We just finished reading one of the most thought-provoking and interesting articles related to Global Trends. It was written by Louis Gave of @GaveKal Research titled “Weeks When Decades Happen“. I originally found this article posted on John Mauldin’s Outside the Box newsletter. We recommend taking a serious look at these predictions of future trends. A brief summary of the main points are highlighted below…
The three big events of 2001 were:
- The terrorist attacks of 9/11. This unleashed a decade of bi-partisan “guns and butter”policies in the US and produced a structurally weaker dollar.
- China joined the WTO in December 2001. China’s full entry into the global trading system signaled a re-organization of global production lines and China’s emergence as a major exporter. Export earnings were recycled into the mother of all investment booms, which drove a surge in commodity demand and a wider boom in emerging markets.
- The introduction of euro banknotes. The introduction of the common currency unleashed a decade of excess consumption in southern Europe, financed unwittingly by northern Europe through large bank and insurance purchases of government debt.
All three trends have ended.
For the future, he indicates the following three important trends:
Instead of lamenting over the past, investors should be coming to grips with the trends of the future:
- the internationalization of the RMB,
- the rise of cheaper and more flexible automation,
- dramatically cheaper energy in the US.
Why these three trends are significant was very well presented in his article. We suggest reading the article in full here: ”Weeks When Decades Happen“. Some interesting comments are highlighted here:
- “the creation of the offshore RMB bond market in Hong Kong, a development which may go down as the most important financial event of 2011.”
- “ yesterday China’s trade mostly took place with developed markets, was comprised of low-valued-added goods, and was priced in dollars. Tomorrow, China’s trade will be oriented towards emerging markets, focused on higher value-added goods, and priced in RMB.”
- “Over the coming decade, cheap labor may not be the comparative advantage it was in the previous decade, simply because the cost of automation is now falling fast “
- “one aspect of policymaking which makes China unique: the country’s leaders wake up every morning pondering how to return China to being the world’s number one economy and a geopolitical superpower in its own right (few other world leaders harbor such thoughts).”
- “Hence we are convinced Beijing will eventually bite the financial reform bullet, and RMB internationalization is the leading edge of that reform. In that light, the creation of the RMB offshore bond market is an event of much greater significance than is currently acknowledged by the general consensus.”
- “This does not make for a stable situation. And given that the RMB is unlikely to replace the dollar as the principal global trading currency for many years to come (see History Lessons and the Offshore RMB), the likely combination of expanding global trade and a shrinking US trade deficit should mean that either the dollar will have to rise, or US assets will outperform non-US assets to the point where valuation differnces make it attractive for US investors to deploy dollars abroad (since US consumers won’t). “
- “The internationalization of the RMB and the birth of the RMB bond market is likely to be one of the most important developments of the decade. The closest analogy is the creation of the junk bond market by Michael Milken in the 1980s. Interestingly, just as in the early 1980s, few people are taking the time to work through the ramifications of this momentous event. Understanding this new market will prove essential to understanding the world of tomorrow.”
- “The likely evolution of the US from record high twin deficits to much smaller budget and trade deficits should help push the dollar higher over the coming years. And this in turn will have broad ramifications for a number of asset prices.”