Have a read of this from Deutsche:
Economic cycles come and go, but sitting above them are the wider structural super-cycles that shape everything from economies to asset prices, politics, and our general way of life. In this note we have identified five such cycles over the last 160 years, and we think the world is on the cusp of a new era – one that will be characterised initially by disorder.
Not all disorder is ‘bad’. Indeed, if the themes of the world economy swing like a pendulum, then it may be that some have swung too far from a ‘sensible centre’ and are due to revert. This can have a cleansing effect. What is worrying, though, is that several themes appear poised to revert at a similar time. This is the point – that simultaneous changes to structural themes will create a level of disorder that will define a new era.
Before we review the key themes of the upcoming “Age of Disorder”, we must note that while some historical super-cycles have begun and ended abruptly, others were slower to evolve and end. The most recent era – the second era of globalisation, during 1980-2020 – is much more like the latter. It started slowly and has been gradually fraying at the edges over the last half-decade. The end of this era has been hastened by Covid-19 and – when, in years to come, we look at the rearview mirror – we may see 2020 as the start of a new era.
By our measure, there have been five distinct eras in modern times, with a sixth likely starting this year:
The cracks in this era began to emerge after the GFC, which revealed that everhigher leverage had papered over the problems that globalisation had created in many Western countries. Firmly in the spotlight were issues including low real wage growth, the outsourcing of many low-paid jobs, and increased inequality. In response, authorities used heavy intervention (especially monetary) to prop up the existing system (rather than reform it), but populism and resentment built. The Brexit and Trump victories were manifestations of this anger in the UK and US, but populism increased across the globe. It was then that most people realised the era of full-feted globalisation was certainly fraying and the problematic issues it had incubated were about to take centre stage.
As the Age of Disorder begins, we believe one of the biggest issues will be the political tension between the US and China. Indeed, this should characterise the era of disorder because China has been at the heart of the most recent era – that of globalisation. The future of this relationship can only be forecast by understanding the past. We delve into this in more detail later, but to summarise: China is looking to restore the position it held for much of history as a global economic powerhouse.
To illustrate, from two thousand years ago until the early nineteenth century, the country represented around 20-30% of the global economy. It then suffered under colonial powers, particularly in the century before Mao established the modern Chinese state in 1949. By the early 1960s, China’s share of the global economy hit an all-time low of 4%. It is now back to 16%.
While China’s fortunes rapidly grew during the era of globalisation, so too did tensions with the West. Partly, this came from the incorrect assumption in the West that as China developed it would increasingly become more Western in its outlook and values, and fully integrate into the liberal world order, which contains much American architecture. With hindsight, this was naïve as China has a long, proud and powerful history with its own values.
A clash of cultures and interests therefore beckons, especially as China grows closer to being the largest economy in the world. From the West’s point of view, China would not be in its current position if the West had not accepted China into its economic orbit during the latest era of globalisation. Now, the Covid-19 pandemic will likely speed the symbolic point at which China overtakes the US economy as the largest in the world. China has seen a post-Covid V-shaped recovery already, while it has become obvious that recovery in many Western countries will be a lengthier process. Assuming its current trajectory continues, China could become the world’s largest economy around the end of this decade or soon thereafter. Regardless, the crossover point with the US seems only a matter of time.
As the economic gap between the US and China narrows, many worry about the so-called Thucydides Trap. This refers to the fact that on 16 occasions over the last 500 years, a rising power has challenged the ruling one, and on 12 occasions it ended with war. While a military conflict today seems highly unlikely, an economic battle is likely to ensue, with the benign global trading conditions of the globalisation era likely to be resigned to the history books. The result of the US election in November is unlikely to change the direction of travel. Over the course of this decade, relations will likely deteriorate into a bipolar standoff as both the US and China seek to prevent encirclement by the other. Companies that have embraced globalisation will be stuck in the middle if relations sour as we fear.
Not just companies, nations, most particularly, Australia.
I could quibble over a few things but it’s basically right. We enter the Age of Disorder in parlous shape. No other nation has so fully embraced globalisation resulting in:
- Competitive disadvantage gutting the industrial base.
- Double Dutch disease of pre-eminent miners and realty overrunning the political economy.
- Mass immigration and Chinese people flows becoming central to the economy as the liberal democracy and security outlook is threatened by exactly the same.
- The most to lose from climate change with the worst policy record of holding it back.
A quick survey of current major party policy positions makes the point perfectly. The Coalition is:
- China hawkish and pursuing decoupling.
- But, is captured by mining and realty interests that prevent policies that will mitigate the fallout from reduced exports to China.
- Is pro-immigration despite it being in complete contradiction to China decoupling.
- Climate change hopeless and a high-cost energy disaster driving further de-industrialisation.
Labor is:
- A China patsy with greybeards wedded to profiteering from the old relationship.
- But, has far better competitiveness and productivity policies – negative gearing reform, industry policy and lower dollar that will mitigate Chinese decoupling.
- Is pro-immigration and Asianisation despite it being catastrophic amid advancing Chinese tyranny, rendering it unelectable.
- Climate change constructive and lower energy costs, helping industrial onshoring.
In short, Australia’s choice right now is between a party that will protect the democracy from China in order for its oligarchic mates to plunder the economy’s last, fading riches. Or, a party that will chart a constructive economic course beyond China but refuses to do it politically and thus puts the democracy at fatal risk.
Worse still, there is no awareness of the demands of the Age of Disorder in the Australian deep state. Treasury has no idea what it is doing, still clinging to its idyllic “three Ps” framework. The RBA is stuck fast in a dated economic paradigm in which the price of mortgages is all that matters while it ignores economic structure and competitiveness, driving up the AUD. All levels of government are addicted to population growth, also wrecking competitiveness.
I would like to say that you should allocate to “this” or “that” asset mix in Australia to survive and see the benefits of the Age of Disorder but I can’t. At the moment, Australian politics is simply not up to its challenges, so it’s best to avoid the place altogether. Such a disconnect between a political economy and the march of history can only end very badly no matter who is in control. And as policy failure meets economic decline the Australian dollar will, despite our own worst efforts, live down to its moniker, the “Pacific peso”.
Thus the best allocation of all is to use any and every eventually of a higher Australian dollar to move your assets offshore.
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David Llewellyn-Smith is Chief Strategist at the Macrobusiness Fund, which has large offshore investments and intends to add more at every available opportunity.
The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance.
