The End of Synchronous Global Growth
As the world begins to undergo an economic polarity shift that is bringing forth a dual polar world, one where two major global economic superpowers battle for supremacy, an examination of the history of global trade growth and the current trajectories for prosperous nations is duly necessary.
Global growth had been relatively synchronous throughout the early to mid 2000s as most countries' economies grew together in tandem. Global trade boomed in a time of financial market peace, fostered by low border trade friction between most nations. This time was ushered in by the introduction of China as the 143rd nation to join the World Trade Organization (WTO) in 2001.
During the 2008 global financial crisis there came the issuance of massive bailouts which were administered in almost every WTO country and thus, by levelling the playing field in this way, ensured a continued synchronicity. Inflation crept in across all nations and global trade continued to soar, resulting in higher prices on commodities, food, housing, and almost all consumables. Household purchasing power eroded across the board, but was partially offset by global trade efficiencies.
Roughly 5 years after the 2008 financial crisis growth began to slow to a “normal” rate in nearly every country except China, which was now leading the way in GDP growth. China was now a major benefactor of global trade, becoming the leading exporting nation to nearly every major economic nation. This was perceived to be in every country's best interest at the time, as these nations benefited from the cost offset of cheap labour for their populations' desired goods.
In 2014 global growth and trade continued to slow. Oil prices had stabilized. The price of hard commodities, such as gold, silver, and copper, became muted for what would be nearly the next decade. Service-based economies were now leading in a slow growth world, while technology companies emerged and began to take centre stage. The emergence of tech leadership was not welcomed by all, and nations began to close their borders to certain tech companies. This new closed border policy suddenly ushered in direct competition for every major American tech company. Amazon had a Chinese competitor, Alibaba. Facebook had a Chinese competitor, WeChat. Twitter had a Chinese competitor, Weibo. Apple had a Chinese competitor, Huawei. The dual polar world began in these days, with technological segregation.
The synchronicity that began in 2001 had now started to uncouple during the Covid-19 global pandemic crisis. Countries did not move in tandem, as they had done so many times before, with relation to how to economically endure this new global crisis. Many countries, specifically the G7 nations, ran enormous budget deficits with the philosophy of spending their way out of crisis. These countries lowered interest rates drastically, overstimulating their now weak economies with a broad swath of payment programs, access to easy credit, and tax incentives on spending which ultimately led to mass inflation. Other nations, such as Mexico, South Korea, and Switzerland, did not stimulate their economies but rather they stayed open for business as usual. Lastly, China and other Asia-Pacific countries shut down completely without direct stimulus packages. The business cycle synchronicity had broken.
How each major country handled this crisis, and the positive or negative effects, will be debated for decades but what is now reality is that some countries are nearing the end of their economic cycle while some are only now entering their next cycle and others are in the middle of their cycle. This is now a dual polar world and understanding desynchronization will play a large role in investment returns going forward.
The world is now watching as two global superpowers, The United States of America and China, draw their lines in the sand. Each nation wishes to have a circle of influence, group of friendly (to them only) nations, exclusive access to waterways such as the Panama Canal, safe ports of call to rest, and trade agreements that lock their superpower competitor out.
What does all this mean? This dual polar economic world will have winners, losers, and unfortunately victims. The business cycles for countries are now out of synch, which will add new risk as well as potential return to specific areas of every portfolio of investments. It’s important to weigh the risks of our investments through this lens, ensuring investments are protected from potential trade embargoes, tariff risk, supply chain risk, as well as late business cycle risk. Now, more than ever, people should seek out an advisor to help them manage and reduce the multitude of risks to their invested capital. Finally, a cautious approach to investments is the key to capital preservation and consistent returns over time.
Please forward this post to anyone you've had recent discussions about investments and the current news headlines. Referrals are how Griffin Financial grows, and they are always much appreciated. Should you wish to discuss your investments in detail I'm always available via email at bob@griffinfinancial.ca. I'll be happy to schedule a time to chat with you. We can review your investment statement together, and discuss details regarding your personal financial planning. Please enjoy your week everyone.
