FYI | Nov 21 2011
GaveKal offered the following observations this week:
For some reason, we often see rapidly accelerating change around the turns of centuries. A man who fell asleep for 30 years in 1790 would have woken up to a very different world in 1820 (France was no longer the dominant European power, Britain was rapidly expanding her global reach, Spain had become a has-been, the United States was experimenting with a new form of government…). The same is even truer for the man who fell asleep in 1890 and rose in 1920 to witness the end of the Austro-Hungarian and Ottoman empires, the establishment of the USSR, the rise of Japan….
And the same is true today: someone who fell asleep in 1990 would likely be surprised to hear that Pentagon officials are now more worried about China than about the Soviet Union (which of course no longer exists), that Europe is going cap in hand to ask for loans from China, India and Brazil, that Iran may, after all, end up exercising ultimate political control over Iraq. Of course, we are not yet in 2020 and so things may still "revert to the past century's mean" over the coming decade… but somehow this does not seem likely! Instead, we should ask ourselves what are some of the key trends which will reshape the coming ten years-especially those trends that investors are perhaps less aware of (i.e., not the rise in the emerging market consumer, nor the scramble for resources, nor the deleveraging in the West…). Amongst the potential important trends, we find:
* The growing irrelevance of cheap labor: Even in China, the land of cheap and productive labor par excellence, some manufacturers (e.g., Foxconn) are increasingly turning to the use of robots in order to remain competitive. And as robots start to perform an ever greater array of tasks, this will put into the question the development model of most emerging market nations. Simply put, will multinationals still feel the need to build factories in the more remote corners of the world if the labor component in manufacturing production falls to the same level as, say, the labor component in agricultural output? In such a scenario, not only will the disparities in wealth between nations increase, but also, worryingly, the disparities between those that own the factors of production, and directly benefit from the productivity gains (shareholders), and those aiming to sell their physical labor.
* The question of whether the US will become energy independent: In the past few years, the ability of the US to find and extract natural gas on its own territory has grown by leaps and bounds (hence the breakdown in the gas-oil price correlation). In turn, this raises the question of whether the US will be able to optimize both its electric grid and its wider energy consumption patterns to profit from what now seems to be a widely available resource (LPG buses and cars? No more heating fuel for homes?…).
The reason these two questions are bothering us is that their answers may hold the key to how our international financial system evolves. Indeed, we still live in a US$ denominated world and when the US current account deficit starts to improve, someone, somewhere, usually finds himself "cut-off" and going bust (obviously, right now, this is Southern Europe). After all, with the US current account deficit averaging $600bn a year in the past decade, we saw the US exporting a huge amount of Dollars largely in order to buy petroleum and goods assembled by cheap labor pools in places like Mexico and China. But what would happen in the coming years if a) a lot of manufacturing moves back to a more robotized US, while simultaneously b) the US stopped being a major importer of oil? How would countries outside of the US then get the Dollars needed to finance international trade, commodity consumption, etc. It would have to be by selling assets and/or services to American savers and consumers. But that would likely only happen at a very different valuation on the US$ then the one that currently prevails.
The above expressed views are GaveKal's, not FNArena's (see our disclaimer). All copyright GaveKal.
GaveKal is a financial services firm that offers institutional investors and high net worth individuals fund management, independent research on global macro-economic trends and events, and independent advisory work on China and its impact on the global economy.
For more information, visit www.gavekal.com
