look forward to picking up pen again in 2022 (next is on Jan 2nd), if you have suggestions on how to improve the note and enlarge its distribution I am happy to hear them.

Have a great holiday,


Are Markets Crowding Innovation?

If you want to mix innovation with the evolution of industry structure then go no further than the Museum of Arts and Metiers in Paris, where upon entering you are confronted by Foucault’s Pendulum – the device that was deployed to demonstrate the Earth’s rotation. 

In the part of the museum beyond the Pendulum there is a fascinating collection of old planes and cars from the turn of the 19th century, a time when France alone had over 600 car manufacturers. Even from 1881, France had a primitive electric car. By 1899, in Germany Ferdinand Porsche had built an electric car that could travel at 100km per hour. I think it is a good example to illustrate the point of ‘this time is different’…in the sense that it is not of course. 

The dynamics of competition, the ability of certain companies to marry technological innovation with financial acumen and an appeal to customers, meant that those 600 car manufacturers were whittled down to a handful, the same being true in the UK, US and elsewhere. This was notably also the case in the railroad industry which in 1900 made up close to 40% of the market capitalisation of the UK and US stock markets. 

With this at the back of my mind, the only rationale I can ascribe to the car industry today is that financial markets are betting that Tesla (whose market capitalisation is equal to that of its nine main rivals put together) and Rivian (whose USD 110 bn market cap reflects a total of zero vehicles sold), will be the ‘winners’ of the struggle to dominate the electric car vehicle industry, notwithstanding the fact that other car manufacturers sell an already large range of electric vehicles, and that the likes of Apple and Intel are entering this market.

It may be that investors have an eye on Apple, perhaps the most forceful example of a winner takes all company. It is now worth nearly USD 3 trn and with four other social media related stocks, part of a group of five companies that make up 25% of the market capitalization of the US stock market (the highest concentration since the 1930’s). Without these stocks, the year’s performance of the Nasdaq index would be closer to 7% than 21%.

Apple’s products are rated as the most popular with the US consumer, and will have thus benefitted from the COVID triggered fiscal stimuli across countries, and it has recently announced that like Facebook/Meta, it will be entering the metaverse (with smart glasses and a headset). Yet all is not quite rosy. Details of a mysterious investment deal with China have been disclosed and the company has recently warned suppliers that orders of its iPhone 13 are slowing. One might expect the stock to have weakened on these news items but instead it has rallied by 9%, outperforming broad indices by 6%, which is unusual for such a large stock.

What appears to be driving Apple’s stock, like that of Tesla, is activity in the options market. Over the past two weeks, there have been millions of call option contracts (with short expiries) bought on Apple, and this heavy activity induces buying of the underlying stock by brokers. The oddity is that the options market is supposed to be a derivative of the stock market (though this year volumes in the options market surpassed those in the stock market for the first time), not its master.

That this can happen in the case of a stock like Apple suggests that financialization as a trend is accelerating and is having real world side-effects. Remember that in theory, events and activity in the real world should be reflected in financial market prices, and not so much the other way around.

There are plenty of implications here, notably that fund managers that restrict their analysis to bare fundamentals will not pick out security moves driven by market micro-structure effects and will be prone to underperform.

More importantly there becomes a growing issue of market stability – recall how the mountain of derivatives that was based on the US housing market soon came to engulf that market. It may mean that assets that become heavily financialized, in turn endure periods of what appear to be inexplicable volatility. This has happened in the commodities sector when metals like silver have had ETF’s (exchange traded funds) structured around them.

Overall, it points to a problem of economic veracity – disentangling the elements of true technological innovation from those of financial innovation, and I suspect that once the financial market geniuses disappear, the promise of the electric cars and gadgets of the future will be more pedestrian.

Have a great week ahead,


PS – Next week’s note will be the last of this year, and will in keeping with tradition, feature my attempts to forecast the trends of the next year, as well as a few book recommendations.

The Red Curtain

For personal reasons Ireland is one of my touchstones when trying to understand the ways in which the world is changing, and more generally it is an interesting laboratory to witness the effects of the rise and fall of globalization on a small open economy.

Globalization has markedly changed Ireland such that the Ireland of the 20th century is drifting steadily out of the collective memories of Irish people. In the middle of the 20th century, the country had few active trade and diplomatic links, something that led the writer Seán Ó’Faoláin to remark that ‘Ireland …is behind a Green Curtain that we have been rigging up for the last thirty years – thought proof, world proof, life proof’.

That is a remark on a country that was waiting to be reconnected with the world, but it recently came to mind when thinking of China.

In the last week, under heavy pressure from the Chinese authorities, Didi Chuxing, the ride hailing company announced it would renege its NYSE market listing and instead list in China/Hong Kong. Also, this week the Women’s Tennis Association (WTA) have suspended their tennis tournaments in China in response to the disappearance of the player Peng Shuai.

She had been ‘recalled’ to China having accused accused Zhang Gaoli formerly a high-ranking Chinese Communist party official, of sexual assault, and she is since believed to been held under duress. While the Epstein trial shows that powerful men can behave appallingly wherever they are, the treatment of Peng is sinister, tone deaf to international public opinion and, has been repeated in the cases of other public figures.

As background I have just started reading the fascinating ‘Red Roulette’, Desmond Shum’s account of what happens to wealthy Chinese who rise too high too quickly (to spoil the surprise Shum details the murder, ‘suicides’ and disappearance of numerous Chinese billionaires).

Couple this with China’s antagonizing of nearly all of its neighbours (some of whom also threaten it), other snippets such as a collapse in passport issuance by the Chinese government (notwithstanding COVID), the exigencies of China’s COVID policy and a growing range of moves to establish self-sustainability and in some cases international monopoly in areas like data (LinkedIn has been cut off in China) and rare earths, and the picture grows of a China that is reinforcing its strategic autonomy, but also cutting itself off from the rest of the world and to adopt Ó’Faoláin’s terminology, enveloping itself in a ‘Red Curtain’.

This ‘Red Curtain’ process, if my view is correct, will be gradual but nonetheless meaningful. David Skilling points out that trade ties between the EU and China are still strong, and that American banks are keen to further implicate themselves in the Chinese financial system (Jamie Dimon of JPM is notable here, though less so for his diplomacy). However, Germany’s new government is markedly less China friendly than the Merkel one, and various EU level oversight processes will curb foreign (Chinese) investment into Europe.

In the big picture, the ‘Red Curtain’ is consistent with other countries or leaders (Brexit/Johnson, Trump, Bolsonaro) turning away from internationalism, and confirms the trend towards multipolarity.

China’s size, the late stage of its very long business cycle (with a slowing property market) mean that the prospects of a ‘Red Curtain’ need to be taken seriously.

Diplomatically, it raises the problem that a more closed off China is harder to read from outside, and somewhat harder to deal with (ask Lithuania). Domestically, there is a risk that this more ‘closed’ approach creates a sense of risk aversion across entrepreneurs, a lack of debate about policy issues (especially at a local level) and as a result of this, a policy mistake. One structural policy error might be that productivity slows.  

From an investors point of view what is interesting is that the heavy-handed approach of Chinese regulators and politicians has turned Chinese equities (especially those listed abroad like Alibaba) into ‘value’ investments. In contrast if US companies that export to China (think of Apple and Tesla) were to be cut off by the ‘Red Curtain’, their valuations would crater.  As an aside, I wonder if the ‘Red Curtain’ will split the MetaVerse in the sense that it offers a distinctly different experience to those that use Chinese technology, to those using Western technologies and platforms.

Notably on the other side, more fund managers have mentioned to me that the Chinese government bond market begins to look attractive compared to those in the West. In that context, Chinese assets – having for long being regarded as a structural emerging market growth play – are becoming interesting for value investors.

Ultimately, whether this value is realized depends on one factor – the mind and ambition of Xi Jinping – by installing himself as China’s leader for the foreseeable future, he has tied the fate of his country to the wishes of one man, which history tells us is a risky strategy, especially if it leaves China ‘thought proof, world proof, life proof’.