October 20, 2025 • 34 mins
Neil Shearing, group chief economist at Capital Economics and author of The Fractured Age, argues hyper-globalization is giving way to a world split into US- and China-centric blocs, reshaping trade, technology, and security. He explains why de-risking will likely be concentrated in strategic sectors (chips, batteries, biotech), bringing more volatile inflation and new portfolio implications—from being cautious on China exposure to watching critical minerals and long-run AI-driven U.S. tech.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Welcome to Merrin Talks Money, the podcast in which the
people who know the markets explain the markets. I'm Merin
sums at Web. This week I'm speaking with Neil Shearing,
Group chief economist at Capital Economics and author of The
Fractured Age, How the Return of Geopolitics will Splinter the
Global economy. Neil's book argues that the era of hyperglobalization,
marked by relatively free movement goods, capital and ideas and
(00:41):
people as well from the nineteen nineties through the two
thousands is over. Now we are entering something he refers
to as a fractured age by geopolitics, national security, and
strategic rivalries increasingly shape global economic outcomes. So we're going
to unpack that argument, and we're going to talk about
why this book is particularly timely in our conversation, and
we'll also get Neil to explain to us how as
(01:02):
searching this book has help him to understand the global
economic picture at the moment, and how that can help
you with your portfolio. I hope you are going to
tell us that, Neil. By the way, Neil, Welcome to
Merrin Talks Money.
Speaker 3 (01:14):
Thanks for having me great to be here.
Speaker 2 (01:15):
Thank you. Now listen, I tell you what I think
we should start off, just by setting the scene and
talking a little bit more, not a great length, because
I think most people are relatively familiar with this discussion.
But this era of hyperglobalization, where did it come from?
How long did it last?
Speaker 3 (01:30):
There's various points which you could date the start of
the kind of globalization period. I think, by the way,
it's nothing new. You've had waves of globalization in the past,
the late nineteenth century. You could argue that there was
a period of integration after the Second World War. But
in the book, I date the most recent wave of
globalization as having started at the fall of the Burning Wall,
(01:50):
so nineteen eighty nine. And the idea behind it that
this wave of globalization was that not only would economic
integration bring prosperity to all economies, but it would also
be a means of spreading common values and therefore peace
as well. The idea being that if you bought Russia,
if you bought China, if you bought the economies of
(02:11):
Latin America into the global economy, into the global fold,
they would probably become a bit more Western. But also
there would be economic gains for the West as well.
Of course we've had a low inflation as partly as
a result of globalization and gains from trade. And there's
lots of quotes that have in the book from Clinton
and Barack Obama and Kofe and on the kind of
virtues of globalization. So nineteen eighty nine is where I
(02:33):
date the start of this period of globalization. It starts
to fragment, I think, actually not with Trump in twenty sixteen,
but actually I go back a bit before that in
the book and say it's partly the global financial crisis,
where I think some of the vulnerabilities that were a
function of this globalized world were starting to be exposed.
But then really in twenty twelve when she became leader
(02:55):
of China and really set China about a very different
course of development, challenge in US A, Germany abroad, and
reasserting the primacy of the party at home.
Speaker 2 (03:05):
Yeah, and that's where we got that Made in China
twenty twenty five project, right, which was a bit of
a turning point. And so up until then, there'd been
this general belief that if you make the economy more
global and everyone becomes a bit of a capitalist capitalism
automatically leads somehow to democracy and to the shared values
that the West thought everyone began to join in. And
it became increasingly clear into the twenty tens that that
(03:28):
wasn't the case, and also increasingly clear that there were
quite a lot of downsides to globalization that we had
sort of refused to discuss in the run up to
it exactly.
Speaker 3 (03:37):
And I think there's a sense in which globalization also
became a convenient scapegoat for a lot of the problems
that the West was facing. Globalization is not the only reason, indeed,
it's not even the most important reason why there's been
the loss of manufacturing jobs in the US and in
the UK, for example. In my view, there is mainly
that's mainly about technological change. But it became a convenient
(03:58):
scapegoat for some of the particularly kind of right wing
populist Trump and so on and so forth. It became
easy to kind of bash globalization. But there were genuine
kind of costs to globalization too that they were also
not part of the discourse. In the two thousands, I
came came up through the Treasury in the kind of
late nineties early two thousands and then it was really
about kind of integration, is a kind of one way back.
(04:19):
Everyone would be better off as a result of global integration,
and clearly that has not been the case.
Speaker 2 (04:25):
Yeah, it's interesting. One of the things that you noted
that in the beginning of your book is to fall
off in global tariff levels. In nineteen ninety four, you
have global tariffs aid about eight point six percent, then
coming down five percent in two thousand and then down
to three percent in two thousand and six. So you
can kind of track the whole thing by tariff rays,
which of course have now turned back up again.
Speaker 3 (04:44):
Exactly turned back up for the US, but not necessarily
turn back up for other countries as well. So we've
got to some pushback on the trade front, particularly from
the US, but not from other countries. And of course,
the big sea change in the two thousands was Chinese
entry to the WTO, and that was really the moment
kind of heralded to China's and particularly the integration of
Chinese producers into the global economy. And since then, of
(05:06):
course China's share of global exports, it has only got a
one direction. Despite pushback from the US through Trump's first administration,
then Biden, and now today with extremely high levels of tarists,
china share of global exports has continued to go in
one direction, which is up.
Speaker 2 (05:20):
Yeah, And would you look back on that and say
that it was a mistake to let China into the
WTO or a mistake to let them in on the
terms that they came in. What I mean that does
seem to be that one of the flash points.
Speaker 3 (05:31):
Well, Hindsight's a wonderful thing, isn't it. And I think
that with the benefit of hindsight we can see that
really China, but particularly under she I think I think
twenty twelve was the moment where things changed, because that
was the moment I think where China signaled really that
it was not going to use openness to trade and
open us to technology to really integrate within the within
(05:55):
the global economy, but just kind of harnessed those as
means to really challenge US agemony. So it was kind
of in the club and it wasn't necessarily going to
play by the rules. So yeah, I think clearly with
hindsight you can say that the mistakes were made, but
I think they were made with the best of intentions.
In the early two thousands.
Speaker 2 (06:13):
Okay, so here we are in a much more adversarial
position and a lot of chat about how globalization is
over and we're turning to a much more nationalistic era.
But one of the things you point out that there
is no sign in the data and the trade data
that globalization is retruating at all. It is pretty much
as it was, so that bit isn't true exactly.
Speaker 3 (06:36):
The genesis of the book really was in some thinking
that we started a capsule economics probably five or six
years ago in the first Trump administration, where there's lots
of headlines about the US imposing tariffs on the rest
of the world, in China in particular, other countries pushing back,
countries turning inwards. We obviously had the Brexit vote in
twenty sixteen here in the UK in a sense that
(06:59):
the country returning in would they were pushing back against globalization.
Lots of kind of images of the nineteen thirties being
in vote, and this idea that the world was deglobalizing.
The rhetoric was everywhere, but we saw no evidence of
this in the data. To like all good ideas, really,
it started by challenging the consensus. So we asked ourselves, well,
(07:20):
what has changed, because clearly something was changing, And when
we started to unpack what was going on, came clear
to me that the key change shift in the global
economy over the past ten years has been the emergency
of China as a strategic rival to the US rather
than a strategic partners as Clinton and others had thought
(07:40):
it might be. And this deepening superpower rivalry between the
US and China, and that has cut through the actions
of the first Trump administration, but then also the Biden administration,
which of course kept Trump's tariffs from the first administration
in place, even expanded them and augmented them with technology controls.
And now, of course we have Trump's second of tariffs.
(08:01):
And it's not just one ways traffic, right, It's not
just the US imposing tariffs on China. China is pushing
back against the US too. So just this year, we've
had controls on outflows of FDI from China to the US,
for example, And in the last couple of weeks we've
had the US finally saying to Nvidia, you can sell
some of your advanced chips to China, not the most
(08:23):
advanced ones, but some of the some of the kind
of second tier, if you like, and China's saying, well,
thanks very much, but we're not interested. We want we
want domestic producers to use domestically produced chips because we
want to develop some self sufficiency and we see some
vulnerabilities in becoming too a meshed in the US technological ecosystem.
I think it's a danger that we view this through
(08:44):
a Western lens, that it's all Trump and it's all
US pushback. But this is happening in China too.
Speaker 2 (08:48):
Okay, So we now have this situation where you've effectively
got China and the US as the two economic greats
in the world. They're not cooperating anymore in the way
that we had hoped that they might separate. So what
you call fracturing is the next bit where the world
effectively divides into two blocks, one circling around the US
(09:09):
and one circling around China.
Speaker 3 (09:11):
Exactly. So the idea, the thesis, if you like, is
not that the world turns inwards, not every country kind
of rex trade barriers and indeed for that amount of
capital controls, because capital flows are still extremely high by
the historic standards too, as our people flows. But rather
that the world breaks into two blocks, one that is
broadly aligned with the US is centered on the US,
(09:32):
and another that is centered upon China. So these blocks
centered upon the two great economic superpowers within the world. Now,
the key point I make in the book is the
exact shape of this fracturing, the form it takes, is
yet to be decided, and the economic consequences will be
determined by both how deep the split between these two
blocks becomes. Can we confine it two areas that are
(09:56):
of strategic importance and let the rest of kind of
global trade kind of get on with it and leave
it relatively untouched, or is it a much broader split?
And the second factor that's really going to determine the
economic consequences of this fracturing will be how other countries align.
Alliances are going to really matter in this fractured world.
And of course there's a big danger to the US
(10:17):
is that through Trumb's actions, they're pushing away allies rather
than pulling them closer towards the US.
Speaker 2 (10:23):
Yeah, well, let's talk about the alliances first and then
talk about the depth. It's quite interesting to think about
who might go where. Obviously, there are sort of natural
partners for each country, and then there are floating areas
where you can't be absolutely sure which way they're going
to jump. So who do you think would definitely be
on the US side and definitely on the Chinese side,
and who's floating.
Speaker 3 (10:41):
If you look at this kind of shape at the
fractured world at the start of this year, about half
of the world in my estimation, kind of fell into
the China Block and about half of the world fell
into the US Block by population. And this is based
on some work that we've done at Caps of Economics
that looks at trade flows, capital flows, defenses, security alliances.
How different countries vote at the UN, for example, is
(11:04):
a kind of sense of political alliance alliance. So about
half of the world's population in the China Block, half
the world's population in the US Bloc. But if you
look by GDP, about two thirds of the world the
world's GDP is in the US Bloc and only about
twenty five percent of the world's GDP is in the
China Bloc. And the remainder is kind of in these
(11:25):
a handful of underligned countries. So who's in the US
Bloc at the start of this year, Well, Europe, Japan, Korea, Taiwan, Mexico, Canada, Australia.
India leans towards the US in our estimation. Indeed, it
is potentially one of the biggest beneficiaries of fracturing because
to the extent that manufacturing has moved out of China
(11:46):
moves to another low cost producer like India, Vietnam, the
Philippines and so on and so forth.
Speaker 2 (11:50):
So is India is Indian given?
Speaker 3 (11:52):
Well, no, exactly, So this is this is a key point, right.
So that's the US block and then the China Block.
You have the usual such Russia and Venezuela are are
in North Korea, a lot of Sub Saharan Africa is
in the China Block. And then there's a handful of
countries like Brazil, Indonesia that I think kind of float
between the two blocks and try to remain unligned. And
(12:13):
then India is the key question here now. I think
if you'd wind the clock back three months and said, well,
what does Trump's return to the White House mean for
US India relations, I think we would have all said, well,
it strengthens them, right, two strong men, they're kind of
nationalistic in their views. They get on personally, so we're told,
(12:34):
and there's a whole load of economic reasons why India
will seek stronger ties with the US. They're deeply skeptical
of Chinese technology, they're concerned about Chinese competition, they have
a long running board of dispute with China that's as
yet unresolved. And of course India potentially is, as just saying,
stands to be one of the economic beneficiaries of this fracturing.
(12:54):
And yet we have a situation where because of this,
supposedly because of India's purchases of Russian oil, these enormous
tariffs slapped on India by Trump, and the siring of
the relationship between Dery and Washington. Now, it remains to
be seen exactly how that plays out, but I think
a reasonable base case might be that India obviously has
(13:15):
a tradition of being underligned through the Cold War. Maybe
it doesn't lean towards the US, maybe it starts to
try to to the extent that is possible, breach these
two blocks is equally possible, I think, such as the
kind of volatile and unpredictable nature of US foreign policy
at the moment, it's possible that we get it some
kind of deal and aprosh mode between Derli and Washington
(13:36):
over the next six months, and all of this kind
of quickly becomes water under the bridge.
Speaker 2 (13:41):
Okay, so there's a there's a bit of weight and
sea to come on. Who goes where. But let's then
talk about the depth of the fracturing, because the hope,
I think, or your hope looking at this, would be
that an awful lot of the global economy continues as was.
Everything from you know, clothing to telephone laptops to fridges, etc.
(14:03):
Continues to be traded in exactly the same way, and
it's only relatively small percent of the global economy things
that the American block on the Chinese block would consider
to be of strategic importance that would be affected. So well,
that's a big deal. It wouldn't make that much difference
to global trade exactly.
Speaker 3 (14:21):
That's the kind of central thesis that I set out
in the book, and it's consistent with the idea that
ran through the Biden administration of there being a kind
of small yard, high fence approach to trade. So otherwis
the small yard being the areas of goods and services,
and frankly capital flows too that you decide that are
so strategically important that you want to hem off from China,
(14:42):
and you build a high fence around that so small
yard high fence, And in the book, I essentially sketch
out three areas where I think will comprise that yard,
if you like, is anything that compromises supply chain security,
anything that compromises national security, and anything that compromises global
technological leadership. So semiconductors, battery technology, need pharmaceuticals, biotech, jaw
(15:07):
use goods, smartphones, the jewel use goods, the jewel use
goods being goods that have applications in both civilian and
military life, so turbine engines, drones being an obvious one.
These are the areas where I think we can be
reasonably sure that over the next decade there's going to
be a pulling a part of supply chains and de
(15:28):
risk in the supply chains in the Western in China
are pushed to self sufficiency in those areas by China,
and are de risking in the West from china reorientation
of supply chains. The question becomes, really, I think, is
can we limit it to those just those areas, And
clearly Trump's tariffs indiscriminate across the board. That raises the
(15:49):
specter of a much wider split. And this really matters.
So the estimates I have in the book are that
if we can contain it's fracturing two areas of strategic importance,
so there's three areas that I just set out, then
there will be an economic cost. There will be about
one percent of global GDP if that happens over a
(16:10):
relatively long period of time. It happens in the gradual
and managed way, it's about one percent of global GDP,
So it's not nothing, but it's manageable.
Speaker 2 (16:18):
But does it not become more than that over time?
If it affects productivity growth and affects technological exchange and advancement,
et cetera. If you have the two major blocks operating
separately on high tech areas, there's got to be a
long term effect that goes beyond the initials. Always that's
(16:40):
really hard to quantify.
Speaker 3 (16:41):
But it's difficult to quantify, and it's difficult to know
what the counterfactual is as well. Right, but it fracturing
has contained to those areas, then it only affects about
ten to fifteen percent of global trades and of course,
most global technological development is happening within blocks rather than
the exchange of ideas between blocks. So at a global
level it could be more limited than many people might suppose,
(17:03):
but there will be an asymmetry in terms of who's affected.
So I think if the US can keep its blocked together,
doesn't push India away, can keep the EU on side,
then most of the costs are going to be borne
by China because the economic diversity of its block is
pretty limited. It's a smaller block. It dominates its block
to a much greater extent than the US does its block.
(17:26):
But coming back to your point about can we contain
it to these areas. If we can't and it's a
much broader split between the two blocks, then the economic
costs become much greater. It may be something in the
order of two to four percent of global GDP, which
again might not sound very much, but that's about the
losses that were imposed by the global financial crisis. We
(17:49):
now think the globe global GDP is about two to
four percent below is pre GFC trend, So that's the
essentially the permanent hip from the GFC. So we're looking
at potentially, if you get a much wider split another
global financial crisis, albeit clearly spread over a number of years,
rather than a happening at once. So the form that
fracturing takes will really determine the economic consequences.
Speaker 2 (18:12):
Okay, well, let's stick with the optimistic view that it
only affects the ten to fifteen percent of global trade
one percent of global GDP. If that were to happen,
how does that affect, say, inflation? Everything feeds into inflation,
But things, say, for example, energy prices, rare earth prices
that we know we're already seeing the beginning of a
new commodity super psycle, right, and that could be massively
(18:35):
exacerbated by, for example, more restrictions are already quite a
lot of restrictions, but restrictions on processed rare eers from China,
or restrictions on the West stability to get raw rare
eerths from Sub Saharan Africa, etcetera, ecceter There's all sorts
of things here that could feed into a very volatile
inflation environment.
Speaker 3 (18:52):
Indeed, and I think volatility is the key point here.
If you said to most economists we're going to roll
back some elements of globalization, what's the impact on inflation.
I think the response would be while there's going to
be inflationary clearly, and I think a bit of context
is important here. Globalization was only one element that pulled
down inflation through the eighties and nineties and two thousands,
(19:16):
and I suspect it probably wasn't the most important either.
The most important was reform of labor markets, product markets,
independent central banks, inflation targeting all of that stuff, running
fiscal policy more responsibly they had. That had by far
the bigger impact in my judgment, on bringing down inflation
than globalization. Globalization, if you like, was the icing on
the cake, the cherry on the top. So if a
(19:38):
bit of that globalization gets rolled back and some trade
barriers go up and only affects fifteen percent of global trade,
and to the extent that in the West we're moving
production out of China and we're putting it in Vietnam
and India and Mexico for these strategically important goods, then
it's going to another low cost producer. And if it
(19:58):
happens gradually, we know from other firms that have shifted
supply chains to de risk them. So if you look
at Toyota after the twenty eleven Fukashima disaster. It rejigits
supply chains to de risk them, have removed single points
of failure, didn't contribute much to overall costs, So I
think the inflationary consequences might be more limited than one supposed.
(20:19):
I think volatility, though, is the key point. So I
think we're going to head into a world where inflation
is more volatile. And you mentioned rare earths in critical
minerals more generally, but if you think about how that's
playing out, what's happening is China's putting on export controls,
and what that's doing effectively is restricting the global supply
of these minerals. The price therefore goes up, and as
(20:41):
the price goes up, that's then incentivizing the production and
then the exportation of other sources. So we're seeing rare
earth minds reopen in California, in Arkansas, in Romania, and
so on and so forth, and so the global supply
will go up and that will then bring the price
back down.
Speaker 2 (20:58):
Back to the old The solution to high prices, as
high prisis.
Speaker 3 (21:01):
Exactly so the consequence there is that you end up
with more volatile inflation a period of high inflation that
essentially is cure cures itself by allowing supplier to respond.
So my subposition is that we've been through this kind
of nice period where non inflationary, constant expansion, et cetera,
et cetera, low inflation, staple inflation. I think we're going
not necessarily to a world where inflation is structurally higher
(21:24):
three or four percent, but just that it's more volatile.
Three percent one year, one and a half percent the
next year, et cetera, et cetera.
Speaker 2 (21:32):
I want to move on to talking about how this
might affect asset classes and ordinary investors in a minute.
But we're talking very much as though this is a
bit like an economic Cold war for a small part
of the global economy. But obviously we're now talking about
a world in which geopolitics have a much bigger influence
(21:53):
than previously, not just on resources, but also on the
way politicians interact. Is there a danger do you think
of geopolitical situation getting worse and worse and this economic
division becoming not just an economic division, but a risk
of further conflicts, the risk of war.
Speaker 3 (22:10):
Exactly. Yeah, And if you're of a particularly cheerful disposition,
and you need being down to earth. Then there's a
whole chapter in the book, chapter eight that talks about
how could it all go wrong? And there's lots of
different ways in which you can visit that this fractured
world could evolve in a much warm, aligned way, which
talks about some of them that there's a deeper slit
between the two blocks. The big risk for America is
(22:30):
that it turns inwards pushes away its allies. In that sense,
America first would really be America loss, because it would
be the biggest loser. But the one that should keep
us all awake at night is the risk of conflict
between the two blocks, and that can emerge from the
several flashpoints. Clearly that the South China Sea in China's
presence there, and disputed islands and lands and so on,
(22:53):
but in Taiwan the other obvious flashpoints. Now I'm a
lonely macroeconomist, I'm not necessarily going to tell the possibility
or probability of the two sides come into conflict. I
do know that if the two sides do come into conflict,
then the least of our concerns is going to be
what the impact is going to be on global GDP.
But there are some estimates in the book. Some people
(23:14):
have done some work looking at this, maybe including your
colleagues at Bloomberg. Actually possibly, you know, Knox ten percent
off of global GDP if the US and China come
to blows over Taiwan, primarily through repercussions through the global
chip industry. But of course it doesn't necessarily need to
be a full blown war. It could be a blockade
that the restricts the flow of these semiconductors, and that
would having a knock on impact to to kind of
(23:37):
risk appetite and markets and et cetera, et cetera.
Speaker 2 (23:40):
Yeah, or a cyber war.
Speaker 3 (23:42):
Exactly, it's a cyber water again, particularly when it comes
to Taiwan. Images of conflict over Taiwan conjure up this.
This kind of image of the kind of amphibious land
is kind of a D Day type conflict from China,
the pla storming the beaches. I don't think that's probably how,
in all, like me, how things would play out. It
was much more likely to be blockade, cyber war, et cetera,
(24:05):
et cetera, et cetera.
Speaker 2 (24:07):
Well, none of this is pleasant. Let me ask you
one thing we haven't talked about again is capital flows.
So we've talked about physical goods and the end of
cutting back of trade in those areas, but what about
the way that capital moves around the world in a
fractured system.
Speaker 3 (24:20):
Well, a couple of really important points to make from
the start here. If you think about things through the
lens of macro rather than the markets, then really global
capital flows are just the flip side of global trade flows.
And so if China is running these large trade surplaces,
which is the kind of fundamental source of tension between
(24:40):
the US and China and a driver of this fracturing,
then it must also be amassing large amounts of external assets.
That's just the logic of running a trade surpas, and
those assets have to go somewhere. And the sheer size
of the accumulation of China's external assets are now close
to nine trillion dollars on some estimates, a bit opaque,
(25:00):
but about nine trillion dollars means that dollar markets are
the only place that they could they can really go.
So I suspect that there's going to be greater friction
in global capital flows in future. I think there's now
a widespread acceptance amongst policymakers, even the IMF, saying that
unfettered free flows of capital is not necessarily a good thing.
(25:20):
But I'm deeply skeptical of the idea that we're going
again back to the kind of nineteen thirties where the
kind of big restrictions on global capital flow is a
big dropping global capital flows in total. And also that
China can disentangle itself from US dollar markets. I don't
think it can, just because of the sheer size of
its external assets.
Speaker 2 (25:40):
Okay, so we can put that aside as a big worry.
That's going to be all right.
Speaker 3 (25:43):
I think so. I mean, I think to the extent
the global capital flows in future are going to be
smaller as a share of global GDP. I think it's
more likely to be because policymakers come to the conclusion
that actually some of the kind of frothy hot maney
is not necessarily a good thing. It creates a financial
honorabilities embedded in the system, And there's a bit of
a that there's a pushback against some of the kind
(26:05):
of Washington consensus idea of unfettered free capital flows being
an unalloyed positive rather than it being China in the
US pulling apart and erecting a big kind of capital
wall between these two blocks. I think that would happen
in some areas. So I think particularly in private markets
where rules around foreign investment are a bit more opaque,
I think there's going to be much greater reticence on
(26:27):
behalf of Western investors in getting involved in China and
investing in China. And we see some of that already
in the data. But I think generally at a global level,
capital flows remaining relatively high would be would be my
base case.
Speaker 2 (26:41):
Okay, so under the key point for this podcast anyway,
what does all this mean for our portfolios? What does
it mean for the future of investment? We have been taught,
haven't we relentlessly over the last over many years, that
a globalized portfolio is the best portfolio, and that our
pension money and our is money can float all over
the world. In fact, everywhere is better than the UK.
So that's been the last couple of decades. What now,
(27:04):
what does this mean for the ordinary person looking at
their SIP and their ISA and saying, Okay, we're not
globalized anymore, We're fractured. Where do I move my money.
Speaker 3 (27:15):
Well, you're right that a key aspect of the latest
wave of globalization, the most recent wave of globalization has
been massive financial integration, and that was something that was
not necessarily present in previous waves of globalization. And part
of that was this idea that we should all be
investing our and SIPs et cetera, et cetera across the
(27:36):
world in the fast growing emerging economies too. My suspicion
is that some of the glosses come off of that already,
not at least because returns in some emerging economies have
been pretty weak. But that's the direction of travel, and
it's the direction of travel that we're heading towards now.
A lot will depend upon the form that fracturing takes.
As I've said in terms of the macro consequences, if
(27:58):
we get a more limited contained form of fracturing, then
I suspect what it means in practice is that you
and I were thinking twice before we invest significant portions
of our sip and is in Chinese equities, but it
doesn't really affect the extent to which we put our
money in the S and P or for that matter,
European stocks. And I think when it comes to private flows,
(28:20):
cups economist. We're speaking to clients all the time in
private markets. There's already some reticence about investing in China
and China's allies sanctions risk as much as anything else,
and I think that that continues to intensify too, so
much greater reticence reluctance to invest in China itself, I suspect.
(28:41):
But it doesn't mean that we stop investing globally, no,
I don't think so.
Speaker 2 (28:47):
Does it mean that we should allocate more to commodities
and gold for example.
Speaker 3 (28:52):
Well, I think that's happened already to some extent with gold.
So gold is seen by some emerging market central banks,
particularly the Chinese Bank, is a way of kind of
mitigating some risk of exposure to the to the dollar
and limited sanctions risks, and that's been a key factor
behind the rise in the price of gold over the
past eighteen months two years in my view. So some
(29:14):
of that is already in the market, clearly, if you're
a savvy investor that can identify those particular critical minerals
that China has a chokehold over, and there's humpty in
different rare earths. The names of which we've never heard of.
Germanium and gallium were two big ones last year I'd
never heard of. But turns out China has a stranglehold
(29:34):
over these rare earths and they're now a scrambled to
develop alternative sources.
Speaker 2 (29:40):
It's the processing they have a stranglehold of, exactly, rather
than the mining.
Speaker 3 (29:45):
Rather than the deposits of them exactly. So the key
point about rare earth is that they're not that rare,
they're pretty prevalent. Is that is that the mining and
the processing, particularly the processing the processing is really dirty work,
which is essentially we'd euxhource that to China for environmental
reasons and now so you know, if you can work
out where those chope points lie and develop domestic sources
off them, then there's clearly opportunities or opportunities there too.
Speaker 2 (30:09):
It sounded so wrong that sentence, by the way, Now
it's dirty works, so we've outsourced it to China for
environmental reasons. The environmental impact is exactly the same. It's
just happening somewhere else, I mean.
Speaker 3 (30:21):
Exactly the same. At a global level, the environmental impact
is exactly the same. But for domestic political reasons, we've
decided that we took a decision kind of fifteen twenty
years ago that someone else could do that.
Speaker 2 (30:31):
Thanks very much, and not just on that interesting Okay,
Can I just argue briefly then about the US market,
partly in connection to your ideas about the fractured age,
but also in general. A lot of our listeners will
be holding global track of farms globally, yes, whatever else
will be very very exposed to the US and still
very exposed to big tech companies. Is that a reasonable
(30:53):
place to be?
Speaker 3 (30:55):
Well, I think it's a reasonable place to be in
terms of future growth when it comes to kind of
big tech and AI in particular, I'm pretty bullish, I
have to say, in terms of the kind of productivity
benefits that that's going to eventually deliver. It's not delivering
them right now, but I think if we wind the
clock forward five ten years then it will start to
have delivered them. Clearly, some of that's reflected the price
(31:15):
of these hyperscalies and big tech stocks already.
Speaker 1 (31:19):
Now.
Speaker 3 (31:20):
The question we always get is is this a bubble?
And it does look pretty frothy, doesn't it when you
look at some of the kind of valuations that these
firms are trading on. And then the question becomes for investors,
if you're already invested, do you hang on? If you're
not invested, do you try and ride the coattails of
the kind of this bubble? And when do you get out?
And that that's an incredibly difficult question to answer and
(31:42):
one that will depend upon individual's preferences and risk appetites
and particular circumstances. My sense would be that we've been
through a period where returns on US equities have outperformed
those comfortably that those of other develop markets, particularly here
in the UK. I suspect that that performance will narrow
(32:02):
over the coming years, just because a lot of that
valuations are extremely high. I don't see that there's the
same scope for price gains. So I suspect that it's
going to be impossible to ignore some exposure to the
US just because of the scale. But the relative act
performance of the US compared to the European markets and
markets in the UK will start to diminish.
Speaker 2 (32:22):
Okay, so expected a little mean reversion in relative terms
at least.
Speaker 3 (32:26):
Yeah.
Speaker 2 (32:26):
Indeed, brilliant, Neil, thank you, thank you so much. Can
I just ask you one last question. Obviously, we are
recommending that everybody buys this book and reads it immediately
the fractured agent body go out by it.
Speaker 3 (32:39):
Read I'm losing my star review as well, leave.
Speaker 2 (32:42):
Five star reviews, and then once you've done that, don't
forget to leave your five star review for the podcast,
because that matters too. Indeed, Neil, you've written this, what
are you reading.
Speaker 3 (32:51):
I'm halfway through Dan Wang's book break Neck on China,
which is really good choke point again on the global
economy and strangleholding. Certain parts of it's really really good too.
I'd recommend both of those books to listeners again about
the feature the global economy and the relationship with the
US and China within it.
Speaker 2 (33:11):
Okay, excellent, Thank you, though we must remember by the
way that books aren't was right. I was telling I
think John on podcast the other day about going through
my bookshelves to deliver some books to the Library of Mistakes,
and there's quite a lot called things like the end
of China and that kind of thing.
Speaker 3 (33:27):
Yeah, maybe version two, the second edition of this will
be the kind of unfractured age.
Speaker 2 (33:32):
Maybe, who knows. Anyway, thank you so much for joining
us today that was absolutely fascinating.
Speaker 3 (33:37):
Thanks for having me.
Speaker 2 (33:42):
Thanks for listening to this week's Merrin Talks Money. If
you like us, show, rate, review, and subscribe wherever you
listen to podcasts, and keep sending questions or comments to
Merror Money at Bloomberg dot net. You can also follow
me in John on Twitter or x I'm at marinas
w and John is John Underscore Stepic. This episode was
hosted by me Marrin's unsep Web was produced by some
Assadiant Moses and sound designed by Blake Maples, Kelly Gary
(34:04):
and Aaron Kaspers. That's, of course to Neil Shearing.
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Welcome to Merrin Talks Money, the podcast in which the
people who know the markets explain the markets. I'm Merin
sums at Web. This week I'm speaking with Neil Shearing,
Group chief economist at Capital Economics and author of The
Fractured Age, How the Return of Geopolitics will Splinter the
Global economy. Neil's book argues that the era of hyperglobalization,
marked by relatively free movement goods, capital and ideas and
(00:41):
people as well from the nineteen nineties through the two
thousands is over. Now we are entering something he refers
to as a fractured age by geopolitics, national security, and
strategic rivalries increasingly shape global economic outcomes. So we're going
to unpack that argument, and we're going to talk about
why this book is particularly timely in our conversation, and
we'll also get Neil to explain to us how as
(01:02):
searching this book has help him to understand the global
economic picture at the moment, and how that can help
you with your portfolio. I hope you are going to
tell us that, Neil. By the way, Neil, Welcome to
Merrin Talks Money.
Speaker 3 (01:14):
Thanks for having me great to be here.
Speaker 2 (01:15):
Thank you. Now listen, I tell you what I think
we should start off, just by setting the scene and
talking a little bit more, not a great length, because
I think most people are relatively familiar with this discussion.
But this era of hyperglobalization, where did it come from?
How long did it last?
Speaker 3 (01:30):
There's various points which you could date the start of
the kind of globalization period. I think, by the way,
it's nothing new. You've had waves of globalization in the past,
the late nineteenth century. You could argue that there was
a period of integration after the Second World War. But
in the book, I date the most recent wave of
globalization as having started at the fall of the Burning Wall,
(01:50):
so nineteen eighty nine. And the idea behind it that
this wave of globalization was that not only would economic
integration bring prosperity to all economies, but it would also
be a means of spreading common values and therefore peace
as well. The idea being that if you bought Russia,
if you bought China, if you bought the economies of
(02:11):
Latin America into the global economy, into the global fold,
they would probably become a bit more Western. But also
there would be economic gains for the West as well.
Of course we've had a low inflation as partly as
a result of globalization and gains from trade. And there's
lots of quotes that have in the book from Clinton
and Barack Obama and Kofe and on the kind of
virtues of globalization. So nineteen eighty nine is where I
(02:33):
date the start of this period of globalization. It starts
to fragment, I think, actually not with Trump in twenty sixteen,
but actually I go back a bit before that in
the book and say it's partly the global financial crisis,
where I think some of the vulnerabilities that were a
function of this globalized world were starting to be exposed.
But then really in twenty twelve when she became leader
(02:55):
of China and really set China about a very different
course of development, challenge in US A, Germany abroad, and
reasserting the primacy of the party at home.
Speaker 2 (03:05):
Yeah, and that's where we got that Made in China
twenty twenty five project, right, which was a bit of
a turning point. And so up until then, there'd been
this general belief that if you make the economy more
global and everyone becomes a bit of a capitalist capitalism
automatically leads somehow to democracy and to the shared values
that the West thought everyone began to join in. And
it became increasingly clear into the twenty tens that that
(03:28):
wasn't the case, and also increasingly clear that there were
quite a lot of downsides to globalization that we had
sort of refused to discuss in the run up to
it exactly.
Speaker 3 (03:37):
And I think there's a sense in which globalization also
became a convenient scapegoat for a lot of the problems
that the West was facing. Globalization is not the only reason, indeed,
it's not even the most important reason why there's been
the loss of manufacturing jobs in the US and in
the UK, for example. In my view, there is mainly
that's mainly about technological change. But it became a convenient
(03:58):
scapegoat for some of the particularly kind of right wing
populist Trump and so on and so forth. It became
easy to kind of bash globalization. But there were genuine
kind of costs to globalization too that they were also
not part of the discourse. In the two thousands, I
came came up through the Treasury in the kind of
late nineties early two thousands and then it was really
about kind of integration, is a kind of one way back.
(04:19):
Everyone would be better off as a result of global integration,
and clearly that has not been the case.
Speaker 2 (04:25):
Yeah, it's interesting. One of the things that you noted
that in the beginning of your book is to fall
off in global tariff levels. In nineteen ninety four, you
have global tariffs aid about eight point six percent, then
coming down five percent in two thousand and then down
to three percent in two thousand and six. So you
can kind of track the whole thing by tariff rays,
which of course have now turned back up again.
Speaker 3 (04:44):
Exactly turned back up for the US, but not necessarily
turn back up for other countries as well. So we've
got to some pushback on the trade front, particularly from
the US, but not from other countries. And of course,
the big sea change in the two thousands was Chinese
entry to the WTO, and that was really the moment
kind of heralded to China's and particularly the integration of
Chinese producers into the global economy. And since then, of
(05:06):
course China's share of global exports, it has only got a
one direction. Despite pushback from the US through Trump's first administration,
then Biden, and now today with extremely high levels of tarists,
china share of global exports has continued to go in
one direction, which is up.
Speaker 2 (05:20):
Yeah, And would you look back on that and say
that it was a mistake to let China into the
WTO or a mistake to let them in on the
terms that they came in. What I mean that does
seem to be that one of the flash points.
Speaker 3 (05:31):
Well, Hindsight's a wonderful thing, isn't it. And I think
that with the benefit of hindsight we can see that
really China, but particularly under she I think I think
twenty twelve was the moment where things changed, because that
was the moment I think where China signaled really that
it was not going to use openness to trade and
open us to technology to really integrate within the within
(05:55):
the global economy, but just kind of harnessed those as
means to really challenge US agemony. So it was kind
of in the club and it wasn't necessarily going to
play by the rules. So yeah, I think clearly with
hindsight you can say that the mistakes were made, but
I think they were made with the best of intentions.
In the early two thousands.
Speaker 2 (06:13):
Okay, so here we are in a much more adversarial
position and a lot of chat about how globalization is
over and we're turning to a much more nationalistic era.
But one of the things you point out that there
is no sign in the data and the trade data
that globalization is retruating at all. It is pretty much
as it was, so that bit isn't true exactly.
Speaker 3 (06:36):
The genesis of the book really was in some thinking
that we started a capsule economics probably five or six
years ago in the first Trump administration, where there's lots
of headlines about the US imposing tariffs on the rest
of the world, in China in particular, other countries pushing back,
countries turning inwards. We obviously had the Brexit vote in
twenty sixteen here in the UK in a sense that
(06:59):
the country returning in would they were pushing back against globalization.
Lots of kind of images of the nineteen thirties being
in vote, and this idea that the world was deglobalizing.
The rhetoric was everywhere, but we saw no evidence of
this in the data. To like all good ideas, really,
it started by challenging the consensus. So we asked ourselves, well,
(07:20):
what has changed, because clearly something was changing, And when
we started to unpack what was going on, came clear
to me that the key change shift in the global
economy over the past ten years has been the emergency
of China as a strategic rival to the US rather
than a strategic partners as Clinton and others had thought
(07:40):
it might be. And this deepening superpower rivalry between the
US and China, and that has cut through the actions
of the first Trump administration, but then also the Biden administration,
which of course kept Trump's tariffs from the first administration
in place, even expanded them and augmented them with technology controls.
And now, of course we have Trump's second of tariffs.
(08:01):
And it's not just one ways traffic, right, It's not
just the US imposing tariffs on China. China is pushing
back against the US too. So just this year, we've
had controls on outflows of FDI from China to the US,
for example, And in the last couple of weeks we've
had the US finally saying to Nvidia, you can sell
some of your advanced chips to China, not the most
(08:23):
advanced ones, but some of the some of the kind
of second tier, if you like, and China's saying, well,
thanks very much, but we're not interested. We want we
want domestic producers to use domestically produced chips because we
want to develop some self sufficiency and we see some
vulnerabilities in becoming too a meshed in the US technological ecosystem.
I think it's a danger that we view this through
(08:44):
a Western lens, that it's all Trump and it's all
US pushback. But this is happening in China too.
Speaker 2 (08:48):
Okay, So we now have this situation where you've effectively
got China and the US as the two economic greats
in the world. They're not cooperating anymore in the way
that we had hoped that they might separate. So what
you call fracturing is the next bit where the world
effectively divides into two blocks, one circling around the US
(09:09):
and one circling around China.
Speaker 3 (09:11):
Exactly. So the idea, the thesis, if you like, is
not that the world turns inwards, not every country kind
of rex trade barriers and indeed for that amount of
capital controls, because capital flows are still extremely high by
the historic standards too, as our people flows. But rather
that the world breaks into two blocks, one that is
broadly aligned with the US is centered on the US,
(09:32):
and another that is centered upon China. So these blocks
centered upon the two great economic superpowers within the world. Now,
the key point I make in the book is the
exact shape of this fracturing, the form it takes, is
yet to be decided, and the economic consequences will be
determined by both how deep the split between these two
blocks becomes. Can we confine it two areas that are
(09:56):
of strategic importance and let the rest of kind of
global trade kind of get on with it and leave
it relatively untouched, or is it a much broader split?
And the second factor that's really going to determine the
economic consequences of this fracturing will be how other countries align.
Alliances are going to really matter in this fractured world.
And of course there's a big danger to the US
(10:17):
is that through Trumb's actions, they're pushing away allies rather
than pulling them closer towards the US.
Speaker 2 (10:23):
Yeah, well, let's talk about the alliances first and then
talk about the depth. It's quite interesting to think about
who might go where. Obviously, there are sort of natural
partners for each country, and then there are floating areas
where you can't be absolutely sure which way they're going
to jump. So who do you think would definitely be
on the US side and definitely on the Chinese side,
and who's floating.
Speaker 3 (10:41):
If you look at this kind of shape at the
fractured world at the start of this year, about half
of the world in my estimation, kind of fell into
the China Block and about half of the world fell
into the US Block by population. And this is based
on some work that we've done at Caps of Economics
that looks at trade flows, capital flows, defenses, security alliances.
How different countries vote at the UN, for example, is
(11:04):
a kind of sense of political alliance alliance. So about
half of the world's population in the China Block, half
the world's population in the US Bloc. But if you
look by GDP, about two thirds of the world the
world's GDP is in the US Bloc and only about
twenty five percent of the world's GDP is in the
China Bloc. And the remainder is kind of in these
(11:25):
a handful of underligned countries. So who's in the US
Bloc at the start of this year, Well, Europe, Japan, Korea, Taiwan, Mexico, Canada, Australia.
India leans towards the US in our estimation. Indeed, it
is potentially one of the biggest beneficiaries of fracturing because
to the extent that manufacturing has moved out of China
(11:46):
moves to another low cost producer like India, Vietnam, the
Philippines and so on and so forth.
Speaker 2 (11:50):
So is India is Indian given?
Speaker 3 (11:52):
Well, no, exactly, So this is this is a key point, right.
So that's the US block and then the China Block.
You have the usual such Russia and Venezuela are are
in North Korea, a lot of Sub Saharan Africa is
in the China Block. And then there's a handful of
countries like Brazil, Indonesia that I think kind of float
between the two blocks and try to remain unligned. And
(12:13):
then India is the key question here now. I think
if you'd wind the clock back three months and said, well,
what does Trump's return to the White House mean for
US India relations, I think we would have all said, well,
it strengthens them, right, two strong men, they're kind of
nationalistic in their views. They get on personally, so we're told,
(12:34):
and there's a whole load of economic reasons why India
will seek stronger ties with the US. They're deeply skeptical
of Chinese technology, they're concerned about Chinese competition, they have
a long running board of dispute with China that's as
yet unresolved. And of course India potentially is, as just saying,
stands to be one of the economic beneficiaries of this fracturing.
(12:54):
And yet we have a situation where because of this,
supposedly because of India's purchases of Russian oil, these enormous
tariffs slapped on India by Trump, and the siring of
the relationship between Dery and Washington. Now, it remains to
be seen exactly how that plays out, but I think
a reasonable base case might be that India obviously has
(13:15):
a tradition of being underligned through the Cold War. Maybe
it doesn't lean towards the US, maybe it starts to
try to to the extent that is possible, breach these
two blocks is equally possible, I think, such as the
kind of volatile and unpredictable nature of US foreign policy
at the moment, it's possible that we get it some
kind of deal and aprosh mode between Derli and Washington
(13:36):
over the next six months, and all of this kind
of quickly becomes water under the bridge.
Speaker 2 (13:41):
Okay, so there's a there's a bit of weight and
sea to come on. Who goes where. But let's then
talk about the depth of the fracturing, because the hope,
I think, or your hope looking at this, would be
that an awful lot of the global economy continues as was.
Everything from you know, clothing to telephone laptops to fridges, etc.
(14:03):
Continues to be traded in exactly the same way, and
it's only relatively small percent of the global economy things
that the American block on the Chinese block would consider
to be of strategic importance that would be affected. So well,
that's a big deal. It wouldn't make that much difference
to global trade exactly.
Speaker 3 (14:21):
That's the kind of central thesis that I set out
in the book, and it's consistent with the idea that
ran through the Biden administration of there being a kind
of small yard, high fence approach to trade. So otherwis
the small yard being the areas of goods and services,
and frankly capital flows too that you decide that are
so strategically important that you want to hem off from China,
(14:42):
and you build a high fence around that so small
yard high fence, And in the book, I essentially sketch
out three areas where I think will comprise that yard,
if you like, is anything that compromises supply chain security,
anything that compromises national security, and anything that compromises global
technological leadership. So semiconductors, battery technology, need pharmaceuticals, biotech, jaw
(15:07):
use goods, smartphones, the jewel use goods, the jewel use
goods being goods that have applications in both civilian and
military life, so turbine engines, drones being an obvious one.
These are the areas where I think we can be
reasonably sure that over the next decade there's going to
be a pulling a part of supply chains and de
(15:28):
risk in the supply chains in the Western in China
are pushed to self sufficiency in those areas by China,
and are de risking in the West from china reorientation
of supply chains. The question becomes, really, I think, is
can we limit it to those just those areas, And
clearly Trump's tariffs indiscriminate across the board. That raises the
(15:49):
specter of a much wider split. And this really matters.
So the estimates I have in the book are that
if we can contain it's fracturing two areas of strategic importance,
so there's three areas that I just set out, then
there will be an economic cost. There will be about
one percent of global GDP if that happens over a
(16:10):
relatively long period of time. It happens in the gradual
and managed way, it's about one percent of global GDP,
So it's not nothing, but it's manageable.
Speaker 2 (16:18):
But does it not become more than that over time?
If it affects productivity growth and affects technological exchange and advancement,
et cetera. If you have the two major blocks operating
separately on high tech areas, there's got to be a
long term effect that goes beyond the initials. Always that's
(16:40):
really hard to quantify.
Speaker 3 (16:41):
But it's difficult to quantify, and it's difficult to know
what the counterfactual is as well. Right, but it fracturing
has contained to those areas, then it only affects about
ten to fifteen percent of global trades and of course,
most global technological development is happening within blocks rather than
the exchange of ideas between blocks. So at a global
level it could be more limited than many people might suppose,
(17:03):
but there will be an asymmetry in terms of who's affected.
So I think if the US can keep its blocked together,
doesn't push India away, can keep the EU on side,
then most of the costs are going to be borne
by China because the economic diversity of its block is
pretty limited. It's a smaller block. It dominates its block
to a much greater extent than the US does its block.
(17:26):
But coming back to your point about can we contain
it to these areas. If we can't and it's a
much broader split between the two blocks, then the economic
costs become much greater. It may be something in the
order of two to four percent of global GDP, which
again might not sound very much, but that's about the
losses that were imposed by the global financial crisis. We
(17:49):
now think the globe global GDP is about two to
four percent below is pre GFC trend, So that's the
essentially the permanent hip from the GFC. So we're looking
at potentially, if you get a much wider split another
global financial crisis, albeit clearly spread over a number of years,
rather than a happening at once. So the form that
fracturing takes will really determine the economic consequences.
Speaker 2 (18:12):
Okay, well, let's stick with the optimistic view that it
only affects the ten to fifteen percent of global trade
one percent of global GDP. If that were to happen,
how does that affect, say, inflation? Everything feeds into inflation,
But things, say, for example, energy prices, rare earth prices
that we know we're already seeing the beginning of a
new commodity super psycle, right, and that could be massively
(18:35):
exacerbated by, for example, more restrictions are already quite a
lot of restrictions, but restrictions on processed rare eers from China,
or restrictions on the West stability to get raw rare
eerths from Sub Saharan Africa, etcetera, ecceter There's all sorts
of things here that could feed into a very volatile
inflation environment.
Speaker 3 (18:52):
Indeed, and I think volatility is the key point here.
If you said to most economists we're going to roll
back some elements of globalization, what's the impact on inflation.
I think the response would be while there's going to
be inflationary clearly, and I think a bit of context
is important here. Globalization was only one element that pulled
down inflation through the eighties and nineties and two thousands,
(19:16):
and I suspect it probably wasn't the most important either.
The most important was reform of labor markets, product markets,
independent central banks, inflation targeting all of that stuff, running
fiscal policy more responsibly they had. That had by far
the bigger impact in my judgment, on bringing down inflation
than globalization. Globalization, if you like, was the icing on
the cake, the cherry on the top. So if a
(19:38):
bit of that globalization gets rolled back and some trade
barriers go up and only affects fifteen percent of global trade,
and to the extent that in the West we're moving
production out of China and we're putting it in Vietnam
and India and Mexico for these strategically important goods, then
it's going to another low cost producer. And if it
(19:58):
happens gradually, we know from other firms that have shifted
supply chains to de risk them. So if you look
at Toyota after the twenty eleven Fukashima disaster. It rejigits
supply chains to de risk them, have removed single points
of failure, didn't contribute much to overall costs, So I
think the inflationary consequences might be more limited than one supposed.
(20:19):
I think volatility, though, is the key point. So I
think we're going to head into a world where inflation
is more volatile. And you mentioned rare earths in critical
minerals more generally, but if you think about how that's
playing out, what's happening is China's putting on export controls,
and what that's doing effectively is restricting the global supply
of these minerals. The price therefore goes up, and as
(20:41):
the price goes up, that's then incentivizing the production and
then the exportation of other sources. So we're seeing rare
earth minds reopen in California, in Arkansas, in Romania, and
so on and so forth, and so the global supply
will go up and that will then bring the price
back down.
Speaker 2 (20:58):
Back to the old The solution to high prices, as
high prisis.
Speaker 3 (21:01):
Exactly so the consequence there is that you end up
with more volatile inflation a period of high inflation that
essentially is cure cures itself by allowing supplier to respond.
So my subposition is that we've been through this kind
of nice period where non inflationary, constant expansion, et cetera,
et cetera, low inflation, staple inflation. I think we're going
not necessarily to a world where inflation is structurally higher
(21:24):
three or four percent, but just that it's more volatile.
Three percent one year, one and a half percent the
next year, et cetera, et cetera.
Speaker 2 (21:32):
I want to move on to talking about how this
might affect asset classes and ordinary investors in a minute.
But we're talking very much as though this is a
bit like an economic Cold war for a small part
of the global economy. But obviously we're now talking about
a world in which geopolitics have a much bigger influence
(21:53):
than previously, not just on resources, but also on the
way politicians interact. Is there a danger do you think
of geopolitical situation getting worse and worse and this economic
division becoming not just an economic division, but a risk
of further conflicts, the risk of war.
Speaker 3 (22:10):
Exactly. Yeah, And if you're of a particularly cheerful disposition,
and you need being down to earth. Then there's a
whole chapter in the book, chapter eight that talks about
how could it all go wrong? And there's lots of
different ways in which you can visit that this fractured
world could evolve in a much warm, aligned way, which
talks about some of them that there's a deeper slit
between the two blocks. The big risk for America is
(22:30):
that it turns inwards pushes away its allies. In that sense,
America first would really be America loss, because it would
be the biggest loser. But the one that should keep
us all awake at night is the risk of conflict
between the two blocks, and that can emerge from the
several flashpoints. Clearly that the South China Sea in China's
presence there, and disputed islands and lands and so on,
(22:53):
but in Taiwan the other obvious flashpoints. Now I'm a
lonely macroeconomist, I'm not necessarily going to tell the possibility
or probability of the two sides come into conflict. I
do know that if the two sides do come into conflict,
then the least of our concerns is going to be
what the impact is going to be on global GDP.
But there are some estimates in the book. Some people
(23:14):
have done some work looking at this, maybe including your
colleagues at Bloomberg. Actually possibly, you know, Knox ten percent
off of global GDP if the US and China come
to blows over Taiwan, primarily through repercussions through the global
chip industry. But of course it doesn't necessarily need to
be a full blown war. It could be a blockade
that the restricts the flow of these semiconductors, and that
would having a knock on impact to to kind of
(23:37):
risk appetite and markets and et cetera, et cetera.
Speaker 2 (23:40):
Yeah, or a cyber war.
Speaker 3 (23:42):
Exactly, it's a cyber water again, particularly when it comes
to Taiwan. Images of conflict over Taiwan conjure up this.
This kind of image of the kind of amphibious land
is kind of a D Day type conflict from China,
the pla storming the beaches. I don't think that's probably how,
in all, like me, how things would play out. It
was much more likely to be blockade, cyber war, et cetera,
(24:05):
et cetera, et cetera.
Speaker 2 (24:07):
Well, none of this is pleasant. Let me ask you
one thing we haven't talked about again is capital flows.
So we've talked about physical goods and the end of
cutting back of trade in those areas, but what about
the way that capital moves around the world in a
fractured system.
Speaker 3 (24:20):
Well, a couple of really important points to make from
the start here. If you think about things through the
lens of macro rather than the markets, then really global
capital flows are just the flip side of global trade flows.
And so if China is running these large trade surplaces,
which is the kind of fundamental source of tension between
(24:40):
the US and China and a driver of this fracturing,
then it must also be amassing large amounts of external assets.
That's just the logic of running a trade surpas, and
those assets have to go somewhere. And the sheer size
of the accumulation of China's external assets are now close
to nine trillion dollars on some estimates, a bit opaque,
(25:00):
but about nine trillion dollars means that dollar markets are
the only place that they could they can really go.
So I suspect that there's going to be greater friction
in global capital flows in future. I think there's now
a widespread acceptance amongst policymakers, even the IMF, saying that
unfettered free flows of capital is not necessarily a good thing.
(25:20):
But I'm deeply skeptical of the idea that we're going
again back to the kind of nineteen thirties where the
kind of big restrictions on global capital flow is a
big dropping global capital flows in total. And also that
China can disentangle itself from US dollar markets. I don't
think it can, just because of the sheer size of
its external assets.
Speaker 2 (25:40):
Okay, so we can put that aside as a big worry.
That's going to be all right.
Speaker 3 (25:43):
I think so. I mean, I think to the extent
the global capital flows in future are going to be
smaller as a share of global GDP. I think it's
more likely to be because policymakers come to the conclusion
that actually some of the kind of frothy hot maney
is not necessarily a good thing. It creates a financial
honorabilities embedded in the system, And there's a bit of
a that there's a pushback against some of the kind
(26:05):
of Washington consensus idea of unfettered free capital flows being
an unalloyed positive rather than it being China in the
US pulling apart and erecting a big kind of capital
wall between these two blocks. I think that would happen
in some areas. So I think particularly in private markets
where rules around foreign investment are a bit more opaque,
I think there's going to be much greater reticence on
(26:27):
behalf of Western investors in getting involved in China and
investing in China. And we see some of that already
in the data. But I think generally at a global level,
capital flows remaining relatively high would be would be my
base case.
Speaker 2 (26:41):
Okay, so under the key point for this podcast anyway,
what does all this mean for our portfolios? What does
it mean for the future of investment? We have been taught,
haven't we relentlessly over the last over many years, that
a globalized portfolio is the best portfolio, and that our
pension money and our is money can float all over
the world. In fact, everywhere is better than the UK.
So that's been the last couple of decades. What now,
(27:04):
what does this mean for the ordinary person looking at
their SIP and their ISA and saying, Okay, we're not
globalized anymore, We're fractured. Where do I move my money.
Speaker 3 (27:15):
Well, you're right that a key aspect of the latest
wave of globalization, the most recent wave of globalization has
been massive financial integration, and that was something that was
not necessarily present in previous waves of globalization. And part
of that was this idea that we should all be
investing our and SIPs et cetera, et cetera across the
(27:36):
world in the fast growing emerging economies too. My suspicion
is that some of the glosses come off of that already,
not at least because returns in some emerging economies have
been pretty weak. But that's the direction of travel, and
it's the direction of travel that we're heading towards now.
A lot will depend upon the form that fracturing takes.
As I've said in terms of the macro consequences, if
(27:58):
we get a more limited contained form of fracturing, then
I suspect what it means in practice is that you
and I were thinking twice before we invest significant portions
of our sip and is in Chinese equities, but it
doesn't really affect the extent to which we put our
money in the S and P or for that matter,
European stocks. And I think when it comes to private flows,
(28:20):
cups economist. We're speaking to clients all the time in
private markets. There's already some reticence about investing in China
and China's allies sanctions risk as much as anything else,
and I think that that continues to intensify too, so
much greater reticence reluctance to invest in China itself, I suspect.
(28:41):
But it doesn't mean that we stop investing globally, no,
I don't think so.
Speaker 2 (28:47):
Does it mean that we should allocate more to commodities
and gold for example.
Speaker 3 (28:52):
Well, I think that's happened already to some extent with gold.
So gold is seen by some emerging market central banks,
particularly the Chinese Bank, is a way of kind of
mitigating some risk of exposure to the to the dollar
and limited sanctions risks, and that's been a key factor
behind the rise in the price of gold over the
past eighteen months two years in my view. So some
(29:14):
of that is already in the market, clearly, if you're
a savvy investor that can identify those particular critical minerals
that China has a chokehold over, and there's humpty in
different rare earths. The names of which we've never heard of.
Germanium and gallium were two big ones last year I'd
never heard of. But turns out China has a stranglehold
(29:34):
over these rare earths and they're now a scrambled to
develop alternative sources.
Speaker 2 (29:40):
It's the processing they have a stranglehold of, exactly, rather
than the mining.
Speaker 3 (29:45):
Rather than the deposits of them exactly. So the key
point about rare earth is that they're not that rare,
they're pretty prevalent. Is that is that the mining and
the processing, particularly the processing the processing is really dirty work,
which is essentially we'd euxhource that to China for environmental
reasons and now so you know, if you can work
out where those chope points lie and develop domestic sources
off them, then there's clearly opportunities or opportunities there too.
Speaker 2 (30:09):
It sounded so wrong that sentence, by the way, Now
it's dirty works, so we've outsourced it to China for
environmental reasons. The environmental impact is exactly the same. It's
just happening somewhere else, I mean.
Speaker 3 (30:21):
Exactly the same. At a global level, the environmental impact
is exactly the same. But for domestic political reasons, we've
decided that we took a decision kind of fifteen twenty
years ago that someone else could do that.
Speaker 2 (30:31):
Thanks very much, and not just on that interesting Okay,
Can I just argue briefly then about the US market,
partly in connection to your ideas about the fractured age,
but also in general. A lot of our listeners will
be holding global track of farms globally, yes, whatever else
will be very very exposed to the US and still
very exposed to big tech companies. Is that a reasonable
(30:53):
place to be?
Speaker 3 (30:55):
Well, I think it's a reasonable place to be in
terms of future growth when it comes to kind of
big tech and AI in particular, I'm pretty bullish, I
have to say, in terms of the kind of productivity
benefits that that's going to eventually deliver. It's not delivering
them right now, but I think if we wind the
clock forward five ten years then it will start to
have delivered them. Clearly, some of that's reflected the price
(31:15):
of these hyperscalies and big tech stocks already.
Speaker 1 (31:19):
Now.
Speaker 3 (31:20):
The question we always get is is this a bubble?
And it does look pretty frothy, doesn't it when you
look at some of the kind of valuations that these
firms are trading on. And then the question becomes for investors,
if you're already invested, do you hang on? If you're
not invested, do you try and ride the coattails of
the kind of this bubble? And when do you get out?
And that that's an incredibly difficult question to answer and
(31:42):
one that will depend upon individual's preferences and risk appetites
and particular circumstances. My sense would be that we've been
through a period where returns on US equities have outperformed
those comfortably that those of other develop markets, particularly here
in the UK. I suspect that that performance will narrow
(32:02):
over the coming years, just because a lot of that
valuations are extremely high. I don't see that there's the
same scope for price gains. So I suspect that it's
going to be impossible to ignore some exposure to the
US just because of the scale. But the relative act
performance of the US compared to the European markets and
markets in the UK will start to diminish.
Speaker 2 (32:22):
Okay, so expected a little mean reversion in relative terms
at least.
Speaker 3 (32:26):
Yeah.
Speaker 2 (32:26):
Indeed, brilliant, Neil, thank you, thank you so much. Can
I just ask you one last question. Obviously, we are
recommending that everybody buys this book and reads it immediately
the fractured agent body go out by it.
Speaker 3 (32:39):
Read I'm losing my star review as well, leave.
Speaker 2 (32:42):
Five star reviews, and then once you've done that, don't
forget to leave your five star review for the podcast,
because that matters too. Indeed, Neil, you've written this, what
are you reading.
Speaker 3 (32:51):
I'm halfway through Dan Wang's book break Neck on China,
which is really good choke point again on the global
economy and strangleholding. Certain parts of it's really really good too.
I'd recommend both of those books to listeners again about
the feature the global economy and the relationship with the
US and China within it.
Speaker 2 (33:11):
Okay, excellent, Thank you, though we must remember by the
way that books aren't was right. I was telling I
think John on podcast the other day about going through
my bookshelves to deliver some books to the Library of Mistakes,
and there's quite a lot called things like the end
of China and that kind of thing.
Speaker 3 (33:27):
Yeah, maybe version two, the second edition of this will
be the kind of unfractured age.
Speaker 2 (33:32):
Maybe, who knows. Anyway, thank you so much for joining
us today that was absolutely fascinating.
Speaker 3 (33:37):
Thanks for having me.
Speaker 2 (33:42):
Thanks for listening to this week's Merrin Talks Money. If
you like us, show, rate, review, and subscribe wherever you
listen to podcasts, and keep sending questions or comments to
Merror Money at Bloomberg dot net. You can also follow
me in John on Twitter or x I'm at marinas
w and John is John Underscore Stepic. This episode was
hosted by me Marrin's unsep Web was produced by some
Assadiant Moses and sound designed by Blake Maples, Kelly Gary
(34:04):
and Aaron Kaspers. That's, of course to Neil Shearing.
Host
Merryn Somerset Webb
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