In a world where the old rules of employment and the economy no longer apply, why should our faith in old assets?
Robert Dirsch carefully combed back the mane of his Percheron, a horse prized in the late 19th century in America for its strength and more importantly, its willingness to work.
On a bright sunny fall morning in rural Pennsylvania, Dirsch, the son of immigrants from the Bavarian region of Germany where his family had bred horses for farm work for generations, was absorbing the rural splendor of the pastoral scene.
Like his father before him and his grandfather, Dirsch was a hardworking horse breeder and the Percheron that he was tending to had been shipped over from the Old World, to be used as a stud.
Though it was hard work, Dirsch loved horses and he loved living off the land, as generations before him had once done in Bavaria.
So when a noisy, smoky contraption clanged its way into Strasburg, Pennsylvania, on an idyllic autumn morning in 1890, the advent of that new technology piqued his interest.
America is a country of innovation. In his short forty years, Dirsch had seen how the country had evolved, as well as the technologies for farming.
He had witnessed firsthand the explosive growth of cities on America’s eastern seaboard into industrial powerhouses.
He had seen the invention of the steam engine revolutionize transport and create railways snaking across the country.
Automation, industrialization, and modernization were sweeping across the country, like an unstoppable force of nature. Even the Percheron that Dirsch was breeding had been shipped into America aboard one of the many massive ironclad steamships crisscrossing the Atlantic.
So when Dirsch saw the first automobile in Strasburg in 1890, he was at first apprehensive, but quick to see its potential.
Other horse breeders had dismissed the contraption, saying that it was too noisy and too smoky to ever be used in farm work, plus it could barely carry people, let alone haul the heavy loads that farming required.
But Dirsch also knew that technologies evolved and that while the first automobile may have been a noisy beast of metal, oil, and smoke, eventually they would improve to revolutionize farming the way that machines revolutionized manufacturing.
That evening Dirsch told his wife about what he had seen in Strasburg, he told her that he was going to start redirecting the family business away from horse breeding into the manufacture of “automobiles for farming.”
His wife, concerned asked,
“But what do we know about making automobiles for farming?”
“Nothing. But then what does anyone else know?”
And with that the Dirsch Company was formed, ending almost three generations’ worth of horse breeding, with Dirsch going on to build the first tractors for farming and the rest as they say, is history.
Old Dog, Old Tricks
Which is what makes our present time so peculiar, especially in the realm of investing.
For past generations, we were taught that the key to a good life was to study hard, go to college and work for one company for the rest of your life.
In return for our indentured servitude, the company would provide certainty, stability and a pension.
There was a time when a family of four could live quite comfortably on one salary alone.
That ship, ironclad or otherwise, has since sailed.
Today, job security is a a privilege, not a prerequisite.
And in the decades since, we were taught that saving money and putting that money to work in a mix of bonds and equities, tied perhaps to an index fund, like the S&P500 (a fund that tracks the largest U.S. companies) would provide us with a comfortable retirement.
American multinationals, with their global dominance were after all, almost a sure bet and the best way to participate in the gravy train of globalization.
And as a general rule, globalization was very good for the stock prices of many big companies, predominantly American.
But the globalization train has been re-routed. Perhaps not necessarily derailed, but there has been a push back from across the globe in what has come to be seen as the hegemony not necessarily of countries, but of companies.
Whose World Is It Anyway?
Because globalization allows for large corporations to place labor where it is cheapest, ship products to where consumers will pay highest and book profits where taxes are lowest, companies can be pretty much everywhere and nowhere all at once, quite similar in that respect to cryptocurrencies.
And because we’ve lived with declining interest rates for so long, that trend may have inevitably masked a shift in geopolitics that would otherwise be more obvious.
While America’s place in the world may have changed, it is the nature of its corporations that has changed such that in many cases, they are American purely in name alone.
And if America’s companies are less American today than they were say two decades ago, what does that portend for the stock prices of U.S. companies and even the dollar itself?
One contrarian scenario painted by AG Bisset Associates dubbed the “Doomsday Dollar” suggests that because the growth potential of American corporations is becoming increasingly limited, it may occasion a situation where both the dollar and U.S. stocks fall in tandem — something that at first blush would seem unlikely.
For one thing, in terms of sheer statistical correlation, the dollar and U.S. stocks have historically tended to track in opposite directions — a weak dollar makes the exports of many American companies relatively more competitive in the global marketplace, which sends stocks of U.S. companies upwards.
The only problem with that assumption is that America doesn’t manufacture as much anymore as it used to.
For all the sound bites emanating from the White House, America has not turned around its manufacturing base and it will unlikely be able to do so for as long as there are other countries where labor is non-unionized, able and willing to work longer hours for less pay and benefits and more importantly, because of automation.
Automation is one of those democratizing forces that in the hands of a small and skilled labor pool can turn almost any region into a manufacturing powerhouse.
And we don’t even have to look too far for examples of that, because Vietnam has been one of the biggest beneficiaries of Trump’s ill-advised trade war with China, with major manufacturers such as Samsung relocating manufacturing to those shores.
But What About The Dollar?
Despite some countries such as China and Russia moving out of dollar-denominated assets, for both political and economic reasons, the dollar remains unassailable (for now) as the world’s reserve currency.
A recent study by the Brookings Institution found that the dollar’s share of global foreign exchange reserves has declined by only 2% since 2007, while by way of comparison, the euro has fallen by 6%.
But that fall in the euro has more to do with that region’s malaise than necessary to do with the dollar’s attractiveness.
During that same period, holdings of the Japanese yen and the Swiss franc have also risen, but in a world of few good choices, the dollar is perhaps the least “bad” choice.
But like an oil tanker needing to shift its course, shifts in the global reserve system aren’t done at the drop of a hat.
AG Bisset CEO Ulf Lindahl notes that the world’s major currencies tend to move in 15-year cycles.
Based on Lindahl’s calculations, which tack currency movements from the early 1970s, after the gold standard was abolished, despite the dollar’s resurgence since April 2018, a new cycle that was started in January 2017 will see the dollar poised to fall against the euro and the yen by as much as 60% over the next few years.
This may sound ridiculous, but what if Lindahl is right?
“Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.”
- Arthur Conan Doyle
Stuck To The Dollar
Because so many assets held by pension funds, family offices, and other large financial institutions are held in dollars, many would be hit hard by depreciating dollar assets.
And a shift by these investors to divert their portfolios away from dollar asset could exacerbate a downturn in American stocks — something that analysts believe is coming anyway because U.S. stocks are at their most expensive in 150 years and that’s even after being adjusted for inflation.
With the majority of American savers with the bulk of their retirement portfolios in the U.S. stock market, what would become of their retirement plans?
Some savvy investors who are betting on this contrarian view, or at least hedging for it have already plowed into gold, sending the price of the shiny metal soaring to above US$1,500 and even cryptocurrencies like Bitcoin.
And as the Dow Jones Industrial Average plunged some 500 points or about 2% on a Tuesday in early October, the price of both gold and Bitcoin continued to show resilience.
While Bitcoin threatened to stay below US$8,000, renewed interest in the digital asset has propped the bellwether cryptocurrency above US$8,200, with increased volatility and trading volumes.
And if the “Doomsday Dollar” scenario actually happens, investors might also pile into the yen and the Swiss franc, forcing U.S. bond yields to rise, something which hasn’t yet happened.
But the reason it hasn’t happened yet is more to do with the conventional wisdom that we are in an environment of low rates forever.
Yet we can’t afford for yields to rise, because a rising tide in this case would sink all ships.
As we have already been warned by the Bank for International Settlements, there is no shortage of “zombie” firms out there that will have trouble servicing their debt and staying in business should rates rise.
And it’s not just sickly companies that will go down with rate rises, healthy ones will as well, as the debt was piled on by corporations to fund share buybacks.
Which is why central bankers have had no choice but to facilitate this inescapable hamster wheel of low rates and why U.S. stocks and dollar-denominated assets have remained high, despite rising political and economic risks for companies.
Will The Music End?
Logic dictates that this arrangement can’t go on forever, yet there’s nothing to suggest that it can end.
Already, companies (let’s call them American for simplicity) are voting with their feet.
A recent EY report saw that the number of Fortune Global 500 companies headquartered in the U.S. fell from 179 in 2000, to 121, while the number headquartered in China exploded from 10 to 119.
The shift represents where companies expect their growth to come from in the future — the branding may be American, but where the products are made and who they are sold to are probably not.
If that’s the case, many of us will need new investment strategies for a new world.
Just as the automobile and the revolutionary effect that it would have on the world was poorly understood when it was first launched, cryptocurrencies and blockchain technology continue to be poorly understood, since their first launch.
And while revolutions may look as if they happen in an instant, the underlying foment behind them has typically been brewing for decades.
When these United States declared independence from the British crown, the dissatisfaction at that imperfect union had been stewing for decades.
When the emancipation proclamation was writ, the injustice of slavery and the underlying differences between north and south had been stirring for decades before the first shot was fired in anger during the Civil War.
The financial crisis may have been pinned on the collapse of the investment bank Lehman Brothers, but the conditions for it had been laid down a full decade earlier as then Federal Reserve Chairman Alan Greenspan kept rates low.
Revolutions feel instantaneous when in the moment, but as historians will tell you, when examined up close, their underlying motivations had been brewing for a long time.
So while the investment strategies of a previous generation may have worked for them, they will not work in the coming age.
Against this backdrop, conventional wisdom serves little more than to provide cold anecdotal comfort for the “good old days.”
One thing is however certain, that the old ways of investing will no longer yield the old returns.
Now that we’ve invented automobiles, we are unlikely to return to hay-powered equestrian transportation, except perhaps in rural Pennsylvania. But that’s another story altogether.
Patrick is an innovative entrepreneur and a lawyer passionate about cryptocurrencies and the business world. He is the CEO of Novum Global Technologies, a cryptocurrency quantitative trading firm. He understands the business concerns of founders and business people helping them to utilise the legal framework to structure their companies to take advantage of emerging technologies such as the blockchain in order to reach greater heights. His passion for travel, marketing and brand building has led him across careers and continents. He read law at the National University of Singapore and graduated with Honors in the Upper Division and joined one of Singapore’s top law firms, Allen & Gledhill where he was called to the Singapore Bar as an Advocate & Solicitor in 2005. He created Purer Skin, a skincare and inner beauty company which melds the traditional wisdom of ancient Asian ingredients such as Bird's Nest with modern technology. In 2010, his partner and himself successfully raised $589,000 from the National Research Foundation of Singapore under the Prime Minister’s Office. He has played a key role in the growth of Purer Skin from 11 retail points in Singapore to over 755 retail points in Singapore and 2 overseas in less than a year. He taught himself graphic design, coding, website design and video editing to create the Purer Skin brand and finished his training at a leading Digital Media Company.
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