Five mega-trends that will dominate the markets

Matthew Lynn takes a look at which themes will dominate financial markets over the next ten years, and gives his five financial 'mega-trends' for the 2010s.

Even the smartest people can end up looking silly when it comes to predicting the future. In October 1929, US economist Irving Fisher said: "Stock prices have reached what looks like a permanently high plateau." We know what happened next.

But despite the risk of looking daft, it's still worth considering which themes will dominate financial markets over the next ten years. Here are my five mega-trends for the 2010s bearing in mind that any forecasts made here are about as reliable as Tiger Woods' marriage vows.

1. Forex markets take charge

In any decade, one sector of the financial markets emerges as dominant. In the 1980s, it was mergers and acquisitions. In the 1990s, it was the dotcom entrepreneurs. And in the 2000s it was the quants, the maths 'geniuses' who gave us the structured products that allowed millions of dud mortgages to be wrapped up into clever-looking bonds and sold to people who didn't understand them.

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Who will dominate the 2010s? Currency traders. The equity markets are supine, the bond markets effectively controlled by central banks. The only way that well-run economies can be rewarded and badly-run ones punished is via the forex markets. Expect huge currency shifts as the markets try to re-balance the global economy via exchange rates. That means currency traders will be the most influential players in finance.

2. The scramble for Africa

It makes no sense that a whole continent is virtually excluded from the global economic system. Particularly when it's rich in the agricultural land and natural resources the rest of the world needs. Yet globalisation has largely by-passed Africa. In the 2010s, that will surely change. Entrepreneurs from both inside and outside Africa will find ways of plugging the continent back into the global economy. The ones who make the most money will be those that get in on the ground floor.

3. Brics companies move West

We tend to think of the Bric economies Brazil, Russia, India and China as providing raw materials and cheap goods for the developed economies of Europe, the US and Japan. Big multinationals are the preserve of the existing major economies. But in the 2010s, that will change. Big new firms will come roaring out of the Brics, providing intense competition for Western giants. The reason is simple. The next decade will see incomes under severe pressure in the old economies. There are debts, public and private, to be paid for, and ageing populations to cope with. Only low-cost producers will prosper and Brics firms have the most experience of making things cheaply. Expect a double boost for Brics stockmarkets as their domestic economies grow and their local companies conquer the rest of the world.

4. The dollar tax gets repealed

The demise of the dollar as the global reserve currency has been predicted for years. Somehow it never quite happens. This decade, however, the dollar should finally be eclipsed. That's usually seen as a bad thing. The transition from one monetary anchor for the global economy to another will be destabilising.

But it's also good news. The dollar's special status acted as a kind of tax on the rest of the world. It allowed the US to run a far larger trade deficit than would otherwise have been possible. In effect, everyone else had to subsidise the over-consumption of the Americans. When that ends as it will if countries don't need to hold dollars any more it will act as a kind of tax cut. Like any tax cut, it will be good for the economy. Americans will have to tighten their belts, but the rest of us, notably countries such as Germany who've been running big trade surpluses, will be able to loosen theirs. That will let them grow faster.

5. The death of independent central banks

Independent central banks were meant to be the guardians of economic stability. By managing interest rates and the money supply, they would control inflation and let economies grow at a reasonable pace. Because they were free of political interference, they would make wise decisions to secure long-term prosperity.

But as the dust settles on the credit crunch and we start to figure out what really caused financial meltdown, it will become clear that the reality isn't living up to the promise. Central banks presided over an era of wildly inflationary asset bubbles that have made the global economy less stable. The Federal Reserve, as even Alan Greenspan now admits, ran too loose a monetary policy, creating the credit boom. The Bank of England doesn't emerge with much credit either. It did nothing to control the housing and debt bubbles, and in the wake of the crash printed money to finance government debt. The European Central Bank, probably because it's heir to the Bundesbank, has done slightly better, but still has to sort out Spain and Greece.

As the decade progresses, it will become obvious that the model of independent central banking is flawed, and that we'll need a better way to manage monetary policy. If we've found it by 2020, the global economy will be in much better shape.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.