Decline of motor industry drives global economic slowdown

Car production shrank for first time in decade, accounting for a quarter of GDP fall

Delphine Strauss in London

A worker operates on the car production line of the newly opened automobile assembly plant of the German automobile maker and Mercedes Benz outside Moscow, on April 3, 2019. (Photo by Pavel Golovkin / POOL / AFP) (Photo credit should read PAVEL GOLOVKIN/AFP via Getty Images)
© AFP via Getty Images



As the global economy faces its sharpest slowdown since the financial crisis, one industry is both culprit and victim.

The motor industry affects the health of the global economy far more than its share of total output would suggest: carmakers have long supply chains to source parts; they are also big consumers of raw materials and chemicals, textiles and electronics; and their fortunes affect millions of service sector jobs in sales, repairs and maintenance.

Last year the sector shrank for the first time since the global crisis. The IMF believes this fall in output accounted for more than a quarter of the slowdown in the global economy between 2017 and 2018.

The sector may also be responsible for up to a third of the slowdown in global trade growth between 2017 and 2018, the fund said last month, after factoring in the spillover effects on trade in car parts and other intermediate goods.

“The car sector has been weighing heavily on manufacturing activity and growth,” Gian Maria Milesi-Ferretti, deputy director of the IMF’s research department, said last month.

The IMF’s forecast of a modest pick-up in global trade in 2020 hinges on a recovery in the sector. But its analysis also underscored the potential for further damage if the sector becomes the next casualty of the escalating trade spat between the US and EU; the White House is due to decide by November 13 whether to impose a 25 per cent tariff on auto imports.


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Some motor industry executives already blame US trade policy for much of the sector’s misfortune, in particular for a sharp downturn in the Chinese market that had driven global sales growth.

“This trade war is really influencing the mood of the customers, and it has the chance to really disrupt the world economy,” Herbert Diess, Volkswagen’s chief executive, said at the Frankfurt motor show in September, adding: “Because of the trade war, the car market [in China] is basically in a recession . . . That’s scary for us.”

But while carmakers are suffering like other manufacturers from the broader uncertainty over trade policy, they have not yet become a direct target of US trade policy.
Instead, the IMF said the industry downturn was mainly due to policy changes in China — including the withdrawal of tax breaks encouraging car ownership and a clampdown on peer-to-peer lending — and the disruption caused by the rollout of new emissions tests in Europe.

The IMF noted that in many countries, consumers were holding off on purchases because standards were changing rapidly, while the options for car-sharing were evolving.

Meanwhile Indian car sales have slumped because of problems in the shadow banking sector that provides around half of new car finance; while recession in Turkey and Brexit-related uncertainty in the UK have held back sales in other big markets.

Overall, car sales fell by about 3 per cent in 2018 and car production by around 2.4 per cent, after correcting for differences in the average price of cars between countries, the IMF said.

Research published by Fitch Ratings earlier this year argued that this global fall in car sales could have reduced world gross domestic product by as much as 0.2 per cent — significantly more than the IMF estimates — after taking account of spillovers to other industries and the effects of lower wages and profits on household and business spending.

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“This is where the global slowdown has been concentrated,” said Brian Coulton, chief economist at Fitch Ratings. “It has been the lead sector, not just broader collateral damage [of the trade war] . . . There is no doubt this is a key driver of the global manufacturing cycle.”

Matters will worsen if the car industry does fall victim to tit-for-tat tariffs. With supply chains criss-crossing borders, and just-in-time manufacturing processes, the industry is especially vulnerable to new trade barriers.

Wilbur Ross, US commerce secretary, hinted in an interview with the Financial Times last month that Washington was inclined to pursue talks with the EU, rather than imposing tariffs on auto imports when a six-month reprieve runs out in the middle of this month.

Yet the threat of tariffs remains live. Analysis published earlier this year by the Peterson Institute for International Economics found that if the US were to act on the threat, imposing a 25 per cent tariff on auto imports from all countries, US auto production would fall by 1.5 per cent, with the sector shedding almost 2 per cent of its workforce and 195,000 workers becoming unemployed nationally as a result of the macroeconomic shock.

If other countries retaliated, US production would fall 3 per cent, with 624,000 US jobs lost and 5 per cent of the sector’s workforce displaced.

“If they do this, we are all losers,” Oliver Zipse, BMW’s chief executive, told a conference last month, adding that tariffs would threaten jobs and production at its factory in South Carolina.


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So far, the US is the only big market where car sales have remained relatively resilient.

Much of the downturn elsewhere appears to be cyclical: the decline followed several years of surging sales, and it came just as many carmakers were being forced to make large investments to develop electric vehicles that will be lossmaking in the near term at least.

But pervasive uncertainty over trade — and the resulting worries over global growth — do not help.

As Holger Schmieding, an economist at Berenberg, pointed out, this kind of uncertainty tends to scare consumers off big ticket purchases: “If you are uncertain . . . you don’t have to buy the car.”

What Really Happened in Bolivia?

Events in the country remain exceptionally fluid following the ouster of President Evo Morales, who has been given political asylum in Mexico. Nonetheless, three preliminary conclusions can already be drawn.

Jorge G. Castañeda

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MEXICO CITY – Events in Bolivia remain exceptionally fluid following the ouster of President Evo Morales. There may or may not be free and fair elections within 90 days. Morales, who has been given political asylum in Mexico, may run again for president or seek to return to power by other means.

The Latin American left may recover from the fall of an icon, or continue to lose ground.

Morales’s policies, good and bad, will be overturned by a rightward swing in Bolivia, not unlike the recent anti-incumbency backlash elsewhere in Latin America, or they will outlast him.

Nonetheless, three preliminary conclusions can already be drawn. The first involves the regional implications of Morales’s downfall, regardless of the details of its consummation. After Latin America’s so-called pink tide – roughly from 2000 to 2015 – many of the left’s emblematic leaders were voted out of power, or resorted to various authoritarian stratagems in order to remain in control. Once the commodity boom ended, and when corruption scandals erupted in several countries, many leftist leaders or parties were unceremoniously evicted.

This occurred in Brazil, of course, as well as in Argentina, El Salvador, and Chile. In Venezuela, Nicaragua, and Bolivia itself, the left hung on to power through increasingly repressive and anti-democratic procedures. With the exception of Mexico, where Andrés Manuel López Obrador won the presidential election in 2018, the left has been on the wane across the region.

President Mauricio Macri’s defeat last month by the Peronist candidate Alberto Fernández in Argentina restored hope to the left’s supporters throughout the region. Similarly, the massive, though often violent, demonstrations in Chile since October, frequently seen as anti-neoliberal protests and as a clamor for a “different path,” gave reason for leftists to believe that the pendulum had swung back.

In this context, Morales’s political demise clearly counts as a defeat. He had lasted longer than any of the region’s other leftist leaders. His indigenous roots in one of the region’s poorest countries, together with his charismatic – or grandstanding – anti-imperialism and flamboyance, made him a rock star in much of the world.

The fact that the economy grew impressively, and that his opponents were often racist, also helped. This is now over, despite his best efforts, aided by his Mexican hosts and their Cuban and Venezuelan allies, to maintain his social-media presence in Bolivia and the international press.

Morales and his backers have sought to portray his fall from power as a classic military coup d’état, analogous to those that overthrew Guatemalan President Juan Jacobo Árbenz in 1954 or Salvador Allende in Chile in 1973. In each case, the military steps in, with American support or acquiescence, captures the presidential palace and most of the president’s aides, shuts down the legislature, represses left-wing activists or leaders, and remains in power for years to come.

Having been overthrown, the democratically elected president who wished to continue to govern with a democratic mandate either commits suicide or goes into exile.

None of this is what occurred in Bolivia in October and November. Morales violated the constitution by running for a fourth term. The two Organization of American States Electoral Observation Missions that he himself had invited, and whose terms he had accepted, then refused to certify the outcome. The Bolivian military arrested no one.

True, Morales resigned when the military told him to, and after he had agreed to protesters’ demands for a new vote. But the existing constitutional provisions were subsequently followed.

The Constitutional Court, which allowed Morales to run, deemed the presidential succession legal; timely elections have been promised; and the military have not taken power. Indeed, the high command under Morales, who “suggested” he resign, has been replaced.

The broader, more abstract question is this: If electoral mechanisms no longer suffice to replace a president who is bent on remaining in power, when does an attempt to remove him or her through other means become legitimate? Would a coup to overthrow Venezuelan President Nicolás Maduro, Nicaraguan President Daniel Ortega, or Raúl Castro in Cuba be acceptable?

What about dictators like Chile’s Augusto Pinochet and Argentina’s Jorge Videla in the 1970s and 1980s? Why is it acceptable when millions in the streets demand their leaders’ resignation, but not when the military join them verbally, and without the use of force?

When dictators assume power through electoral means, and then hold onto it through other methods, eliciting demands for their departure by students, unions, women, and indigenous peoples – like in Ecuador, just weeks ago – matters are no longer as clear-cut as they seemed decades ago.

Morales’s fall was brought about by a complex combination of factors, only one of which was the military’s call for him to step aside. Transforming him into a modern-day Allende who survived because he fled may be good propaganda for the radical left in Mexico, New York, and Bolivia, but it does not correspond to realities on the ground.

This leads us to the third conclusion. If the new Bolivian government sticks to the timetable foreseen by the constitution and schedules elections within 90 days, this will foreclose the discussion about coups and non-coups.

If Morales’s party, the Movimiento al Socialismo, fields a candidate other than Morales, it will lend full legitimacy to the process. Morales will almost certainly not be allowed to run, both for having attempted to steal the previous vote, and in view of the existing prohibition on running for a fourth term.

If the center-right opposition wins, it will undoubtedly attempt to overturn many of Morales’s policies and decisions. It is worth noting, however, that Carlos Mesa, who would have contested the run-off vote against Morales if the latter had not proclaimed himself the winner in the first round, is no extreme right-winger.

In fact, he was Morales’s representative at The Hague in Bolivia’s suit against Chile before the International Court of Justice. But that is what elections and rotation in power are for: to change course when the electorate so decides.

Morales will continue seeking to use his Mexican asylum and official sympathy for his cause to return to power. He may even succeed. But that would not address the country’s underlying dilemma. During 200 years of independence, Bolivians, like so many others in Latin America, have failed to transfer power peacefully and democratically over a sustained period of time.

Mandates to govern were interrupted by coups, revolutions, insurrections, or accidents – or leaders remained in power indefinitely. Having Morales pass from the scene for good, while transferring power peacefully and democratically from one president to another for the foreseeable future, would be a major accomplishment.


Jorge G. Castañeda, former Foreign Minister of Mexico, is Professor of Politics and Latin American and Caribbean Studies at New York University.


Gold Will Break Its All-Time High in 2020

By E.B. Tucker, editor, Strategic Investor



I sat down for half a dozen media interviews earlier this year where I called for $1,500 per ounce of gold in 2019.

In several cases, the hosts nagged me about my prediction, asking if I would stick with it. I did. In August, it hit my target.

Now, the price has retreated a bit since, but gold’s still flirting with $1,500 per ounce, as I write.

Here’s why I’m writing you today: I believe $1,500 is only the beginning for gold.

I expect gold to take out its previous high of $1,900. That’s a 27% gain from here. And I expect that to happen in 2020.




In fact, as I told Kitco News recently, from there I see it hitting $2,200 – about a 47% rise from its current price of $1,492 per ounce.

Today, I’ll share why… and how you can start taking advantage…

A Major Gold Rally Is Underway

All of the serious money I’ve made investing came through positioning for a big move and sitting tight. Trading is tough. In and out all the time can work over a short period. But the big gains come from sitting tight and letting the bull market run.

After hitting an all-time high in 2011, the price of gold fell 45% to a low of $1,052 in late 2015.

While the Obama administration and the Federal Reserve experimented with radical money policies, gold stayed stuck. Notice in the chart above it didn’t do much after hitting its 2015 low.

What’s bad for gold is unbearable for gold miners. They commit to projects assuming they’ll sell produced gold for $1,500. Then it falls to less than $1,100. That means the project is bankrupt before it pours the first gold ounce.

That period is over.

I can give you a list of anecdotal evidence as proof. Several large mining firms combined this year in order to survive. These were not bidding war takeovers. CEOs got over their egos and merged to avoid losing their companies entirely.

Political dysfunction and ballooning deficits also set the stage for gold today. The three largest central banks in the developed world recently declared they’ll do anything to stimulate their economies. That’s central bank lingo for “create more money.”

But we need more than strong anecdotes to risk money on the gold sector.

From our view, that’s why the chart of gold is so important. It’s how I determined $1,500 was an important target for gold this year. If it hit that target, which it did, I felt it was a green light to invest more aggressively for higher prices.

The gold chart below goes back to 2014. Notice that after gold hit its low in late 2015 (circled in red), each rally that followed registered a higher low. The pullbacks of 2016 and 2018 (also circled in red) each hit low points higher than the last. To us, this meant it was a matter of time before gold exploded higher.




Breaking $1,500 was the first test. Now, I expect it to correct, which is market speak for rest and get ready for the next leg higher.

That next move for gold will catch mainstream asset managers off guard. As I said above, I expect it to eventually take out its 2011 high. That’s why the current pullback in gold is the perfect time to position for what may come next.

If you haven’t already, the first step is buying some physical gold. If you’re new to gold, start with common 1-ounce coins like the ones offered here by Gainesville Coins.

(I asked Gainesville Coins to create this page as a starting point for Casey Daily Dispatch subscribers who are new to physical gold. We do not receive any compensation from Gainesville Coins for bringing you this offer.)

After owning physical gold, you should consider speculating on select mining stocks, which can provide leverage to a rising gold price.

Let me explain…

Gold Mining Stocks… and the Power of Leverage

The word “leverage” usually means borrowing. That’s not the case at all in the gold market.

If you aren’t familiar with the concept of leverage in gold stocks, here’s a quick example of how powerful it can be…

Say the price of gold rises from $1,300 to $1,400. That’s roughly an 8% gain. If you own physical gold, you’re up 8%.

Now, say a mining company owns a million ounces of gold in the ground, and gold is trading at $1,300. The value of the gold in the ground isn’t simply $1.3 billion (1 million ounces x $1,300 per ounce). Instead, the gold in the ground is worth much less than that, because it will cost a lot of money to extract.

Say it costs the company $1,250 per ounce, all-in, to mine the gold. At a gold price of $1,300, the company has a potential profit of $50 on each ounce of gold.

However, if the price of gold rises only 8% to $1,400, the company’s profits per ounce increase by 200% ($1,400 – $1,250 = $150 profit per ounce). This small move in gold can cause the stock price to increase 40%, 50%, or more.

This is why a small increase in the price of gold can cause a gold stock to soar many times that amount.

It’s happened before…

Gold producers boomed during three separate cycles when gold surged: 1979-1980, the mid-1990s, and 2001-2006.

First up, the king of all gold bull markets: 1979-1980…

Gold more than tripled during this period. But gold stocks more than quadrupled.




This wasn’t the only time gold stocks ran further than gold itself…

There was another boom in the 1990s. The average gold producer went up more than 200%…
Cambior rose 124%. Kinross Gold returned more than 190%. And Manhattan Gold & Silver skyrocketed over 760%.

All while gold only rose 8%.

Then, another big boom hit from 2001-2006.

Gold returned 158%, while the average gold producer gained over 400%.

Newmont shot up 270%. Gold Fields soared over 500%. And Goldcorp returned over 800%.

As you can see, an increase in the price of gold (even a small one) can lead to huge returns.

Now’s the Time to Take Advantage

You don’t want to be sitting on the sidelines while the motherlode of all gold rallies gains momentum…

Remember, before owning a gold stock, it’s wise to have some physical gold.

Then, you can speculate on higher gold prices by buying gold miners, which gives you the chance to multiply your money in a gold bull market.

You can look into an exchange-traded fund (ETF) like the VanEck Vectors Gold Miners ETF (GDX), which holds a basket of gold stocks.

But the best way to take advantage is by following our advice in my newsletter Strategic Investor. In our core portfolio we have a world-class gold miner that shot up 56% during gold’s move from May to September of this year. This is no penny stock. This multibillion-dollar miner turns a profit and pays a dividend.

The same goes for silver. Our top pick surged 83% over the same period. It too pays a dividend.
In short, now’s the time to strike before gold really takes off.

Just remember, gold stocks are extremely volatile. Like in any industry, the stocks of stronger companies will go up more than those of the weaker ones. As always, never bet more money than you can afford to lose.

It only takes a small stake in the right companies to make a fortune as gold prices rise.

Technically Speaking: Everyone Is Swimming In The 'Deep End'

by: Lance Roberts


Summary
 
- As asset prices have escalated, so have individual's appetite to chase risk. The herding into equities suggests that investors have thrown caution to the wind.

- With cash levels at the lowest level since 1997, and equity allocations near the highest levels since 1999 and 2007, it suggests investors are now functionally "all in."

- Of course, as the markets continue their relentless rise, investors feel "bulletproof" as investment success breeds overconfidence.

- Poor, or deteriorating, fundamentals, excessive valuations and/or rising credit risk is often ignored as prices increase.

- The stock market has returned more than 100% since the 2007 peak, which is more than 2.5x the growth in corporate sales and almost 5x more than GDP.
    
 
With the market breaking out to all-time highs, the media has started to once again reach for their party hats as headlines suggest clear sailing for investors ahead.
 
After all, why not?
  • The Federal Reserve cut rates for the 3rd time this year.
  • The Fed is also back in the "QE" game of buying bonds.
  • President Trump has "surrendered" to China in order to end the "trade war."
  • Corporate stock buybacks are on track for the second largest year on record.
  • Earnings, due to buybacks, are beating lowered estimates,
  • consumer sentiment remains near record highs; and,
  • economic data is weak, but not terrible.
 
With those supports in place, markets are pushing new highs as we discussed would likely be the case last month:

"Assuming we are correct, and Trump does indeed 'cave' into China in mid-October to get a 'small deal' done, what does this mean for the market. 
The most obvious impact, assuming all 'tariffs' are removed, would be a psychological 'pop' to the markets which, given that markets are already hovering near all-time highs, would suggest a rally into the end of the year."
This is not the first time we presented analysis for a "bull run" to 3300. To wit:

"The Bull Case For 3300
  • Momentum
  • Stock Buybacks
  • Fed Rate Cuts
  • Stoppage of QT
  • Trade Deal"
All the boxes have been checked.
 
Even more important than these supports, is the overall psychology of the markets.
 
As Doug Kass recently noted, investors "want to believe."

"'Price has a way of changing sentiment.'  
- The Divine Ms. M.
  • They want to believe that the trade talks between the U.S. and China will be real this time. 
  • They want to believe that there is no 'earnings recession' even though S&P profits through the first half of 2019 are slightly negative (year over year) and that S&P EPS estimates have been regularly reduced as the year has progressed. 
  • They want to believe that stocks are cheap relative to bonds even though there is little natural price discovery as central banks are artificially impacting global credit markets and passive investing is artificially buoying equities. 
  • They want to believe that technicals and price are truth - even though the markets materially influenced by risk parity and other products and strategies that exaggerates daily and weekly price moves. 
  • They want to believe that today's economic data is an "all clear" - forgetting the weak ISM, the lackluster auto and housing markets, the U.S. manufacturing recession, and the continued overseas economic weakness. 
  • They want to believe that, given no U.S. corporate profit growth, that valuations can continue to expand (after rising by more than three PEs year to date). 
  • They want to believe though that the EU broadly has negative interest rates and Germany is approaching recession (while the peripheral countries are in recession) - that the Fed will be able to catalyze domestic economic growth through more rate cuts. 
  • They want to believe that the U.S. can be an oasis of growth even though the economic world is increasingly flat and interconnected and the S&P is nearly 50% dependent on non-U.S. economies."
The "need to believe" is a powerful force which has lured investors back into the "warm waters of complacency." The sentiment is certainly understandable given the market's advance which has triggered investor's "Pavlovian" response to the ringing of "the bell." This was shown recently by a series of charts from Sentiment Trader.
 
Everyone Back In The Pool
 
As asset prices have escalated, so have individual's appetite to chase risk.
 
The herding into equities suggests that investors have thrown caution to the wind.
 
 
 
With cash levels at the lowest level since 1997, and equity allocations near the highest levels since 1999 and 2007, it suggests investors are now functionally "all in."
 
 
 
With net exposure to equity risk by individuals at historically high levels, it suggests two things:
  1. There is little buying left from individuals to push markets marginally higher, and;
  2. The stock/cash ratio, shown below, is at levels normally coincident with more important market peaks.
But it isn't just individual investors that are "all in," but professionals as well.
 
 
 
Importantly, while investors are holding very little "cash," they have taken on a tremendous amount of "risk" to chase the market. It is worth noting the current levels versus previous market peaks.

Importantly, what these charts clearly show is there is nothing wrong with aggressively chasing the markets, until there is.
 
As Doug Kass often states: "Risk happens fast."
 
Which brings me to something Michael Sincere's once penned:
"At market tops, it is common to see what I call the 'high-five effect' - that is, investors giving high-fives to each other because they are making so much paper money. It is happening now. I am also suspicious when amateurs come out of the woodwork to insult other investors."
Michael's point is very pertinent, particularly today. As shown in the two charts below, investors are clearly "high-fiving" each other as risk aversion hits near record lows.
 
 
 
While the fundamental backdrop of the market has materially weakened, the confidence of individuals has surged. Of course, as the markets continue their relentless rise, investors feel "bulletproof" as investment success breeds overconfidence.
 
As Sentiment Trader shows, retail investors (dumb money) are currently pushing levels which have typically denoted short-term market peaks, This should not be surprising as individuals, with regularity, "buy tops and sell bottoms."
 
 
Strongly rising asset prices, particularly when driven by emotional exuberance, "hides" investment mistakes in the short term. Poor, or deteriorating, fundamentals, excessive valuations and/or rising credit risk is often ignored as prices increase. Unfortunately, it is after the damage is done that the realization of those "risks" occurs.
 
Regardless of what you believe, a "bear market" will eventually come. We don't/won't know what will trigger it, but some unforeseen exogenous event will start a "flight to safety" by investors. The chart below is the "bear market" probability model from Sentiment Trader.
 
Importantly, note the index peaks a couple of years before the onset of a "bear market." (The last peak was in 2015)
 

 
 
 
Here is the point, despite ongoing commentary about mountains of "cash on the sidelines," this is far from the case. This leaves the current advance in the markets almost solely in the realm of Central Bank activity.
 
Again…there is nothing wrong with that, until there is.
 
Which brings us to the ONE question everyone should be asking.
"If the markets are rising because of expectations of improving economic conditions and earnings, then why are Central Banks pumping liquidity like crazy?"
 
Despite the best of intentions, Central Bank interventions, while boosting asset prices may seem like a good idea in the short term, in the long term it harms economic growth. As such, it leads to the repetitive cycle of monetary policy.
  1. Using monetary policy to drag forward future consumption leaves a larger void in the future that must be continually refilled.
  2. Monetary policy does not create self-sustaining economic growth and therefore requires ever-larger amounts of monetary policy to maintain the same level of activity.
  3. The filling of the "gap" between fundamentals and reality leads to consumer contraction and ultimately, a recession as economic activity recedes.
  4. Job losses rise, wealth effect diminishes, and real wealth is destroyed.
  5. The middle-class shrinks further.
  6. Central banks act to provide more liquidity to offset recessionary drag and restart economic growth by dragging forward future consumption.
  7. Wash, Rinse, Repeat.

If you don't believe me, here is the evidence.
 
The stock market has returned more than 100% since the 2007 peak, which is more than 2.5x the growth in corporate sales and almost 5x more than GDP.
 
The all-time highs in the stock market have been driven by the $4 trillion increase in the Fed's balance sheet, hundreds of billions in stock buybacks, PE expansion, and ZIRP.
 
 
 
What could possibly go wrong?
 
However, whenever there is a discussion of valuations, it is invariably stated that "low rates justify higher valuations."
 
Maybe.
 
But the argument suggests rates are low BECAUSE the economy is healthy and operating near full capacity.
 
The reality is quite different.
 
The main contributors to the illusion of permanent prosperity have been a combination of artificial and cyclical factors.
 
Low interest rates, when growth is low, suggests that no valuation premium is "justified."'
 
Currently, investors are taking on excessive risk, and thereby virtually guaranteeing future losses, by paying the highest S&P 500 price/revenue ratio in history and the highest median price/revenue ratio in history across S&P 500 component stocks.
 
This valuation problem was discussed last week by our friends at Crescat Capital.
 
To wit:
 
 
There are virtually no measures of valuation which suggest making investments today, and holding them for the next 20-30 years, will work to any great degree.
 
That is just the math.
 
The markets are indeed bullish by all measures. From a trading perspective, holding risk will likely pay off in the short-term. However, over the long-term, the "house will win."
 
Just remember, at market peaks - "everyone's in the pool."

The New Anti-Capitalism

It should not be surprising that our era of rapid technological change has coincided with renewed skepticism of capitalism across Western countries. Yet this time is different, not least because of the rise of winner-take-all markets and a shift in the geographic center of the global economy.

Harold James

james161_Peter MacdiarmidGetty Images_capitalismgrimreaper


PRINCETON – We are currently living through the most dramatic technological and economic transformation in the history of mankind. We are also witnessing declining support for capitalism around the world. Are these two trends connected, and if so, how?

It is tempting to say that capitalism’s growing unpopularity is simply a symptom of Luddism – the impulse that led artisan workers in the early Industrial Revolution to break the machinery that threatened their jobs. But that explanation doesn’t capture the complexity of today’s movement against capitalism, which is being led not so much by distressed workers as by intellectuals and politicians.

The current anti-capitalist wave comes at a time when free-market neoliberalism and globalization are nearly universally excoriated. Opposition to neoliberalism came originally from the left, but has been taken up – perhaps even more vigorously and rancorously – by the populist right.

After all, there was more than a touch of old-style interwar-era anti-capitalist sentiment in former British Prime Minister Theresa May’s 2016 speech denouncing cosmopolitan “citizens of the world” as “citizens of nowhere.” Or as her successor, current British Prime Minister Boris Johnson, put it even more succinctly: “Fuck business.”

Likewise, in the United States, Fox News anchor Tucker Carlson has channeled the pathos of the Trumpian right through lengthy rants against capitalism, complaining about “mercenaries who feel no long-term obligation to the people they rule” and “don’t even bother to understand our problems.”

A partial explanation for the new zeitgeist is that it is a predictable reaction to financial destabilization. Just as monetary conditions following World War I seemed unfair and generated a ferocious reaction, the 2008 financial crisis fueled a widespread belief that the system is rigged.

While governments and central banks rescued large financial institutions in order to prevent a collapse of the entire global financial system and a repeat of the Great Depression, the millions of people who lost their homes and jobs were left to fend for themselves.

The financial crisis alone was enough to sow the seeds of anti-capitalist sentiment. But it also coincided with a much broader technological and social transformation. Innovations like smartphones – the iPhone was unveiled in 2007 – and new Internet platforms have fundamentally changed the way that people connect and conduct business. In many ways, the new mode of business is antithetical to capitalism, because it is based on opaque payments and asymmetric or two-sided markets.

We now obtain services by “selling” our personal information. But we’re not actually aware that we are engaged in a market transaction, because there is no sticker price that we can see: the price paid is our privacy and personal autonomy.

At the same time, zero-sum thinking has become the predominant form of economic analysis. This, too, clearly has roots in the financial crisis. But it has also been fostered by the new information technologies (IT), owing to the power of network effects within winner-take-all markets – particularly with respect to the platform economy and the development of artificial intelligence (AI).

The more people there are on a network, the more valuable it becomes to each user, and the less room there is for any second player in the market. According to a famous Avis advertisement from 1962, “When you’re only No. 2, you try harder.” But now if you’re No. 2, there’s no point. You’ve already lost.

Moreover, the new IT and AI capitalism has a specific geography. It is rooted in the US and China, but the Chinese aim to achieve dominance by 2030. Capitalism has always driven geopolitical change, but now that it is becoming increasingly associated with China – after having been synonymous with America from the interwar period onward – it invites objections from different sources than in the past.

Looking ahead, the radical changes of the post-financial-crisis world will continue to unfold, with the IT/AI revolution altering the nature of most economic activity. Banks will fade away, not because they are evil or systemically dangerous, but because they are less efficient than the new alternatives.

For all of the improvements in electronic communication, bank costs and charges have scarcely fallen; indeed, for many consumers in areas with zero or negative interest rates, fees have actually increased. At some point in the not-too-distant future, most banking services will likely be unbundled and offered individually – and in new and improved ways – through online platforms.

The genius of capitalism lies in its ability to produce organic answers to most problems of scarcity and resource allocation. Markets tend naturally to reward the ideas that prove most useful, and to penalize dysfunctional behavior. They can bring about broad-based outcomes that states cannot, by driving vast numbers of individuals to adjust their behavior in response to price signals.

In today’s warming world, there is obviously a need for effective ways to limit greenhouse-gas emissions. But even a problem as complicated as climate change should not be left to technocrats.

We all need to be involved, as citizens and as market participants. For their part, the defenders of capitalism need to figure out how to make the system more inclusive, so that it can claim the public’s support once again.


Harold James is Professor of History and International Affairs at Princeton University and a senior fellow at the Center for International Governance Innovation. A specialist on German economic history and on globalization, he is a co-author of the new book The Euro and The Battle of Ideas, and the author of The Creation and Destruction of Value: The Globalization Cycle, Krupp: A History of the Legendary German Firm, and Making the European Monetary Union.