With little doubt, we are at a historical inflection point from a geopolitical and geo-economic perspective. The influence of Russia is shrinking (especially in the energy sector), Erdogan in Turkey plays a uniquely ambiguous game, the EU is still searching for a leader, the Middle East may be shaken up in the sense of a conflict between Israel and Iran (especially in the midst of geopolitical turmoil), and in the midst of that upheaval, Qatar’s role (with its LNG reserves) may start diminishing, while MBS’s role in Saudi Arabia also remains ambiguous.
At the same time, Chinese politics (both internal power plays as well as external economic and geopolitical plays) are in flux and that picture may not be clear until the year’s end after (and if) Xi secures a third term. How should/could the markets (equities and debt) reflect the above developments?
We have been here before, around 1914, the year when the engine of finance (AKA war) started picking up speed and thermal power. By 1914, most of the world identified with a state of affairs where England dominated militarily, politically, and financially. No match could be found for England’s power. How could that have happened?
Only through the lenses that can view events over a long period of time can we see the streams that formed the river of history that ended up in the ocean of cataclysmic changes in 1914. Of course, the end of World War I denotes the beginning of the American century as it turned out that England was not ready for those cataclysmic changes.
The key to maintaining and advancing a position is the ability to adapt and lead when the river of history is about to flow into the ocean.
Central banks are changing at the same time – let’s not forget that 1914 marked the first year of the Fed’s operations – means of payments are changing. Fintech and decentralized finance (DeFi) invent not only new means of payments but also new monies (where the three functions of money – medium of exchange, unit of account, and store of value – may start functioning simultaneously).
Markets are changing at the same time. Valuations in some cases are exploding and in some other cases are dropping fast. Market volatility and trajectory cannot be seen purely from the perspective of higher rates, higher inflation, and respectively adjusted valuations. Markets discount or uplift the forthcoming global changes.
Among the major market forthcoming changes that we see is an amalgam of new asset classes that reinforce each other. Energy has always been the locomotive of change. The world did not start experiencing real growth until the steam engine was put into practice. Suddenly, coal power uplifted global growth. The same thing happened when we passed from coal to petroleum. We are in a transitional period now, where natural gas and LNG are powering the locomotive. However, at the same time, environmental concerns point to the fact that gas is the transition fuel until renewables and other forms of energy (i.e., hydrogen) take over. In that transition, new asset classes are being created, such as carbon markets.
How does a new asset class (such as carbon) relate to fintech, DeFi, new means of payment, and new monies?
The first stream that led to 1914 was an intellectual one: Scientific developments led to rationality that advanced inquiry and progress. At the same time, inventions (including advancements in seafaring and warfare) established a basis for European expansion. In a similar manner, tech developments of the last thirty years (much sooner than the old road to rationality) are bringing us to today’s inflection point.
A second stream was the conquest/settlement/colonization of new lands whose resources enhanced wealth, enriched asset classes, and allowed more money to be circulated, all of which advanced growth and the standards of living. Nowadays, growth primarily in Asia mirrors the new lands whose integration advanced the world to 1914, but we cannot neglect the possibility that by 2038 we may be talking about a 21st century that belongs to Africa.
The third stream that will be underwriting the ocean of change deals with the forthcoming central bank digital currencies (CBDCs) and the way they will shape finance and payments, as well as the way they will be associated with the incoming new asset classes and the emerging forms of payments briefly discussed above. The dollar and the Fed in 1914 changed the world forever.
In that past, the Sumerian period invented civilization and the world changed. The peoples of the Fertile Crescent invented agriculture, and the world changed. In the mid-19th and early 20th centuries, Great Britain took the lead and brought together the scientific/industrial/technological revolutions along with the colonies it controlled and the sterling that was augmenting trade and credit.
In a similar manner, the fourth stream which will be bringing changes and advancing the streams and rivers of history to the forthcoming ocean of changes will feature the leadership of a hyperpower, which will be tying together the streams of undercurrent changes.
John Charalambakis is the Managing Director of the BlackSummit Financial Group. He holds a PhD in Economics and an MBA with an emphasis on macro-trends and financial markets. He has been a Professor of Economics and Finance, as well as an advisor on asset allocation, for over twenty years. He has worked as a consultant for government agencies, corporations, and non-profit groups in several countries, including providing recent support to the Congressional Financial Crisis Inquiry Commission. Charalambakis is also the author and editor of books and numerous articles related to economics, finance, and investments.