The tide of globalization is going out.
Peter Thiel, German-born co-founder of PayPal and advisor to President Trump
The speed of light does not merely transform the world. It becomes the world. Globalization is the speed of light.
Paul Virilio, French intellectual
The evolutionary process of technology seeks to improve capabilities in an exponential fashion. Innovators seek to improve things by multiples. Innovation is multiplicative, not additive. Technology, like any evolutionary process, builds on itself.
Ray Kurzweil, from The Age of Spiritual Machines
Globalization is a product of accelerating technology and in turn a contributor to accelerating technology. Short of a major war or a big meteorite hitting the earth, it can’t be stopped. Technology, according to futurologist Ray Kurzweil among others, is accelerating at an accelerating rate and is part of an unstoppable evolutionary process. I think Kurzweil has offered a pretty good description of reality.
The “bad” Trump, reinforced by his Rasputin-like economic nationalist advisors Steve Bannon and Peter Navarro, is promising to stand Canute-like in the face of an ever more powerful technology-driven tide of human evolution. In the short run, the more successful he is at implementing his announced anti-globalization goals, the more he will hurt the US and world economies. In the long run, Trump will be gone and technology and globalization will continue to accelerate.
Some of the short run anti-globalization measures are disturbing. These measures have been given the new clothes of “protecting the American people against terrorism.” The blanket refugee ban (now halted by the courts) is one example. The Wall is another. The world has been put on notice that legitimate egress and ingress into the United States is no longer a simple or predictable matter. Already tourism into the US, US tech companies and US universities with their large foreign student business have all been reportedly negatively affected. Don’t the economic nationalists know that tech companies are major exporters? That tourism and educating mostly full-pay foreign students are themselves de facto export industries?
Another “protection” is the just imposed ban on computers on airplanes coming from the Persian Gulf Arab states. A definite body blow to the Gulf airlines in the competition for the global business traveler. The Gulf states all have spanking new airports and reportedly have security measures equal to those in the US. The Gulf States are US Sunni allies against Iran. The US has military bases in the Gulf states, including Qatar and the UAE. Gulf airports operate as hubs for travelers from Asia heading to the US and Europe. The Gulf airlines have new planes, offer superior service and pose a considerable threat to the oligopolistic American Tres Amigos — American (AAL), United (UAL) and Delta (DAL). These US airlines have been moaning about competition from the Gulf airlines for quite some time. It is hard to believe that this computer ban is not a protectionist measure — a clever one at that — inspired by the US airlines.
Stay Bullish on Stocks
Notwithstanding the above, I think investors should stay bullish on the stock market, particularly technology stocks. Technology and globalization will overcome. Investors should get on board evolution. Trump may even come to realize how the US benefits from globalization. And there are “adults” in his cabinet and among his advisors who do take a more internationalist view. The “good” Trump is getting rid of regulations that were loaded on to the economy by the past two Administrations. And, his recent Obamacare setback notwithstanding, it is still likely that a tax cut is going to happen sooner or later. Hopefully one without a border tax and economic nationalist strings on repatriation.
Take a Look at the Nineteenth Century
The 19th century was a golden age of globalization and technological innovation and saw a giant leap in world prosperity. Canals, railroads, screw propeller ships, refrigeration, the telegraph — all united the world economy as never before. Markets formerly geographically distant at the beginning of the century had become one by the century’s end. Of course there was push back as all major economic changes inevitably produce losers. For example, one group of potential losers in the nineteenth century were European landowners who suddenly found themselves competing against much cheaper farmland from the Americas. French and German landowners did succeed in getting tariffs imposed against agricultural imports from the Americas while U.K. workers basked in free trade agricultural abundance. But technological breakthroughs, particularly in transportation, resulted in commodity price convergence. This in turn, to use economists’ jargon, brought about factor price convergence. Lower European wages tended to converge with higher American wages. Mass migrations and growing world trade were responsible. Push back there was from the losers but the globalization process only was halted by World War I. (For a wonderful description of the 19th century process of globalization and resulting commodity and factor price convergence, see Globalization and History, by Kevin H. O’Rourke and Jeffrey G Williamson.)
If you believe a major war, let’s say between the US and China or the US and Russia, is on the horizon, yes sell all your stocks. And find a place to hide.
The Intel-Mobileye Acquisition
The just announced $15 billion acquisition of Mobileye (MBLY) by Intel (INTC) offers an example of how globalization can proceed even in the face of an anti-globalization American administration. First, Mobileye is headquartered in Israel, not in one of the American rust belt “Carnage” venues, so lamented by Trump in his macabre Inaugural Address. Israel is a staunch American ally and one with substantial political support in the United States. Not a peep will be heard from Bannon and Navarro on this acquisition.
Second, apparently to make the acquisition Intel is using some of the spare cash it had stashed abroad. Better spend the money on a foreign acquisition than wait for Trump to get his tax reduction passed, maybe with economic nationalist strings attached on repatriated cash. Intel might even argue that its cost of capital was zero and that, despite what some critics said, it did not overpay. Qualcomm (QCOM) might make a similar argument for its NXP (NXPI) acquisition. Something for Apple (AAPL) to emulate?
Third, Mobileye’s competitors/customers are all over the world. US based Nvidia (NVDA) for sure (which has its chips fabricated in Taiwan) is its major competitor. But really Mobileye’s competitors/customers are the global auto industry and its suppliers. The same autonomous and assisted driver technologies will be everywhere in the next few years. In economists’ perfect world, the global markets would decide which technology and which companies are the winners. Of course, the world isn’t perfect. China for example might opt for its own homegrown technology or standard. Just like Japan adopted its own 3G mobile telecommunications technology, for which the term Galapagos Syndrome was invented. Japan thereby shut itself out of world markets. Let’s hope Trump wouldn’t be tempted along these lines.
Fourth, Intel has announced that its automotive chip program would be headed up by Mobileye and remains in Israel. There are a number of things that are very unique to this arrangement but it does underline one important fact. Tech companies are knowledge companies that to grow must operate globally. Research centers don’t have to be in Silicon Valley if petty politicians prevent the entry of tech workers into the United States. Accelerating leaps in communications technology have made this possible. Perhaps all major companies are now global tech companies. Even Starbucks (SBUX) and Domino’s Pizza (DPZ).
The Carnage Is Real — But What Is the Cause?
There is no question that there are a significant number of Americans – though nowhere near the majority — who find themselves left out of the fruits of globalization. Their plight has been outlined in Charles Murray’s book Coming Apart. They are predominantly white and from newspaper accounts they are over-represented in America’s new opioid epidemic. They are the losers to globalization and automation.
I will offer an additional explanation. Consider: In the 19th century, millions of people left their homes in Europe to resettle in the United States and other countries in the Americas. (And millions would have left China had their entry into the US not been prohibited by the Chinese Exclusion Act of 1882.) Question: Would these millions have left Europe had they had today’s extensive welfare systems to sustain them? For example would millions of Irish have left the famine stricken Emerald Isle in the late 1840s had they had food stamps to purchase imported food? I think not. I think many Europeans would have stayed, lived on government welfare and had descendants who more often than not would be dysfunctional people still dependent on government handouts. Their governments would have all gone broke a long time ago. And no factor price convergence.
It’s a hard truth but it just may be that government largess is what has damaged rust belt Carnage Americans. When their local industries declined, these Americans might have been better off leaving their small towns and migrating to where work was. Or without government assistance they might have been more resourceful. (Actually many of these people have been resourceful as has been argued in Antoine Van Actmael and Fred Bakker’s book, The Smartest Places on Earth, Why Rustbelts Are the Hotspots of Global Innovation.)
I do not pretend to be an expert in this area and I realize that talking about this subject in this way can sound heartless. But I offer the following concluding quote from a recent Foreign Affairs article by Arthur C. Brooks entitled “The Dignity Deficit Reclaiming Americans’ Sense of Purpose”:
The roots… lie all the way back in the 1960s, when President Lyndon Johnson launched his so-called War on Poverty. Only by properly understanding the mistakes made in that war — mistakes that have deprived generations of Americans of their fundamental sense of dignity — can the country’s current leaders and political parties hope to start fixing them. And only once they properly understand the problem will they be able to craft the kind of cultural and political agenda that can heal the country’s wounds.