Change is here

Change is here

This is a follow up from the post: “Change is Coming” that we published in September 2016, you can read that here.

A few months later it’s obvious that Change is definitely here.

Whether you look at the Trump Presidency, the rise of populism or the seismic change in markets, it’s clear that the winds of change are blowing hard.

More and more global events are driven by politics, a variable that is by essence unquantifiable and to which no probability of occurrence can be assigned.

 

The global outlook is becoming increasingly difficult to discern and drifting into unchartered waters. We are at a juncture in history where all macro categories – politics, the economy, societal issues, the environment, technology – constantly intersect with each other in a whirlwind of complex interactions.

I was recently at a special private gathering of rich families and their family offices. We sat down to discuss the clouds on the horizon and what we see as the most important issues.

Here’s a behind the scenes look at what the ‘smart’ money is talking about.

  1. Political and Geopolitical Risks
  2. Economic Risks
  3. Demographics and Health

 

Political and Geopolitical:

To a considerable extent, what’s currently happening in the world is determined by what’s happening in the realm of politics.

The victory of Donald Trump in the US, the UK decision to leave the EU, the upcoming elections in Europe (Italy, France, The Netherlands, Germany), the global rise of authoritarian leaders in different countries, ranging from Turkey and Russia to the Philippines, all combine to make the world a messy place.

Hard to predict policies are now becoming the norm, rendering the life of investors ever more difficult.

Dealing with complex, non-linear adaptive systems with antiquated methodologies and off the shelves models doesn’t cut it anymore.

What can be taken as a given is this: in the years to come, the emergence of multi-polarity and increasing polarization and divides will be an ever more potent source of risks, particularly as the Sino-American symbiosis comes to an end.

There was talk of a tri-polar world: Americas, Europe and Asia/China.

 

It seems that the backlash against globalization is real and that Laissez Faire (as epitomized by the Anglo-Saxon economies) is dead. This, in turn, suggests that economies (principally the US and the UK) will progressively move to the left of the political spectrum.

 

The broad consequences of this assumption are the following:

(1) De-globalization means marginally less free trade, more protectionism, and less outsourcing that will lead to wage growth in DMs and higher inflation;

(2) The end of the Laissez-Faire capitalism means more government spending and less budget discipline, while new legislation to raise wages will lead to higher inflation;

(3) The end of “Open Borders” entails less immigration, meaning higher domestic wages

 

The practical and very broad investment implications are that:

(1) The 35-year bull market in government debt is over – more specifically, a Trump presidency is negative for bonds (because of fiscal spending);

(2) DM will prevail over EM;

(3) The USD will find itself in a prolonged bull market due to fiscal spending;

(4) This is positive for domestic companies, by definition small medium enterprises, but negative for export-oriented, outsourcing multi-nationals.

 

 

Employment & Technology:

One major uncertainty stems from the furious pace at which innovation and disruption are engulfing our lives – they will affect the labour market sooner than we realize.

Following 30 years during which, in accordance with Moore’s law, computing capacity has become a billion times more powerful, the beginning of 2016 marked a tipping point: it became clear that AI (Artificial Intelligence) was to be the transformative technology of this century.

It will bring many “cool” technologies that will make our lives easier and possibly more productive, but it also raises the spectre of massive technological unemployment (until labour-substitution effects start replacing lost jobs with new ones).

To illustrate this critical point with some examples, one speaker pointed to new innovations such as driverless trucks (last month, Otto, a self driving vehicle carried out its first commercial delivery for Budweiser) and delivery drones.

 

 

The technology is ready to go to markets and will generate tremendous efficiency gains, but what will be its impact on the current employees whose jobs depend on the “old technology”.

Already, artificial intelligence and robotics are making many jobs uncompetitive, while for many hard-pressed workers the sharing economy often resembles a “sharing the scraps” economy. The fact that there is not, as yet, an effective plan to deal with the possibility of more severe inequality is a cause for serious concern.

It is likely the flashpoint where economics collide with politics.

 

 

Demographics and Health:

We are at a critical juncture in terms of new things and discoveries coming to market, with impressive breakthroughs at the intersection of medical science, data and engineering.

To put it simply: a “bio-revolution” is occurring, generating tremendous opportunities in healthcare and personalized medicine (but beware: some of these opportunities can turn into threats if they fall in the wrong hands).

Dramatic advances are occurring thanks to the CRISPR technology that now enables the replacement of a gene.

 

 

Progress in tissue engineering, for example, makes the re-generation of a human bladder possible. DARPA, the US government agency at the forefront of innovation has had some tangible success with bionics, exoskeletons and even implants to restore memory.

All these and more are no longer the preserve of science fiction!

Big data is a huge enabler in terms of new therapies, which means that in medicine like in all other fields, institutions that are unable to access large data sets will be outcompeted.

Innovation has become “cross-disciplinary”, hence the critical importance of networks and the necessity to break silos between different disciplines. This may sound anecdotal but it portends an important lesson for investors: every year, DARPA invites science-fiction writers and artists for a two days offsite on creativity and innovation.

 

Our world is changing in ways that will keep surprising us – radically, very fast and everywhere. There is only one strategy to cope with such incessant change: “continual legacy-free reinvention”.

 

Go ahead, see what you’ve been missing. 

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