Several months ago I had an important insight. Unsurprisingly this insight followed a mistake. Actually I made several mistakes. Firstly I expected the Federal Reserve to push the Fed rate back down to 1% before it started to raise rates. In fact its done very little of either. The Fed I guess is determined to not let interest rates feature as an issue in the forthcoming US election. The 2nd mistake was I believed gold was going to over $2000/oz in the run-up to the election, due to softer interest rates and an escalation of tensions in Iran. In fact gold only rose as high as $1034/0z. The reason was the Fed did not do as expected, and there was no conflict in Iran, but there was something more. It was the realisation that this credit cycle is not over. The banks are over-stretched no question, but after some consolidation you will see the markets recover. People might have some difficulty believing this because they are not accustomed to seeing a 'super cycle'. There are those periods in history when economic conditions are particularly attraction and sustained for a long time. These circumstances occur during periods of:
1. Trade liberalisation: There has been no period of greater market liberalisation in history. Africa, Asia, Eastern Europe, and even the Western countries have witnessed an opening up of markets. This has not simply been a reduction in trade barriers, but a willingness to buy product with little consideration for where it comes from. Its not just products either; increasingly business services are being outsourced, and people are even finding marital partners overseas. All this augers well for future exchange because there is a consensus that closed markets do not create jobs.
2. Innovation: This is without a doubt one of the most innovative periods of world history. This is not surprising given the prosperity, skilled population migration, strong competitive pressures and the pooling of savings that has helped fund long term investment. The greatest gains have been the savings from product miniaturisation and material sciences, the growing functionality of products and the scalability and automation of business processes as a result of software & hardware-based internet solutions. The other aspect of this super-cycle is financial innovation. There are a raft of new financial products such as credit instruments and derivatives which have extended the capacity of money to make money. This has the inevitable potential to push up asset prices even further. We need to remember that it is only Western markets that are fully leveraged at the moment. This is not the case in Asia. This gives a clue as to where future investment will be.
3. Barriers to development: Never has it been easier to develop a business. The scalability of internet solutions, the ready availability of information on the internet allows any person with access to the internet the power to learn and engage in global product markets. This will continue. Watch as governments streamline the way they collect taxes, since in all fairness they are the worst at recognising market realities. We will have greater freedoms to travel, to live in foreign countries, etc. This is as much a cultural revolution and the focus is on integration of markets, cultures and families. The availability to study and interact on the internet very much changes the 'cultural' constraints. Everyone can find their 'type of people' on the internet.
For these reasons the globe is on a journey that is not yet finished. The reason I know this cycle has not yet finished is because it has not yet reached ever corner of the globe. A super-cycle is like a tsunami; it makes an indelible impact on every shore in its circle of influence. The ASEAN region is undergoing a period of transformation including trade liberalisation, financial market integration and eventually more common regional currencies. The emerging ASEAN trade bloc will encapsulate 3 of the largest economies in the world - Japan, South Korea and China. China, Japan, South Korea and Taiwan have the highest foreign exchange reserves in the world. Whilst they are likely to continue investing in US bonds, we are going to see more domestic consumption in Asia. These countries are going to become less veracious savers, just as Japan's national savings rate fell from 30% to 9% between the 1960s to 1990s.
These super cycles are not without precedence. We can consider the first super-cycle to be the period shift from hunting & gathering to agrarian land occupation about 30,000 years ago. In early AD there was several regional empires which were significant, but nothing swept the world like the Rennaissance Period from the 1550s. During this period the printing press was discovered, global maritime exploration took off because of improvements in ship building and navigation, which gave rise to the ascension of the British Empire. Later super-cycles were the American-sponsored cotton, tobacco and sugar export boom. Today its being lead by China and India. What is important to recognise is the exponential growth trend. More people, more ideas, more innovation, more money and more leverage. It means more reward, but also more risk if you don't understand the trends. The current credit contraction or 'credit crunch' is a buying opportunity. The West has had its asset inflation - some countries like China and Thailand have done OK, but there is going to be a focus on the ASEAN region in the coming decade that will see it perform even better than the Western markets. Each successive empire is built faster than the last. The US overtook Britain in very good time, Japan overtook the USA (in per capita terms) even quicker, South Korea even quicker, and China even quicker still. This says more about the power of money flows and ideas than anything else, though certainly some will elevate the superiority of their culture.
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Andrew Sheldon www.sheldonthinks.com
1. Trade liberalisation: There has been no period of greater market liberalisation in history. Africa, Asia, Eastern Europe, and even the Western countries have witnessed an opening up of markets. This has not simply been a reduction in trade barriers, but a willingness to buy product with little consideration for where it comes from. Its not just products either; increasingly business services are being outsourced, and people are even finding marital partners overseas. All this augers well for future exchange because there is a consensus that closed markets do not create jobs.
2. Innovation: This is without a doubt one of the most innovative periods of world history. This is not surprising given the prosperity, skilled population migration, strong competitive pressures and the pooling of savings that has helped fund long term investment. The greatest gains have been the savings from product miniaturisation and material sciences, the growing functionality of products and the scalability and automation of business processes as a result of software & hardware-based internet solutions. The other aspect of this super-cycle is financial innovation. There are a raft of new financial products such as credit instruments and derivatives which have extended the capacity of money to make money. This has the inevitable potential to push up asset prices even further. We need to remember that it is only Western markets that are fully leveraged at the moment. This is not the case in Asia. This gives a clue as to where future investment will be.
3. Barriers to development: Never has it been easier to develop a business. The scalability of internet solutions, the ready availability of information on the internet allows any person with access to the internet the power to learn and engage in global product markets. This will continue. Watch as governments streamline the way they collect taxes, since in all fairness they are the worst at recognising market realities. We will have greater freedoms to travel, to live in foreign countries, etc. This is as much a cultural revolution and the focus is on integration of markets, cultures and families. The availability to study and interact on the internet very much changes the 'cultural' constraints. Everyone can find their 'type of people' on the internet.
For these reasons the globe is on a journey that is not yet finished. The reason I know this cycle has not yet finished is because it has not yet reached ever corner of the globe. A super-cycle is like a tsunami; it makes an indelible impact on every shore in its circle of influence. The ASEAN region is undergoing a period of transformation including trade liberalisation, financial market integration and eventually more common regional currencies. The emerging ASEAN trade bloc will encapsulate 3 of the largest economies in the world - Japan, South Korea and China. China, Japan, South Korea and Taiwan have the highest foreign exchange reserves in the world. Whilst they are likely to continue investing in US bonds, we are going to see more domestic consumption in Asia. These countries are going to become less veracious savers, just as Japan's national savings rate fell from 30% to 9% between the 1960s to 1990s.
These super cycles are not without precedence. We can consider the first super-cycle to be the period shift from hunting & gathering to agrarian land occupation about 30,000 years ago. In early AD there was several regional empires which were significant, but nothing swept the world like the Rennaissance Period from the 1550s. During this period the printing press was discovered, global maritime exploration took off because of improvements in ship building and navigation, which gave rise to the ascension of the British Empire. Later super-cycles were the American-sponsored cotton, tobacco and sugar export boom. Today its being lead by China and India. What is important to recognise is the exponential growth trend. More people, more ideas, more innovation, more money and more leverage. It means more reward, but also more risk if you don't understand the trends. The current credit contraction or 'credit crunch' is a buying opportunity. The West has had its asset inflation - some countries like China and Thailand have done OK, but there is going to be a focus on the ASEAN region in the coming decade that will see it perform even better than the Western markets. Each successive empire is built faster than the last. The US overtook Britain in very good time, Japan overtook the USA (in per capita terms) even quicker, South Korea even quicker, and China even quicker still. This says more about the power of money flows and ideas than anything else, though certainly some will elevate the superiority of their culture.
------------------------------------------------
Andrew Sheldon www.sheldonthinks.com
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