Larry Fink has written another letter.
The chief executive of giant asset manager BlackRock – arguably the most quietly powerful man in the markets – told BlackRock shareholders yesterday that Russia’s invasion of Ukraine “has put an end to the globalisation we have experienced over the last three decades.”
Fink is wrong. Globalisation peaked a while ago. This is just another step down the road away from it.
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So what happens next and what does it mean for investors?
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Russia’s invasion of Ukraine is just another step down a road we’ve been on for ages
“Russia’s brutal attack on Ukraine has upended the world order that has been in place since the end of the Cold War, more than 30 years ago.”
Fink can be forgiven for glazing over the 2014 annexation of Crimea and the 2008 invasion of Georgia. You could still cross your fingers at that point and pretend that we wouldn’t get to where we are today and that “buy the dip” was still the order of the day. This one is a bit harder to brush off.
Also, it’s important from a PR point of view. BlackRock is the world’s biggest asset manager. That means that it’s inevitable that BlackRock owns some Russian assets (though not “significant investments” as Fink quickly points out). Much of this will be entirely automatic – no more sinister than a side effect of tracking lots of emerging market indices.
But no one cares why you own Russian assets right now. You have to be seen to be getting rid of them and to be condemning the idea that you ever owned them in the first place.
(This may sound cynical, but I say this as someone who has always avoided Russian assets, mainly because I’ve always been slightly concerned that something like this would happen.)
Fink also continues to subtly shift expectations as to what counts as “ESG” (an investment that ticks the environmental, social and governance boxes). He’s already talked about the “energy transition” requiring some “light brown” interim fuels like natural gas, before we get to the full-blown “green” stuff.
The Russia invasion merely adds to the case for fossil fuels not being as evil as they once were thought if it means the goodies don’t have to rely on the baddies for their energy sources. (Again, a point that anyone paying attention could and did make many times before this war kicked off).
Anyway, to be fair to Fink, he sums up the new backdrop for investors well. Countries now care about security of supply – on everything from energy to toilet roll – more than cost of supply. We’re moving from a “just in time” world to a “just in case” one.
This unwinding of globalisation is bound to drive up prices. It already has. As Fink puts it: “A large-scale reorientation of supply chains will inherently be inflationary.”
Inflation is here to stay
But this has been happening for a while. Like most things, what might seem to be a social or political phenomenon (”Russia is not our friend any more, we need to stop trading with it”) is really an outcome of economics.
A lot of the long-term forces driving “de-globalisation” have little to do with war, or even the pandemic. They are just the logical corollaries of the initial surge.
Put very simply, globalisation boomed in the first place because the communist part of the world – China and the USSR – opened up (arguably due again to economic contradictions inherent in their social models).
Suddenly a vast pool of labour and capital that had previously been unavailable was up for grabs. Energy prices were low too.
Making stuff in China (and emerging Europe) was cheap. Employing workers in China was cheap. Getting stuff from China to other places was cheap. Offshoring made complete sense. The cost savings were more than ample to offset the risks. So it made perfect sense for companies to take advantage.
There were a lot of benefits from this. China’s embrace of pseudo-capitalism in particular raised a huge chunk of the global population out of poverty. It also kept a lid on inflation in both developed and emerging economies.
However, as Howard Marks of Oaktree Capital points out in his latest memo, which happens to touch on many of Fink’s points, “offshoring also led to the elimination of millions of US jobs, the hollowing out of the manufacturing regions and middle class of our country, and most likely the weakening of private-sector unions.”
The US experience does not directly map onto the UK, which had experienced an awful lot of these things already. However, the broader point – that vastly increased labour market competition saw workers in developed markets bear the brunt of globalisation while lacking the voice or political representation to do anything about it – is true.
The 2007-2009 financial crisis marked a tipping point because even the people who thought they’d been winning (because their house price had been soaring) realised they’d been conned at some level.
A desire for change and the road towards populism really started there.
I’ve discussed all that before but I really do think it’s just worth remembering this when you’re surrounded by voices arguing that this is a sudden turning point, or that Brexit and Trump and the rest of it was all about Facebook or “disinformation”. It wasn’t – it was the inevitable consequence of our “elites” (for want of a better word) taking the peace dividend of the 1990s and squandering it.
Incidentally, Marks also makes the interesting assertion that developed economies – and Europe in particular – outsourced their dirty energy production needs to not-necessarily-friendly countries in order to bolster their “green” credentials. That’s a more contentious point and one I’d like to visit at another time but it’s one to think about at least.
Anyway, all of this just goes to say that inflation is here to stay for the long run. That means managing your money more actively. If you haven��t already subscribed to MoneyWeek magazine, you should do so now (and you get your first six issues free).
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