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Macquarie: "This Is The End Of The Liberal Order... But At Least No Wars Yet"

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One week after Council on Foreign Relations president Richard Haass wrote an op-ed in which he waved farewell to the world he helped create, saying "Goodbye, Liberal World Order." Then overnight, one of Wall Street's most original, if underappreciated analysts, Macquarie's Victor Shvets, gave his own unique take on this increasingly sensitive topic, injecting a dose of his unique pragmatism, in a note that one could say has a silver lining based on the title: "The end of liberal order: De-globalization drift; but no wars, yet." Unfortunately, in a world in which almost every analyst sounds increasingly as skeptical as this website has been for the past 9 years, that's as far as the optimism goes, as the following note reveals.

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The end of liberal order: De-globalization drift; but no wars, yet

Investors continue to search for order; there is none

Investors seem to be striving to find order and pattern in a world that has neither. It is only human to search for patterns as without some order, there are no investment strategies. Instead, it becomes a world dominated by noise. Whether it is Trump tariffs, CBs (incessant debate – ‘too dovish or too hawkish?’) or Facebook and the role of social media, investors embark on a fairly meaningless task of calculating likely damages while trying to rationalize these actions within confines of conventional economic theory (trade is good; lack of it is bad). As a result, there is a growing chorus of shrill voices about onset of trade wars and/or need for deep regulatory changes. Similarly, any widening of spreads (however small) is almost immediately interpreted as the onset of major liquidity contraction. In a modern world of signals, noise & AIdriven re-pricing, reality is just ‘fake news’ (or basically facts you don’t like).

De-globalization is a fact of life; both trade & capital

Amongst all the noise, it is still useful to examine the latest trade news with some degree of realism. First, de-globalization has been a fact of life for more than a decade. There are already ~50,000 cases outstanding with WTO, with members introducing various anti-dumping duties & non-tariff measures. This is more than double the case load of ’08, and it is bound to grow exponentially; the US is not even the greatest offender. The liberal trade order had died at least a decade ago. Second, global economy is no longer driven by conventional trade, with elasticity close to one (trade to incremental GDP) vs. ~2x in ‘80s-90s.


There are many reasons for such erosion, but atrophy of supply chains and dominance of technology in trade flows are the key. Third, CBs interference with exchange & interest rates to constrain capital markets is also likely to become ever more pronounced. Neither Japan nor China have a yield curve, why should the US have one? The same applies to constraints on cross-border capital flows. The essence of liberal order was not freedom of shipping but freedom of capital.

The public demands protection from ravages of globalization and wants to see a shift of returns from capital to labour. Investors now reside in essentially a zero-sum world. This explains unorthodox political and electoral outcomes and it seems inevitable that politics would deliver what public demands, one step at a time. Having said that, there is a huge difference between an inexorable slide towards de-globalization and an outright trade war. The former is inevitable, the latter is unlikely, at least for a while; corporate lobbying and desire to avoid the most extreme outcomes is likely to prevent a trade war on a broad waterfront (just see how China has thus far avoided targeting industries that make America Great – soybeans & planes).

Not an anomaly; an integral part of investment landscape

De-globalization and constraints on capital flows are now not anomalies, but are an integral part of the new  investment climate. It implies that it is no longer possible to assess what is ‘safe’. Aggressive public sector & technological disruptions blur lines between ‘safe’, ‘value’, ‘cyclicals’ etc. It explains why value fails to perform or why even disruptions prevent staples from outperforming. It also makes assessment of trade vulnerability hard; Korea, Japan or Taiwan export radically different products vs. Thai or Mal. The former have low substitution & high value while latter is commoditized, facing disintegrating supply chains.


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