This newsletter
I have made the decision to turn this newsletter into a weekly commitment. Its unlikely to ever be a fully formed essay, but more of a glimpse of where I think we are based on my latest conversations, anecdotes, data and reading. There is a Japanese word for this sort of stream of consciousness writing, but I am struggling to recollect it.
Anyway, it might some contain some predictions but more likely scenarios for the future, the perils and the possibilities. And of course plenty of philosophical musing on the big questions which humanity faces.
Currently I am making it available for free and by contribution only. If you cannot invest in this newsletter, then if it is at all useful please consider forwarding it to your friends.
Overall
I remain optimistic about the world - longer term - but I cannot but help feel great trepidation about the next few years. Aside from the economy and ecological crisis, it seems to me that governments in the West are increasingly preparing for (more?) war. Rishi Sunk yesterday cryptically said "the next few years will be some of the most dangerous yet most transformational our country has ever known….more will change in the next five years than in the last 30". Knowing that the clouds of war were coming in, is this why employed a former Prime Minister to be Foreign Secretary? The various moves I have been observing in Europe, Asia and the Middle East since 2014 have reminded me of the run up to previous world wars. I can imagine scenarios later this year which are quite concerning, including war, constitutional crises and even postponed elections. That all said, nothing was achieved by being pessimistic. Be realistic and be vigilant yes. But find a niche in life thats meaningful to you and hopefully society, and passionately focus on that. It seems like a good time to hold this mantra as we go through this immense transition, even if its a baptism of fire.
I foresee the birth of a new civilization on the horizon which makes this an incredible time to be alive. In fact, its already birthing if you look carefully.
Science Fiction
In recent weeks I have watched a number of sci-fi movies or series - including Three Body Problem, Dune and Mortal Engines. Whilst I would never rely on sci-fi to predict the future (although Star Trek did a pretty good job on the tech side), it does at least open the mind to various possibilities by stimulating the imagination. It also surfaces some major debates now about the course of civilization. It is interesting that both fantasy and sci-fi are having such a boom at the moment - confirming yet again that most people sense that humanity is at a critical juncture.
Chinese Sci-fi : 3 Body Problem
I was pretty mind blown when I read Caixin Liu’s book The Three Body Problem a few years ago. As I was living out in East Asia, I knew that China was catching up (and in many cases overtaking) the West in some pretty key technologies: including AI, green tech, nuclear fusion and quantum technologies. So it seemed natural that we should start to get some pretty serious and interesting sci-fi. In fact, the book was first published in English in 2014; symbolic as this is when I noticed Congress and the National Security apparatus of the USA starting to get quite concerned about China’s ascendency in advanced technology.
For me it was interesting that it depicted quite shocking scenes from the cultural revolution in the early chapters (with no apparent censorship) but far more importantly it touched on deep and long term civilisational issues, that went far beyond the borders of China.
The author once wrote:
“All we had hoped for was just to let American readers become aware that there is sci-fi in China. Now that it has been embraced by readers in the UK and the US, it supports an idea I once had: sci-fi as a literary vessel is the most global, the most universal [storytelling], with the capability to be understood by all cultures. Sci-fi novels are concerned with problems faced by all of humanity. Crises in sci-fi mostly threaten humanity as a whole. This is a unique and treasurable trait inherent in the genre – that the human race is perceived as a single entity, undivided.”
I think he was shocked by how much overseas recognition and accolades the book received.
Fast forward to March 2024, and Netflix released its English adaption driven by the creators of Game of Thrones. I really enjoyed it. Of course part of me always prefers Hollywood to be more faithful to good books, and in a way I would have preferred that they kept it in China instead of moving much of the plot to London. But still I would highly recommend it and I understand why they did that.
I will likely touch upon it - and some of the themes - going forwards. But first of all just watch it!
[Now the spoiler alert - skip forward to the next section if you haven’t seen it]
One of the big civilisational themes of the book might be captured by the paragraph:
“It was impossible to expect a moral awakening from humankind itself, just like it was impossible to expect humans to lift off the earth by pulling up on their own hair. To achieve moral awakening required a force outside the human race.”
This wake up call came in the form of the Chinese researcher managing to contact an alien civilization. Its interesting as the Disclosure movement is really taking off in Washington DC at the moment.
“Set against the backdrop of China's Cultural Revolution, a secret military project sends signals into space to establish contact with aliens. An alien civilization on the brink of destruction captures the signal and plans to invade Earth. Meanwhile, on Earth, different camps start forming, planning to either welcome the superior beings and help them take over a world seen as corrupt, or to fight against the invasion.”
Essentially one of the protagonists - Ye Wenjie - unleashes a sequence of events which might end humanity as a fleet of 1000 ships departs for earth, due to arrive in 400 years time. Its a pivotal moment in the series when she presses the button to make contact.
Personally I think that alien civilisations are likely to be far more advanced than our own. However, I agree with the author’s assertion that we need to find peace amongst our fellow humans:
“On Earth, humankind can step onto another continent, and without a thought, destroy the kindred civilizations found there through warfare and disease. But when they gaze up at the stars, they turn sentimental and believe that if extraterrestrial intelligences exist, they must be civilizations bound by universal, noble, moral constraints, as if cherishing and loving different forms of life are parts of a self-evident universal code of conduct. I think it should be precisely the opposite: Let’s turn the kindness we show toward the stars to members of the human race on Earth.”
There are people out there in the West who could become the statesmen/women to catalyse this. We in the West really do not need to be enemies of China and Russia. I hope a new United Nations does not have to emerge out of the ashes of another global war or catastrophe. Maybe the aliens do need to show up to help us.
Macro-Economy
Many seem to settling in to the view that the economy is fine and that we have avoided any hard landings. Major risk markets seem to be close to the highs. This is not an investment letter but given the importance of the economy to our lives I am quoting some key perspectives today which I think are important to note.
Recently McKinsey sent me an e mail suggesting this as well. Apparently the latest McKinsey Global Survey on economic conditions in March said: “Respondents have increased confidence in the economy—both globally and at home. Notably, respondents share much brighter assessments of both the global economy and conditions in their own countries than they did at the end of 2023. Views of the global economy are the most positive they’ve been since March 2022 and, in the majority of regions, respondents also have a more hopeful outlook on domestic conditions despite enduring concerns over geopolitical instability and conflict.”
When I look at longer trends and tectonic forces as well as assets priced for perfection, I struggle to think there will be easy returns going forwards unless you are investing with some astute active managers. I also fully expect another financial crisis.
Jamie Dimon, as one of the most influential bank CEOs on the planet, should be taken seriously. Even if you don’t like him - or any of the bankers! In various ways he has hinted at trouble ahead. In his recent letter to shareholders he did spell out some of the risks.
“In the policy section, we talk about how we may be entering one of the most treacherous geopolitical eras since World War II. And I have written in the past about high levels of debt, fiscal stimulus, ongoing deficit spending and the unknown effects of quantitative tightening (which I am more worried about than most) so I won’t repeat those views here. However, the impacts of these geopolitical and economic forces are large and somewhat unprecedented; they may not be fully understood until they have completely played out over multiple years.”
It is worth reading the entire report where he warns of persistent inflationary forces and elevated interested rates.
In a later interview he quoted a market adage: “The markets will do whatever they have to do to hurt the most people.’ This may be one of those set-ups.”
Later in his annual report he says:
“The mini banking crisis of 2023 is over, but beware of higher rates and recession — not just for banks but for the whole economy.
When we purchased First Republic in May 2023 following the failure of two other regional banks, Silicon Valley Bank (SVB) and Signature Bank, we thought that the current banking crisis was over. … Most of the other regional banks did not have these problems. However, we stipulated that the crisis was over provided that interest rates didn’t go up dramatically and we didn’t experience a serious recession. If long-end rates go up over 6% and this increase is accompanied by a recession, there will be plenty of stress — not just in the banking system but with leveraged companies and others. Remember, a simple 2 percentage point increase in rates essentially reduced the value of most financial assets by 20%, and certain real estate assets, specifically office real estate, may be worth even less due to the effects of recession and higher vacancies. Also remember that credit spreads tend to widen, sometimes dramatically, in a recession.
I assure you this is secret code for: the proverbial might and probably will hit the fan again.
Two of my concerns are private equity and commercial real estate. I will probably drip feed data and anecdotes into this newsletter over time. On the PE front , Bain’s annual review explains the PE Winter quite well:
“It’s safe to say the private equity industry has never seen anything quite like what’s happened over the last 24 months.
While the sharp drop-off in deal activity in late 2022 and into 2023 echoes the period following the 2008–09 global financial crisis (GFC), the situation the industry faces today is largely unprecedented.
The numbers are all very GFC-like: Deal value and deal count have fallen 60% and 35%, respectively, from their peaks in 2021. Exit value is down 66%, and the number of funds closing is off by nearly 55%.
Yet what’s driving these declines couldn’t be more dissimilar to what was happening in 2008–09, and making sense of it requires a different lens altogether.
As difficult as it was, the aftermath of the GFC followed a predictable pattern: To cope with the crisis, central bankers slashed interest rates to spur activity, the economy slowly stabilized, and private equity was able to claw its way back from what many predicted would be its unraveling. The resulting period of growth in the years that followed created a private equity industry that is vastly larger and more complex than anyone in 2008 could have reasonably expected.
Yet today that size and complexity magnify the challenges the industry faces. Business conditions are more perplexing than predictable. Interest rates have risen faster than at any time since the 1980s, and it remains unclear when the US Federal Reserve will reverse course or where rates will eventually settle. Concerns about what we dubbed last year “the most anticipated recession in history that hasn’t happened yet” continue to linger. Yet to the surprise of most analysts, the economy is chugging along nicely. Record-low unemployment, reasonable growth, and surging public markets in the US suggest the possibility that we might just escape these months of turmoil with nothing worse than a soft landing.
These crossed signals have left private equity hamstrung. The sheer velocity of the interest rate shock was something few in the industry had ever experienced, and the impact on value has driven a wedge between buyers and sellers.”
They say that if rates stabilise or ease, and we have indeed avoided recession, then it might be the darkest before the dawn. I am not so convinced. I think that refinancing is going to be a challenge as they hint elsewhere in the report:
“with a large volume of portfolio companies facing refinancing hurdles, it will be critical that debt holders take the stance they did in 2008–09. Lenders clearly didn’t want the keys to a bunch of troubled portfolio companies then and probably don’t want them now. That leaves open the opportunity to pay a penalty, add some equity, and arrive at a workable capital structure.
Just as a reminder, Thomas Hoenig, a former president of the Kansas City Fed, wrote this a number of years ago. If I am correct that the background music (on inflation and interest rates) has passed a turning point as significant to the early 1980s then these comments are still true.
“An entire economic system. Around a zero rate. Not only in the U.S. but globally. It’s massive. Now, think of the adjustment process to a new equilibrium at a higher rate. Do you think it’s costless? Do you think that no one will suffer? Do you think there won’t be winners and losers? No way. You have taken your economy and your economic system, and you’ve moved it to an artificially low zero rate. You’ve had people making investments on that basis, people not making investments on that basis, people speculating in new activities, people speculating on derivatives around that, and now you’re going to adjust it back? Well, good luck. It isn’t going to be costless.”
Inflation vs Deflation
Extreme inflation or deflation can destabilise economies and societies. When I was posted by Morgan Stanley from New York to Tokyo in the 1990s, the economy was undergoing a mild deflationary environment. Whilst many international investors complained, people led a remarkably comfortable life. I am personally more concerned about high inflation as this tends to break down trust and social cohesion.
My medium term view is still intact from 2019: that 2020s would be characterised by inflation (in the Western world at least) driven by tectonic forces such as demographics, debt, deglobalisation and geopolitical risks. Gold is also confirming this prognosis.
There are two counter-forces to my inflationary prognosis - China and technology. China is trying to export deflation: with its domestic market unable to absorb all of its massive production, it will strive to sell this overseas. Just look how in such a short space of time has become a major player in EVs, undercutting all of the global players. Tesla, in fact, has just announced cuts its workforce in response. You can see this across many sectors.
Technology - and especially AI - will be a longer term source of deflation. More on this later.
So if you believe that geopolitical tensions are over and the ‘new global disorder’ is over, then possibly you might look at tech and China as drivers of deflation. I don’t think we are there yet. As I said earlier, I am quite concerned about even more geopolitical rifts and wars.
Gold
Gold movements confirm my views above.
Philippe Gijsels, the chief strategist for BNP Paribas Fortis, and his colleague chief economist Koen De Leus — the authors of The New World Economy in 5 Trends — have said in relation to gold “this isn’t just an interest rate thing. People are hedging against a new world”. Thats what I believe.
I was interested to see a tweet recently by economist Brad Setser noting that China’s holdings of US financial assets as a share of its gross domestic product are back down to where they were when the country joined the World Trade Organization in 2001. The Chinese have been pulling out of the US. Not all of that went into gold, of course but it speaks to that changing world. Just look at the long and growing list of countries - many in the Global South - which are repatriating their gold reserves from financial centres like London or New York.
Demographic collapse
In the last few weeks Elon Musk has been tweeting (X-ing?) about population collapse as a catalyst for the decline of civilization. In fact, when Jack Ma (the richest man in China at the time) did an onstage interview with Musk (the richest man in the world / USA), the one thing that they did agree upon was the threat of demographic collapse in 2019. I was really surprised it did not seem to get much media attention.
In a recent talk I gave in the financial city of London, I mentioned that by 2035 (if not earlier) it should have dawned on everyone that global population is about to decline for the first time in 700 years.
This year we have seen so many data points
Fertility rates in Singapore and South Korea fell to record lows in 2023, as governments try but fail to encourage couples to have more children.
The average number of births per woman in Singapore during her reproductive years dropped below 1.0 for the first time to 0.97 in 2023 - it was 1.04 in 2022.
South Korea's national statistics agency reported a fertility rate of 0.72 last year, down from 0.78 in 2022.
And the data coming out of China, no longer the world’s most populous nation, is also fascinating. After seeing 2 consecutive years of population decline, Chinese institutes are forecasting that China’s total population might halve toward half a billion by 2100. It’s entirely conceivable that the USA - if it still exists by then - will have a higher population by then if it continues to be a ‘nation of immigrants’.
Interestingly Stephen J Shaw, a British demographer, and I spoke at a conference in Japan recently. His documentary is excellent and worth watching:
Suffice to say this demographic collapse will have implications. Of course, some will say this is great for the environment. But I fear that it's the top 10% of consumers who are doing a lot of the ecological damage - we need to slow consumerism and redesign our economies completely in my opinion. Relying on population decline is not enough of course. And then there are the negative ramifications - our entire pension schemes and economies are reliant on having workers support the elderly. I do not think our governments - or long term investors - have fully thought this through.
I have a lot of thoughts on AI and crypto but as this week’s newsletter has become quite long, I think I will post them next week. I think Stan Druckenmiller hit the nail on the head, though, when he said that AI is over-hyped in the short term but under-hyped in the long term. I have much more to say on this, and the longer term risks, ethics and opportunities. And I promise next week will be a lot more optimistic in tone!
News
Late summer we are running a futurist retreat - Embassy of the Future: Imagineering the 2030s” at Broughton Hall, one of the leading retreat centres in the world. We have some remarkable speakers and facilitators, as well as plenty of futures methodologies to harness the imagination - everything from war-gaming scenarios to sci-fi writing.
I am in Switzerland this week as a guest of a Swiss financial institution, Syz Capital, for their annual conference and I will also be appearing on a podcast they are launching. It will be interesting to garner insights from various international investors.