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,