Deutsche Bank investment strategist Jim Reid likes to ease clients into the day by peppering his early daily market musings with updates on his wife, three kids under five (two of whom were being potty trained over the summer), and dog Bronte (who was rushed to the vet last month after chomping through a chocolate bar).
There was no rundown of the latest in the Reid household, however, in Wednesday’s morning note. And those that clicked into a link to a report he had written with colleagues on the long-term outlook for the global economy and markets probably wish they hadn’t.
The tome said the world has been through five distinct “super-cycles” over the past 160 years. They’ve spanned the first era of globalisation (1860-1914); two world wars and the great depression (1914-1945); the Bretton Woods system of international financial order that gave rise to the baby boomers and welfare states (1946-1970); high inflation in the 1970s; and the second era of globalisation that started in 1980, but which, the Deutsche analysts suggest, is coming to an end.
“The era of globalisation to [which] we are likely waving goodbye saw the best combined asset price growth of any era in history, with equity and bond returns very strong across the board,” they said.
Indeed, if you look at a chart of Wall Street’s S&P 500 index, going back to 1980, the Black Monday market crash of 1987, dotcom bust, 2008 financial crisis and this year’s Covid-19 shock appear as mere blips in an otherwise sharp upward advance by US shares over the past 40 years.
Investors who put $1,000 into the index in 1980 – the year Ronald Reagan was elected US president, former Beatle John Lennon was fatally shot outside his New York apartment, and Apple floated on the market and set up a base in Cork – would be sitting on more than $80,000 today, assuming the reinvested dividends.
Now economies and investors alike must brace themselves for a new epoch, which Reid and his team have called the “Age of Disorder”.
It will be an era characterised by an already-fraying US-China relationship unravelling further, a reversal of globalisation, a make or break decade for Europe that has lurched from one crisis to another in recent times and higher government debt and helicopter money becoming mainstream, they predict. (That’s not to mention bubbling tension between Millennials, a generation of “have nots”, and the elderly ; and technology becoming even more highly disruptive.)
It’s a world that will clearly have a greater impact on the Republic, arguably the biggest beneficiary of globalisation in Europe, than most – even if economists have to go through our quarterly gross domestic product figures with a forensics kit to work out what is real domestic activity and what’s not.
The period of globalisation, heralded by Reagan and Thatcher, saw the deregulation of financial markets, the collapse of communism in the east, and the expansion of production chains across the planet. However, it has been under siege for more than a decade, as the financial crisis exposed how debt – and lots of it – helped paper over issues including low real wage growth, the outsourcing of many low-paid jobs and increased inequality.
The outcomes of the Brexit referendum and Trump victory in 2016 and the rise in populism internationally were symptomatic of how many have felt left behind.
Trump’s clashes with China, which has been at the centre of the globalisation story, have ratcheted up ahead of November elections, with threats to “decouple” from the world’s biggest manufacturing base.
The Democrats’ candidate, Joe Biden, has pledged to be even more hawkish on Beijing, calling Chinese president Xi Jinping a “thug”. One of his senior campaign aides, Kurt Campbell, the top Asia official in the Obama state department, told the Wall Street Journal this week that Trump’s assessment that China was a dishonest competitor was “largely accurate”.
While Europe has mostly taken a more laissez-faire approach to China, “the next decade will likely see a much tenser world order as the country gets closer and closer to becoming the largest economy in the world”, the Deutsche report said.
Meanwhile, the report says that already highly indebted advanced countries will add 15-20 per cent to their debt-to-GDP ratios this year to deal with Covid-19, and up to a further 10 per cent in 2021 if there is no real recovery from the pandemic – leaving the world more prone to financial shocks.
Even before the Irish Government set about borrowing billions to cover an unforeseen €30 billion budget deficit brought on by Covid-19 spending, gross debt stood at 233 per cent of annual revenues. Credit ratings firm Fitch noted this month how that is well above the average 118 per cent ratio seen among countries holding an A-grade debt rating, similar to the Republic.
Reid’s team also highlight how big cities have been major winners in the globalisation era. About a third of the Republic’s population resides in the greater Dublin area, making it one of the most centralised states in the developed world.
“Will this trend reverse post-Covid? If it does, this will have a major disorderly impact on society as we currently know it,” the report said. “It’s very difficult to analyse without firm evidence, but it could be a major theme in the years ahead. It will also have major implications for cities, transport, residential and commercial property, workers and many ancillary sectors and general activities we’ve taken for granted over the last several decades.”
Finally, the soaring market valuations of technology giants in recent times “are attracting the glare of politicians and regulators across the globe”, Deutsche said. EU officials have already made it clear they will be pushing to go it alone and proceed digital tax proposals, seen as a major threat to the Republic’s tax take, if wider agreement isn’t reached among members of the Organisation for Economic Co-operation and Development (OECD) next year.
In short, if you thought the world would return to “normal” when Covid passes, it might be time to think again.