In the past week there were three pieces published by highly respected investors and analysts about how Russia's invasion of Ukraine will portend the end of globalization. Adam Posen, Larry Fink and Howard Markets all outlined the rollback of globalization as the use of sanctions could lead to the need to shrink supply lines and repatriate capital in an effort to shift foreign production back onshore.
Marks is more cautious in his analysis, but Fink needs to rethink his views on ESG if he believes in his newest musings. If globalization is rolled back what difference would efforts at greening investment make if nations were to seek the cheapest energy in a quest for gaining a competitive advantage over their rivals?
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China and other emerging countries will restart coal burning electricity plants for what good would a Paris or Glasgow agreement be when the developed world was curtailing it foreign direct investment, and lessening the spread of advanced low/non carbon technologies? There has been a move to push for a GLOBAL green initiative financed by large corporations, NGOS (and probably central banks if we are to believe Christine Lagarde, Isabel Schnabel and most recently, the Federal Reserve's Jerome Powell).
Fink's Blackrock has been a major promoter of ESG-based investment guidelines but if globalization is over the ESG initiative would be a huge competitive disadvantage for U.S. and European businesses as they compete with a technologically-advancing China. What gain would India receive from investing in high-cost green technology in its desire to become a more prosperous, middle-class nation? The end of globalization would certainly raise WAGE levels in the advanced economies as the pressure of global labor arbitrage that has defined the last 30 years would come to an end ensuring that inflation is even more robust then the FED's models currently predict.
It has been the benefit of global capital chasing billions of low paid workers that have worked to keep pressure on wages throughout the developed world. If Russia's invasion and NATO's response leads to the to a suppression of global capital flows then interest rates, and especially EQUITY MARKETS, are in for some periods of great volatility. It has been the combination of “cheap” capital coupled with low-wage labor that has driven up equity values around the world. In 2013, Thomas Piketty captured this in his simplistic equation: R>G, meaning that return was greater than growth.
If Posen, Marks and Fink are correct the coming years will experience a dramatic repricing of P/E ratios as global capital loses it mojo. While there's some glory in the use of sanctions, I advise holding off on popping the champagne corks. When will capital feel the pain of lower returns and higher interest rates? I have timetable but it is something to be concerned about. It certainly makes the FED's task of a neutral interest rate very difficult, especially as it also attempts to SHRINK its balance sheet in an effort to deleverage the financial system. Globalization has been great for equity capital, but I wonder if Daleep Singh has factored this into his sanctions formula. The world as seen from NOTES FROM UNDERGROUND rests on the premise that 2+2=5. Any answers for there certainly are a plethora of questions.
***On Tuesday, the Financial Repression Authority's Richard Bonugli will host a podcast with Credit Suisse analyst Zoltan Pozsar and myself. Check in with FRA because it may wind up being interactive. Two weeks ago, Pozsar wrote a piece on the end of the petrodollar, which we will probably discuss, as well as his recurring theme for Powell to find his inner Volcker.
Most importantly, we will makes sure to discuss his definition of the FED's newest word "NEUTRAL" as the appropriate level of interest rates in an effort to calm the rising headline inflation. To quote from Larry Summers's blog post published on March 23:
The central principle of anti-inflationary monetary policy is that to reduce inflation it is necessary to raise REAL RATES. Equivalently, it is necessary to raise interest rates by more than the inflation being counteracted and above a neutral level that neither speeds nor slows growth. I had thought this was universally accepted following the work of former George W. Bush administration official John Taylor and former Obama administration Council of Economic Advisers chair Christina Romer and her husband, David Romer.
As long as the FED has coalesced around NEUTRAL it is our task to define it as an effort to seek the most profitable investments.