Author : John E. Charalambakis
Date : September 28, 2015
In the art of war (in the general spirit of geopolitical and geoeconomic diplomacy) the opponent’s greatest strength happens to be his greatest weakness. Let’s take a look at a few examples. When we think of China, we usually think of its outstanding economic growth since 1995, which now is turning to be its greatest weakness. When we think of Russia, we think of its natural resources (mainly energy), which these days happen to be the source of its main economic vulnerabilities. When we think of the EU, we consider the Euro as its main accomplishment, which in our opinion is the cause of its major wounds. And when we think of Germany, we envision its efficient engineering and exports which these days is haunting her through the Volkswagen issue (Switzerland suspended VW sales over the weekend).
Similar examples abound in the geopolitical and geoeconomic spheres. The rise of nations, companies, and institutions from very low levels and sometimes their astonishing drop from their heights, reflects exactly the point we made above (think e.g. of Japan following WWII). When we look around the globe we observe with awe sometimes the ascendance of those disruptors who rise up and “all of a sudden” their ascendance is disrupted. In the investment world the disruption of the disruptors is a process of creative destruction, which may itself represent an inflection point of reallocating assets and of thinking anew in terms of risks and returns.
This commentary aims at discussing briefly the new chapter which is being drafted and is concerned with the disruption of some well-known disruptors. However, before doing so let’s review a basic schematic that represents the global system as we know it.
The four forces shown above which make up the global system are susceptible to ongoing disruptions. It is the complexity of those disruptions that determine whether the system will find an unstable equilibrium or a stable disequilibrium. The significant thing about the current disruptions is that they are so perplexed and complex that as we wrote before (see e.g. http://stage.blacksummitfg.com/2564), we are of the opinion that we have moved from the age of unstable equilibrium to an era of a stable disequilibrium where we try to find ghosts and scapegoats to blame (we call them secular stagnation, deflation, etc.).
Let’s start with our own Fed’s ZIRP arrangements. The zero interest rate policy has created plenty of misallocations and misconceptions to the extent that almost ten years after the Fed’s last rate increase and after several rounds of QEs we are concerned if a 25 bps increase may create financial tremors. This by itself signifies the instability of unnatural policies and reflects the state of disequilibrium. Unless the disruption of the ZIRP disruptor takes place, it may be difficult to move to a phase where we could experience growth, which could come when financial repression is abandoned.
Let’s move from the Fed to the BRICS. Their rise was thought to symbolize a new era where co-determination between developed and emerging powers would be the force that shapes the global system. However, when we take a look at any of them we observe huge issues from debt (China), to significant recession and funding problems (Russia, Brazil), to political instability (Brazil), to anemic reforms (India), and to stagnation (S. Africa). The BRICS’s disruption has been disrupted.
In Greece, the disruption that the Syriza party was envisioning for all of the EU, has been disrupted itself by its compliance to the demands of the creditors, and in the process the troika has been transformed into the quartet where the ECB, the IMF, and the EU have been supplemented by the European Stability Fund which will provide additional credit facilities in order to save a monetary union which never complied with the fundamentals of an optimal currency union. We are still of the opinion that such dysfunctionality (a.k.a. Euro) will be reversed and the disruptions it causes will be disrupted.
In the Middle East the Arab Spring looks more like an Arab winter and the disruptions it fired up are being disrupted by violence, civil wars (Syria, Libya, Yemen), and significant unrest. We believe that in a similar manner to which the era of terror (Khmer Rouge) in Cambodia ended, the Syrian conflict will also end, and the latest developments may be indicative of that. Furthermore, the Iran deal will unfold a force in both geoeconomic (energy) and geopolitical spheres (Syria, Iraq), which may itself disrupt the disruptions the system has experienced over the last thirty years.
In the examples that we discussed, I left technology disruptions last. Throughout history technology is a force whose outcomes shapes destiny. It is again our opinion that technology and biotechnology is in a trajectory where we will see over the course of the next 10-15 years such advancements (from flying between New York and London in less than 75 minutes, to printing a human heart, to altering the treatments of diseases) which, in combination with the disruption of all the other disruptors, will shake up the global system as a whole and move us away from the state of stable disequilibrium where we have been trapped.
Ode to the disruption of the disruptors!