Change in Megatrends
World politics & economy of next decade may be different from earlier 40 years
Spoiler Alert: It is not sectoral analysis which many readers may intuitively expect from an Investment Advisory Firm. But I expect, for market participants, the reasons of articulating the thoughts may be clearer by the end of the piece.
We have seen few tectonic shifts in global polity and economy over last 40 years – Every major change, good or bad, have some consequences and in most cases are understandable only in hindsight.
Over last forty years the world around us changed beyond recognition in almost every conceivable way. If we take an account of the achievements & failures of the period then it can be broadly summarised as
1) Unprecedented advancement of technology which transformed the way we live, communicate, work, socialize, entertain ourselves.
2) Our self-identity & thought patterns are shaped, honed or blunted and, to a large extent, manipulated and shaped by big tech, very affordable electronics, big & cheap data and ubiquitous media on tap of a phone or remote control.
3) Power of Information Technology, Globalization of trade and cheap labour from China, South Asia and South East Asian countries supressed price of goods and services (lower inflation in traded goods) and also created a significantly large number of relatively prosperous labour pool in these local markets who served as factory or back office for developed world.
4) It disproportionately rewarded the capital over land or labour resulting in two broadly distinct outcomes --- a) soil erosion or river pollution to overall environmental degradation leading to climate change and b) very wide gap of income and wealth between rich and poor.
5) It reduced cost of capital and inflation across the world but also reduced labour’s bargaining power (as jobs can be easily offshored or automated).
6) Though wealth gap widened, millions were rescued from abject poverty, poor didn’t become poorer in the period and rather their economic condition mostly became better than before. This sobering effect was most pronounced in countries like China, India, Bangladesh and other South East Asian countries.
7) In many cases, Foreign Direct Investment helped in technology and know-how transfer to developing nations and privatization of state-owned enterprises lowered fiscal burden on governments and improved public services (like telecom or airlines in India).
8) Individual become sole unit of identity than community, family, society or country. Outlook towards society and individuals in it were different in earlier era as captured in the popular catchphrases like solidarity, liberty, fraternity of previous era with individual merit & individual capacity to survive or flourish in the changed system. We learnt selfishness is virtue, greed is good! Citizens had very little influence over an ‘efficiency’ focussed technocratic governance system and they receded from being an active citizen to be just an atomised consumer of myriad goods and services. The idea of happiness itself got a fresh meaning. More your ability and choice to consume, supposedly happier you are! It created social epidemic of loneliness, depression and family disharmony especially in developed world.
9) The power of sovereign Government blurred compared to the diffused power of Multinational corporations and technology giants.
10) In spite of huge wealth created in the period, the public goods like health, education, skill development, public transport and social safety net shrunk significantly due to lack of fiscal power in hands of sovereign states. Corporate tax cut, offshoring of wealth by the rich, corruption, ossified & indifferent bureaucracy and, competitive politics without competing ideology hollowed out the state power to a large extent. And in effect that has reduced the power of democracy to change direction of politics or economic policies. This further accentuated the alienation of people from government, society & community.
This world order created over last 40 years first broken apart during Global Financial Crisis (GFC) which overnight changed fortunes of many individual and families like a wartime. In the aftermath, with all the wisdom available handy, Govt bailed out the same entities which created the problems in the first place than directly helping the people whose fortunes were ruined and lives were unsettled.
Original proponents of these free market theories namely Edward Von Mises or Frederick Hayek knew limitations of their ideas (they were academicians not ideologues). But these ideas had backings of powerful elites and owners of property & capital so over time it developed into an uncritical belief system for general population. When an idea suits the elite, it can gather enough academic and intellectual patrons to ratify those in college, university, think tank, media and NGOs. It’s the nature of any ideology --- It can see something clearly and something is kept completely out of view or pretends it doesn’t exist. Like Communists gloss over the idea of justice, human rights, personal liberty and coercive power of ruling elite. When Communism was fashionable, it churned out scores of its votaries from academia, intelligentsia & think tanks.
The resentment and disillusion GFC created, gradually changed the politics over time in last decade. The inactive, enfeebled “common man” felt the political debate & decision no longer speaks for them or their wellbeing. The incumbent political leadership perceived to have lost their legitimacy as corrupt, incompetent and dysfunctional. And angry people look for radical solution! In absence of any alternate political direction or ideology they attracted to charismatic leaders. Slogans, symbols and sensations became more precious in politician’s armoury than facts, figures and reality.
In this backdrop we see many major changes in the global political and economic landscape happening in last few years which may shape the future very differently than previous 40 years --- The fight between big tech and sovereign governments over control of digital space; The unprecedented income support unheard of in human history distributed to people with no strings attached to tide over pandemic in richer nations; The massive infrastructure push to improve public service and public goods in US and Europe; The power struggle between incumbent USA & upstart China for setting global rules of engagement & supremacy; The unanimous broad support from every side irrespective of particular country level economic costs and consequences to control climate change; The acceptance by organizations like International Monetary Fund (IMF) that 40 years of neo-liberal experiment increased inequality and thus jeopardized durable long term global economic expansion; The proposal and relatively weaker resistance to higher taxation of corporate and very wealthy individuals in USA.
The Covid pandemic has also hastened the process of change as we have seen that without massive government intervention it’s almost impossible to handle the economic and health cost of pandemic. Stimulus checks in rich countries to free food for large mass of people in poorer nations to free vaccination --- everything depended on big intervention of the Governments and market abjectly exposed its inadequacy to serve in these situations.
Artificial Intelligence, Genome Sequencing, Roll out of 5G technology, Robotics can further force many unskilled people to be unemployable and almost redundant as workforce. Even if everyone gets requisite skills, employing them gainfully would need a very different resource allocation mechanism. No government or sovereign state can overlook this grave crisis for many years without social upheavals. How will it respond to these challenge will be critical to watch.
When changes happen slowly in multiple dimensions, we miss the cumulative impact of those at the time of its occurrence but possibly these very directional changes portend a future different from the immediate past many years.
As a market participant we have seen unprecedented prosperity for owners of asset and capital. Entire investment industry and associated stardom of famous and ultra-rich investors operated under a specific political economic social backdrop which may not remain so in the days ahead.
It is always better to be aware of the larger ecosystem in which we operate than to remain oblivious of it. Our job as investment managers is not to forecast future but to observe reality both with telescope and microscope and to quickly adjust to realities than to be blindsided by it.
It’s possibly the only way we can manage risk, protect and grow capital consistently.
Aveek Mitra
Founder & CEO
Aveksat Financial Advisory
aveksatequity.com