How should we prepare, as a new era begins for the world economy?

Summary: Often the most important insight is the largest but least obvious aspect of a situation, hidden amidst the river of data that flows over us every day. Today the key thing to know is that we’ve entered a new world, once in which almost anything can happen. This creates new rules for individuals and business, with new risks and opportunities.  {1st of 2 posts today.}

“Innovation of new forms of society and technology. It is the key to our progress. It has allowed us to evolve from naked hunter-gatherers to the dominant species on this planet. This process is slow, normally taking hundreds or even thousands of years. But occasionally evolution leaps forward.”

— A slightly revised version of Professor Xavier’s words from the title sequence of the movie “X-Men”.

The new era begins

Signs of the new era

I find that even casual conversations with my fellow Boomers show that most of them feel that the world has changed since 2000, as if a tornado has carried us to Oz — a world where everything is different. Here are a few examples; you can add many more to this list (a longer list appears at the end).

The 2008 global recession was the worst since the 1930s, on a scale that economists believed could not happen again, with causes that remain poorly understood.

Bubbles are an inherent part of free market systems, randomly appearing during the past two centuries (they predate both fiat currencies and fractional reserve banking). The Wall Street adage was that “everybody gets one“. We’ve had three during the past two decades.

The post-WWII era was one of cyclical growth, as booms ended when Central Banks “took away the punch bowl” to stop inflation from rising above their limits. Now Central Banks set goals for a minimum rate of inflation to provide a cushion against deflationary busts. Despite massive increases in money and reserves they cannot bring inflation up to those targets.

Accurate economic predictions have become almost impossible, as we should expect during regime change. During the past five years we’ve seen frequent predictions by economics of inflation or hyperinflation on one hand, and on the other hand predictions of a “return to normal” or even “booming” growth. Astonishingly, both have proven wrong.

More broadly, paying attention to predictions has been a waste of time since 2010 — not just in economics. Who predicted the rise of the Islamic State (which reads like dystopian fiction), the Middle East aflame and sliding into what might become like the horrific Thirty Years War? Did any political guru predict that 3 months before the first primary, half of Republicans would support Trump or Carson, with the establishment candidates trailing far behind? Did anyone foresee the increasingly loud calls for “gender-neutral” bathrooms?

"Change" signal

About “regimes”, the key to understanding events of the past and today

“For the world is changing: I feel it in the water, I feel it in the earth, and I smell it in the air.”
— Treebeard, leader of the Ents, speaking in Tolkien’s Return of the King.

The old but fuzzy term “economic regime” describes the dynamics of an economic system at a specific point in time. It results from the current political and social environment, plus the physical and technological background. Is there a global hegemon, or a multi-polar international order (which might involve well-defined regional powers or global disorder)? What are the norms or rules governing war, diplomacy, and trade? What are the predominant economic and political systems (e.g., communism, democratic capitalism or state capitalism)? What are the key commodities, and are they scarce or in oversupply? What is the balance of power between economic actors (megacorps and billionaires vs. States)?

These and countless other factors form a cohesive system, complex beyond our ability to model and therefore predictable only over short periods. A regime has strong tendencies, giving us a feeling of stability. It is inflationary or deflationary, with major or minor wars. It favors global trade or autarky, growth or stagnation, and unstable or cyclical trends. Economic metrics have stable trends and ranges; the metrics of security asset classes have reliable means, relationships, and covariances (i.e., in the pre-WWII era, stock dividends were higher than bond yields; in the post-WWII era this relationship reversed).

A regime can last for generations and so it seems enduring. But no matter how solidly built it appears, history shows that regimes can evaporate in a discontinuous jump (aka “regime change”) — during which almost everything changes. A thousand year-long history can be swept away in a few years, with a shattering effect on society.

Regime change occurs during transitional periods a few decades long, in which accelerating change place immense stress on the political, social, and economic systems. Engineers know that systems become unstable when at the edge of their operating envelope, so large wild swings characterize these periods.

These cycles form the seasons of life for humanity. The revolutionary and Napoleonic Wars (1792-1815) were a winter for Europe. The 19th century (1815-1914) was a summer for western civilization, peaceful (relatively) and prosperous. The 35 year transitional period was a winter for the word, with its two global wars and a great depression. The post-WWII era was a summer, with a high degree of peace plus the fastest global economic growth since the invention of agriculture.

Now we’ve begun a new transitional period, much as did the generation before WWI. Historians will pick an arbitrary starting date for the start of the transition; my guess is that they will choose 2008. We cannot yet see the outlines of the new order.

Magic 8 ball

Implications for us, as individuals

“宁為太平犬, 莫做亂离人” (“Better to be a dog in a peaceful time, than to be a man in a chaotic time.”)
— From “Stories to Awaken the World”, Volume 3 by Feng Menglong (1627).

Play your cards cautiously. Take Heraclitus’ advice to “expect the unexpected”. Use debt carefully, avoiding excessive leverage or rollover risk (e.g., short-maturity balloon payments). Keep a large cash reserve. A secure jobs is often better than one with a high risk-reward ratio (if more people understood this, the hordes taking civil service exams would be even larger than they are today).

Investing during chaotic times is a game where the “last man standing” wins (i.e., those willing and able to invest boldly at the trough). Read the bold predictions of gurus — bullish or bearish — only for entertainment. Assume that at least half of what you know is wrong. Regard your preconceptions lightly, while closely watching events. Radical diversification is your best friend. Panic and euphoria are your worst foes. In other words, win by doing the opposite of what most investors do.

We make it sunset or sunrise.
Every sunset on a regime is sunrise for a new one.

More signs of an era ending and the dawn of a new one

Anything Could Happen.”
— A powerful insight in a song of that name by Ellie Goulding.

None of these events marked a decisively break with the post-WWII era, but cumulatively by 2000 they had eroded away its foundation. They show the creative destruction that opens the way for a new era.

  • In the 1990s the corporate revolution began, as CEOs realized they could strip-mine their companies using a combination of creative accounting, manipulation of Wall Street analysts, and stock buybacks to boost stock prices — yielding vast fortunes via their options and restricted shares, and laying the foundation for our present oligarchy.
  • On 26 December 1991 the Soviet Union dissolved.
  • In the early 1990s the third industrial revolution began (it’s still accelerating). In 1991 digital cellular technology (GSM) was launched in Finland by Radiolinja. Government-fund research produced the Mosaic web browser in 1993. In 1995 Windows 95 made a graphical user interface the dominate standard, starting the truly mass market for computers.
  • On 17 March 1998 Zhu Rongji became Premier of China, implementing political and economic reforms like those he had used to make Shanghai the growth center of China. He set China on course to again become a great power.
  • On 11 September 2001 bin Laden staged the most cost-effective military operation in history, predictably used by Bush and Cheney to fundamentally change the course of the United States. Last week the second phase of this process began in Paris.
  • A boom in oil prices (from WTI rising $12 in 1998 to $145 in 2008 (plus a similar rise in coal) sparked changes in use (e.g., substitution, more efficiency) plus development of new supplies (e.g., deep sea oil, fracking/horizontal drilling, and renewables) — leading to the current bust with prices at $45 — destabilizing both companies and countries (e.g., the Gulf States, Brazil, Russia, Argentina) around the world.
  • The past quarter-century has seen social changes on a scale that would have been unimaginable to our grandparents. For example, the on-going redefinition of gender roles, of marriage, even of physical gender itself.

Everything is new now
That’s the way you feel it
Everything is new now
Everything is new now
Change has been released
Everything is new now
I was raging from the fear of the end
I was much too tired to try and defend
Someone came and dragged me out of my head
We ran so fast the pavement turned into sand
I saw a lantern go to appear in her face
I saw a change in every godd*** place
Everything is new now

— From Jack Peñate’s “Everything Is New“.

For More Information

Please like us on Facebook and follow us on Twitter. For more information see all posts about the end of the post-WWII era, about the 3rd industrial revolution, and especially these…

Learning from the past

For descriptions of how this feels I recommend reading about the previous transformative period. Such as Stephan Zweig’s autobiography The World of Yesterday and Otto Freidrich’s Before the Deluge: A Portrait of Berlin in the 1920s. I strongly recommend reading the powerful first chapter of Zweig’s book.

The World of Yesterday
Available at Amazon.
Before the Deluge
Available at Amazon.