“In the previous edition of Seeds, I focused on how the re-weighting of career risk was manifesting itself among bankers, PM’s, market makers and corporate leaders, but I’d be remiss not to mention how I believe it will play out for political leaders as well. Growth is unlikely to find its legs and underemployment will continue to be a problem for those seeking re-election. In response to pressure from the populace, I see politicians going back to the scapegoat-well, this time blaming those beyond their borders for what ails them. The result? I suspect Venezuela’s recent currency devaluation and Japan’s more activist role in a weaker Yen mark the not so subtle beginning of an increasingly protectionist global macro environment.” - Seeds of Thought 13-6 (March 5, 2013)
Well before the above, in the LiquidMacro Investment Letter for May 2008 and again the following month, I listed “Rise of Protectionist Rhetoric” as being on my radar.
“Here is a generic list of my views. Bearish Commodities; Expect Equity and Real Estate Bubbles to Continue Expanding; Bearish Tropical Emerging Markets; Bearish Global Growth; Anticipate Increase in Protectionism; Bearish Volatility; Favor Deflation over Inflation.” - Seeds 13-11 (May 21, 2013)
In 2014, I reminded readers that the Arab Spring had more to do with the combination of massive unemployment, particularly among young men, combined with the spike in food prices, than the man who’d been in charge of Egypt for the previous 30 years.
“The trend is evident when you look at the Global GDP over an extended period, but keep in mind, that downward trend occurred when financial innovation was creating credit like never before, technology was experiencing an evolutionary leap, and the global economic population was growing well above trend. I hate to be cynical, but does it make sense to think global growth is in for a spike? Probably not.
"Make no mistake, what Japan, Europe and so many others are practicing is a form of protectionism. They are essentially manipulating their currencies to pull growth away from the one country whose economy has been performing well, the United States. The problem with this solution is two-fold. First, as I’ve written about numerous times recently, thanks to wealth disparity and the inability to entice capital out of the financial economy and into the real economy, loose monetary policy is ineffective and it shows in the ever declining velocity. Secondly, stealing growth from the rest of the world when everyone else is experiencing strong growth can be an effective policy. However, when everyone else is struggling too, it becomes less and less so.
Take a look at the correlation between currency moves and export growth. There was a time when it was an excellent idea for Japan to weaken their currency, mostly because they were struggling when the rest of the world was on fire. Now, with everyone else struggling too, well, not so much. And what happens when growth in the US begins to falter again? Yes, I said when, not if.” - Seeds 14-9 (December 18, 2014)
Let’s boil the Brexit vote down to its essence to understand why it happened and its significance. The world is struggling to generate growth. Thanks to the leap forward in the evolution of technology which began late last century, wealth disparity has returned to previously problematic levels, resulting in the same consequences. During these periods, unemployment is sometimes the issue, but underemployment and the low wages relative to hopes and expectations is often the bigger problem, leading to a sense of helplessness.
While Brexit may wind up being significant, it is merely one more step down a path we’ve been headed for quite some time. When wealth disparity reaches extremes, growth is difficult to generate and underemployment stays elevated, human history tells us what we should expect. Before solutions are proposed or even demanded, people just want “change”. That’s what last night’s vote was. A vote for change. No plan. No expectations. Just change for change’s sake.
While the pundits reasoned that the overthrow of Mubarak, was the result of a populace having had enough, the truth lay deeper. While the Brexit result may be surprising, it is the continuation of a trend that began with the Arab Spring. The same can be said for the rise of socialist leadership, nationalism, terrorism, and anti-immigration. When we face problems, especially those that seem insurmountable, we turn inward, like retreating to the protection of a castle and looking outward for the enemy that is trying to destroy us. We dig in, both physically and mentally, resulting in increasingly polarized politics, thereby reducing the likelihood of reaching an optimal solution. The problem is that no simple solution exists and there isn’t an evil antagonist to blame, so we must create one.
That being said, Brexit is a symptom of a bigger issue, not the issue itself. While it won’t cause the next stages of the global problem, the “Exit” outcome may speed up its arrival. This is not a UK specific problem, it is global. Though the rating agencies will likely penalize the UK alone, it says more about their inability to truly understand the global issues. Rather than looking at the whole picture, they, like many others, view it in piecemeal, dissecting each issue independently as it arises.
So what does Brexit represent in isolation? A potential hinderance or barrier to trade at a time that the global economy can ill afford it. That’s it. To be honest, I don’t see a great deal changing as a result in the near term. The world will continue to struggle to generate growth. Wealth disparity will continue to grow. Technology will continue to move further and further up the cognitive scale, making us more efficient while also making many of us either redundant or simply too expensive. We will see further polarization on the political front around the world. Borders will realign to reflect that polarization, in the hopes that it will solve the problems, but it will not. So, what does it mean for my investment thesis? Nothing has changed. The generic list of views I provided on May 21, 2013 remains solidly in place. “Bearish Commodities; Expect Equity and Real Estate Bubbles to Continue Expanding (in DM); Bearish Tropical Emerging Markets; Bearish Global Growth; Anticipate Increase in Protectionism; Bearish Volatility; Favor Deflation over Inflation.”
About the Author For nearly thirty years, Stephen Duneier has applied cognitive science to investment and business management. The result has been the turnaround of numerous institutional trading businesses, career best returns for experienced portfolio managers who have adopted his methods, the development of a $1.25 billion dollar hedge fund and 20.3% average annualized returns as a global macro portfolio manager.
Mr. Duneier teaches graduate courses on Decision Analysis and Behavioral Investing in the College of Engineering at the University of California.
Through Bija Advisors' coaching, workshops and publications, he helps the world's most successful and experienced investment managers improve performance by applying proven, proprietary decision-making methods to their own processes.
Stephen Duneier was formerly Global Head of Currency Option Trading at Bank of America, Managing Director in charge of Emerging Markets at AIG International and founding partner of award winning hedge funds, Grant Capital Partners and Bija Capital Management. As a speaker, Stephen has delivered informative and inspirational talks to audiences around the world for more than 20 years on topics including global macro economic themes, how cognitive science can improve performance and the keys to living a more deliberate life. Each is delivered via highly entertaining stories that inevitably lead to further conversation, and ultimately, better results.
His artwork has been featured in international publications and on television programs around the world, is represented by the renowned gallery, Sullivan Goss and earned him more than 50,000 followers across social media. As Commissioner of the League of Professional Educators, Duneier is using cognitive science to alter the landscape of American K-12 education. He received his master's degree in finance and economics from New York University's Stern School of Business.
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