Globalization: How Investors Can Make Sense Of The World Today

Globalization: How Investors Can Make Sense Of The World Today

Globalization – Disordered World Or New World Order? How Investors Can Make Sense Of The World Today by Gerstein Fisher

On April 13th, Gerstein Fisher hosted a special event in New York City, “Disordered World or New World Order? How Investors Can Make Sense of the World Today.”

The evening’s presenters included Harvard Business School’s Professor Rawi Abdelal, noted expert on the politics and economics of globalization and an Academic Advisor to Gerstein Fisher, and Council on Foreign Relations Senior Fellow Dr. Adam Segal, author of “The Hacked World: How Nations Fight, Trade, Maneuver, and Manipulate in the Digital Age.”

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Against the dynamic global economic, geopolitical, and digital backdrop painted by our guest speakers, Gerstein Fisher Chief Investment Officer Gregg S. Fisher offered perspectives and practical considerations for individual investors in a time of multi-layered change.

Rawi Abdelal

Herbert F. Johnson Professor of International Management, Harvard Business School
Director of the Davis Center for Russian and Eurasian
Studies, Harvard University
Academic Advisor to Gerstein Fisher

The global system is changing, impacted by cycles that are centuries in the making. We’re emerging into a new world order that is quite disordered, and into a new era of global capitalism.

The period from 1978 to roughly 2010 was one era. In 1978, the Chinese economy began to open up to the world. Before that, China for the post-World War II period had been essentially irrelevant to the global economy. After 1978 and a series of reforms, China joined the global economy and fundamentally reshaped it.

The End of the American Century

2010 was just a few years after the global financial crisis began. That crisis is still unfolding; it is not over. Many vestiges of the great age of leverage that led up to it still have not been reckoned with. It was around 2010 that we began to realize that the question of when we were going back to the pre-crisis world had an answer: never. We can’t go back. Instead, we have ahead of us a very different global order unlike the one we took for granted and built for the previous 25 years. What we have going forward will be much more complex and in a way more interesting, but with a very different set of fundamental geopolitical and macroeconomic stories underpinning it.

For centuries there have been recurring cycles of the rise and fall of Great Powers. Exhibit 1 traces which countries were the world’s largest in terms of economic output. In the late 19th century, the transformation was from a world in which China was the largest economy (though one that was not well integrated with the rest of the world) to one in which the United Kingdom was, for a while, at the center of the world economy and the Pound Sterling was the world’s principal reserve currency. By 1913, however, the US had easily overtaken the UK as the world’s largest economy.

If we move ahead to 1950, on the line graph in Exhibit 1 you can see this extraordinary moment, unique in the history of modern capitalism, in which one country (the US) accounted for nearly one-third of world output and no other country produced even 10%. That dominance lasted for quite a while. Japan rose to become the world’s second largest economy before stagnating and declining, on a relative basis, for the past 25 years. Then, we have the extraordinary rise of China to overtake Japan in second place. Depending on how we measure it, China has either already overtaken the US as the world’s largest economy (if we use purchasing power parity as a metric) or, if we use market exchange rates (and the Chinese economy does not implode), it will surpass the US within a decade or so.

These dynamics do not mean that the US ceases to be relevant. It is still one of the largest economies, but because other countries have grown more quickly, today the US is only about 20% of the world economy, not one-third as it used to be. We’re living in a different world in which there is not one single dominant nation like the US at the center of the system. Nor are we talking about a new Chinese century. Instead, there is a transition away from a uni-polar system to multi-polarity with several large national economies of roughly equal size, none of them dominant over the others. The fundamental issue here is that the era in which the US was at the center of the world economy is gone and is not coming back. The center of economic gravity in the world is moving away from the US, which means that the post-war system of the US writing the rules of the global economy is over. We are at the end of this American century and on the verge of something new.

Globalization’s Ebb and Flow

The story of Great Power cycles is related to another large theme, the ebb and flow of globalization itself. Exhibit 2 depicts how integrated the world economy has been over time, if we narrowly define globalization as the degree of integration of markets for goods, services, and capital across country borders.

Many people imagine that our great era of a globalized world is something special, unique, the culmination of a centuries-long process. But that’s not the case at all. Instead, what we’ve seen over the last 160 years are wild cycles. Between 1870 and the outbreak of the First World War, we built a first great era of globalization in which the world economy was extraordinarily integrated. There were many fewer political units back then – it was an age of empire, whereas today we live in a world of 192 nationstates organized very differently. But from 1870 to the First World War, there was a high degree of market integration across country borders for goods, services, and capital.


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