CONTRIBUTION Fact, fiction and fantasy: How to maneuver in this brave new world
A "Make America Great Again" hat is seen hanging as traders work on the floor of the New York Stock Exchange during morning trading in New York, April 1. AFP-Yonhap
There are decades where nothing happens, and then there are weeks where decades happen. The past few weeks have certainly fallen into the latter category, with remarkable intensity.
The 'Magnificent 7' stocks — comprising the most influential tech companies — are undergoing a correction, and the dollar is depreciating, prompting questions about whether we are witnessing the end of U.S. exceptionalism. Meanwhile, across the Atlantic, European policymakers are beginning to recognize that riding the waves of global change in the sidecar of the U.S. is no longer an option.
Germany is preparing to start running deficits not seen since reunification to boost its investments in defense and infrastructure. Maybe in 10 to 15 years' time, we will look back at this time in history as the moment that Europe took its fate into its own hands.
However, it will not be a walk in the park. The road that the old continent will have to travel to be once again a voice on the world stage will be long, hard and winding.
On the other side of the Pacific Ocean, China is still struggling with its balance sheet recession. The Japanese experience teaches us that monetary stimulus does not work when companies and consumers will do anything to restore their balance sheet after a real estate market crash.
Saving and not investing nor consuming is the name of the game. The only way to get the engine of the second-largest economy in the world running again will be through good old-fashioned Keynesian stimulus, fiscal stimulus that is.
There is a very big chance that this will be exactly the medicine that will be administered by the Chinese government in the coming months, probably after they have a little more visibility on what the exact measures by the Trump administration will be in their trade war with China. However, using visibility and Donald Trump in one sentence maybe is not the best of ideas.
In short, we are looking at a world in which the only constant will be change and volatility.
Philippe Gijsels, chief strategist for BNP Paribas Fortis / Courtesy of Philippe Gijsels
This volatility originates from both the geopolitical and economic domains. As Neil Howe so eloquently argues in his book "The Fourth Turning Is Here," a fourth turning is unfortunately a period marked by wars and geopolitical tensions — an era in which extremist parties, both from the left and the right, gain strength, while the center becomes smaller, weaker and increasingly powerless to make the decisions that, in the end, everyone knows must be made.
It is also a point in history during which sitting presidents, parties, and governments of any color, shape or ideology are typically voted out. We have seen this in Canada as well in many Asian and European countries. If you were to venture a bet on the election outcome during a fourth turning, do not put your money on the incumbent. In this respect, the election of Donald Trump as well as the fact that he took both houses of parliament should not have come as too big a surprise.
The second big source of uncertainty and volatility originates from the economic sphere and is closely related to the first one. In a fourth turning, globalization is under pressure. In our book "The new world economy in 5 trends" that Koen De Leus and I wrote, we talk not about deglobalization but multi-globalization.
We are no longer looking at a unipolar world that is solely centered around the U.S. Say hello to the multipolar world in which China is rapidly becoming a pole of economic and military power. Then there is Russia, which is clearly still a military even though not an economic power. And the old continent Europe, that is struggling to speak with one voice and remain relevant.
Interestingly, there are a number of countries like India, Vietnam, Mexico and South Korea, to name the most important ones, that will thrive in this environment as they will be able to navigate the change and benefit from strong relationships with the poles. For Mexico, the trade wars put this thesis a bit into question. And India has clearly the potential to emerge as an additional pole in the not-too-distant future.
Cargo containers for export are stacked at Busan Port, April 1. Yonhap
Just to say that the economic volatility that we are witnessing is closely related to the geopolitical fragmentation. Not so long ago, when the world was still truly globalized, we had one global business cycle. All the major blocks tended to move together on the waves of global expansion and global contraction.
In this world, central banks’ action would sometimes differ a bit in an amplitude, but generally the direction would be the same. Today, it is not so hard to envision the U.S. economy to grow structurally faster than Europe’s. Or should we think the opposite with the news coming out of Germany? There are weeks that decades happen. The bottom line however is that the speed of growth will differ. And that the European Central Bank and the U.S. Federal Reserve will not necessarily conduct the same policies in the future.
Also, China will, depending on the policies conducted, grow at a different speed. Japan is finally exiting more than four decades of deflation and its interest rates are on the rise, while in most other parts of the world they are coming down.
We should look at this new economic reality in terms of tectonic plates. The blocks are no longer moving at the same speed in the same direction. Instead, the plates are shifting unpredictably at different speeds. It’s no wonder that we'll see collisions, leading to massive volatility in currency and interest rate markets as a logical consequence.
In this world, volatility will be more the rule than the exception. The main conclusion of our book “The new world economy in 5 trends” is that after the COVID-19 pandemic, we have moved into a new economic paradigm in which both interest rates and inflation will be structurally higher than from 1982 until the pandemic.
It all comes and goes in waves, it always does. And a huge wave is coming. The drivers of this totally new environment are the massive debts, aging of the population, multi-globalization (including a new arms race) and climate change. Innovation may play a mitigating role and may in an extreme scenario be even powerful enough to counter the four other forces.
Gold jewelry is on display at a jewelry store in Beijing, China, March 31. EPA-Yonhap
All of this has deep and profound consequences for investors. Even though volatility will be huge, holding too much cash is not an option as inflation will eat up its purchasing power.
As American exceptionalism comes under pressure and the Magnificent 7 are no longer the only game in town, active management will make a comeback, and diversification will once again prove its worth.
Above all, investors should focus on real assets like equities, real estate, wine and gold and silver, for which the bull market has only just has begun. The same goes for the commodity space. We are only in the very first inning of the largest commodity bull market in time due to massive supply shortages that we foresee.
For companies, it means that they should put in place hedging techniques for navigating a world of higher interest rates, higher inflation and higher and more volatile commodity prices.
Countries have in a fourth turning a unique opportunity to outperform, at least for those who understand the rules of the new game. Those who don’t will have a hard time to keep the bond vigilantes off their backs.
For all of us, more than ever, it will be important to distinguish between fact, fiction and fantasy.
Philippe Gijsels is chief strategist for BNP Paribas Fortis. He is the co-author of the book: "The New world economy in 5 trends" which made it to the Financial Times summer reading list in 2024. His banking career spans more than 35 years, in strategy, investments and management in Europe.