7 major trends are going to sweep over the globe in the next 5 years causing a tsunami of change for the global economy. Read on for a most insightful analysis of what the effects most likely will be.
The comments made in Part 1 (Japan), Part 2 (Europe) and Part 3 (China) will tend to be bullish for the dollar, which will make dollar-denominated debt in emerging-market countries more difficult to pay back and, given the amount of debt that has been created in the last few years, it is likely that we’ll see a series of crises in emerging-market countries, along with an uncomfortably high level of risk of setting off an LTCM-style global financial shock.
Trend #4 – Continuing currency crises
…Now that Russia has tumbled into a full-fledged currency crisis with serious signs of contagion… I would assign an 80 to 90% probability that it will continue to do so, as a function of:
- the rising U.S. dollar and a reversal in cross-border capital flows,
- falling commodity prices,
- or both.
This massive wave is going to create a lot of opportunities for courageous investors who are ready to surf when countries are cheap.
Trend #5 – Continuing bear market in U.S.
I do not believe that the secular bear market in the United States…has ended. Secular bull markets simply do not begin from valuations like those we have today. Either we began a secular bull market in 2009, or we have one more major correction in front of us...The secular bear is not something to be scared of but, simply, something to be played. It also offers a great deal of opportunity. If I am right, then the next major leg down will bring on the end of the secular bear and the beginning of a very long-term secular bull. We will all get to be geniuses in the 2020s and perhaps even before the last half of this decade runs out. Won’t that be fun? Let’s call the end of the secular bear a 90% probability in five years and move on.
Trend #6 – A restructuring of the U.S. tax and regulatory regime
The voters of the United States are going to have to make a decision about the direction they want to take the country. We can either opt for growth, which will mean a new tax and regulatory regime, or we can double down on the current direction and become Europe and Japan. I’ve traveled to both Europe and Japan, and they’re both pleasant-enough places to live, but I wouldn’t want to be a citizen of either Japan or the Eurozone for the rest of this decade. I would rather live and work and invest in a high-growth country, with opportunities all around me, a country where we reduce income inequality by increasing wealth and opportunities at the lower end of the income scale instead of trying to legislate parity by increasing taxes and imposing government-mandated wealth redistribution, which slows growth and squelches opportunity for everyone.
A restructuring of the U.S. tax and regulatory regime does not mean a capitulation to the wealthy, big banks, or big business. Properly conceived and constructed, it will allow the renewal of the middle class and result in higher income for all. Sadly, it is not clear to me that either the Republican or Democratic parties are up to the task of making the difficult political decisions necessary – they each have constituencies that tend to opt for the status quo – however I see hope on both sides of the political spectrum that change is possible. The course they set will give us an idea where we will want to focus our portfolios in the decade of the ’20s. It is a 100% probability that we will have to make a decision. It is less than 50% that we will make the right one – or at least the one that I think is the right one.
Trend #7 – Development of new technologies
We have entered the Age of Transformation. We’re going to see the development of new technologies that will simply astound us – from increasingly capable robots and other applications of AI to huge breakthroughs in biotechnology. The winners are going to be those who identified the truly transformational technologies early on in their development and invested wisely. While riskier (potentially far riskier) than most of your investments should be, a basket of new-technology stocks should be considered for the growth part of your portfolio. I see the Age of Transformation as a 100% probability.
Just for the record, I also see:
- a continuation of the global deflationary environment and
- a slowing of the velocity of money
until we have some type of resolution concerning sovereign debt.
Central banks will continue to try to solve the “crises” I mentioned above with monetary policy, but monetary policy will simply not be enough to stem the tide. Central banks can paddle as hard as they like into the waves of change, but they cannot reverse their
Disclosure: The original article, by John Mauldin (mauldineconomics.com), was edited ([ ]) and abridged (…) by the editorial team at munKNEE.com (Your Key to Making Money!) to provide a fast and easy read.
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Parts 1, 2 and 3 below:
The Japanese government simply cannot allow interest rates to rise, or it would face an economic catastrophe of the first order. Therefore, my simplistic conclusion is that it won’t but, since the only way you can control interest rates and a rapidly growing bond market is to ensure adequate purchases and demand, and since the only real demand in the country is from the Bank of Japan, the BoJ will continue its radical experiment in quantitative easing. We are talking about a level that is two to three times (in relative terms) the magnitude of recent quantitative easing of the United States – and that is today.
The euro is not a currency; it is an experiment. It will not be a currency until France has a true crisis in which the European Union has to decide whether to keep the euro and create a fiscal union or to dissolve into competing currency environments that will allow for adjustments among different countries. Either path will be horrifically expensive.
I think there is a 70% probability that China will suffer either a hard landing OR a long period of Japanese-style stagnation in the next 5 years and, in the event that the Chinese government is forced to absorb non-performing loans to prevent a debt crisis), the probability is over 95%.