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| David Chon, CEO of DMLab |
After many years of financial market gains and rising asset prices, there is much uncertainty in the global economy and financial markets this year. Some are highlighting the fact that the high inflation and risk of recession are the main reasons for this uneasiness.
Currently, the rising interest rates to curb inflation are indeed putting stress on financial asset prices around the world. Within this negative environment, some are starting to postulate that we will be back to a "happy place" next year.
I do not see the current market dislocation as a one-year problem. I think it will take many years of painful adjustments and resets to bring the global economy back into equilibrium.
To highlight what challenges we will be facing, I thought of a tongue-in-cheek simulation where we jump forward to 2032 and think about how the events since 2022 could help us possibly to predict the future. Fasten your seatbelts, everyone!
It's going to be a bumpy ride.
Here are some of the major events that took place during 2023-2032.
In every election around the world, the incumbent leaders lost as none of them were able to solve their respective economic problems. Other than undergoing a period of painful adjustments, there was no quick fix.
International economic agreements and alliances started to break down as each country started to blame others for their economic problems.
The EU and European Monetary Union broke up in 2028.
Many emerging countries gave up their currencies and accept and use gold as their main means of exchange. The price of gold tripled. The dollar got too strong against all the other currencies and created another term for an economic crisis: inflation export. The rest of the world agreed not to accept the US dollar as a convertible currency in a desperate move to fight the importation of inflation.
Global inflation stuck to around the 20 percent level for many years as the indexation of inflation became institutionalized.
This situation was the only economic carrot left for politicians and most countries around the world adopted this indexation as a protocol for wages. Economists from Brazil, Argentina and Turkey became "expert" senior leaders at the World Bank and IMF.
Over 50 percent of global banks are now nationalized as the monster credit cycle started to emerge in 2023.
Rating agencies such as Moody's, Standard & Poor's and Fitch became Fortune 500 companies as the demand for their services exploded.
Ironically, they filed for bankruptcy a few years later as all the global credit ratings became very simple and easy.
World credit rating now has only 2 categories: solvent and insolvent.
Debt forgiveness becomes one of the most popular political tools. What started as student loan forgiveness in the U.S. spread to other countries in 2023.
This trend became a kind of necessary fad. Even countries forgave each other's debt as some countries' annual interest costs exceeded 10 percent of their GDP.
Because of the politically popular debt-reset policies, the period of 2023-2032 is now known as the Great Global Reset (GGR).
After 20 years of low-cost capital-driven mindless capacity expansion, big manufacturing countries signed the Global Manufacturing Capacity Constraint Act. These countries realized that investing in capacity irrespective of demand is not a good thing.
Even by 2032, the world still is working off the excess capacity of everything.
A silver lining is that the global environment has finally started to show signs of recovery.
Global consumption contracted for the first time during the modern era.
Overall consumption declined by 20 percent globally and remained depressed.
The new norm has global consumers on average buying only 4 watches instead of 5, 4 pairs of shoes instead of 5, and seeing 4 movies instead of 5. Other than the companies selling the products and services, no consumer notices any change.
A total restructuring of the global financial industry took place. The most popular product was the wealth preservation fund. The industry limited only 5 analysts to covering each listed company. And the regulators forced each financial company to invest its capital according to their recommendations.
The stock ratio rated "sell" jumped from the current 7 percent to 50 percent.
The first countries to emerge from the GGR are those that did not participate in modern finance development. They are some central Eurasian and African countries.
The global pecking order changed.
The G-7 became the G-3.5 and the OECD changed its name to the Organization of Mega Governments.
The next few years will show that several universally accepted "truths" about economic policies have many flaws.
Unlimited liquidity creation by the central banks, the almost sub-zero interest rate experiments, phantom globalization, "this time it is different" doctrines regarding bloated asset prices, complacent financial sector research and many policies and accepted principles that defined 2000-2020 showed that they had an expiration date. In 2022, the limits of the current economic policies and political-economic strategies prevalent around the world started to show fatigue. In 2023, many more uncertainties converged to create perfect chaos.
Although this is a simulation of what could happen, there are some real issues we need to find answers to in the coming years.
With everyone focused on near-term inflation and central bank policies, what is missing is the pending credit cycle risk.
How deep, wide, long and damaging will this credit cycle be?
If a favorable global backdrop allows it, the balance sheet expansion has induced demand expansion.
Then what sort of economic results can an actual contraction of global liquidity bring about?
No one knows precisely how the global economy will evolve in the coming years. What we do know is that the current setup is very complex and very serious. We cannot simply say that next year everything will be ok.
Risk analysis and management, balance sheet analysis, dynamic credit analysis, fundamental macro and micro research and the curbing of expected returns are all the lost disciplines of finance that we will need to brush up on.
Many changes and challenges will be coming our way.
A simple look back from the year 2032 shows us how profoundly and quickly things can change.
David Chon is CEO of DMLab and former CEO of KDB Asset Management.
