3/25/14 – What Russia Tells Us About the Global Economy

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Mar 25, 2014 1:00:00 PM

and tagged Commentary, Politics and the Economy

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Russia is the new poster child for a deglobalizing world, which will result in less economic efficiency and a lower standard of living in many countries. Fortunately, the U.S. will be positioned to benefit from this.

With the recent Russian invasion of Ukraine, the market has seesawed back and forth on varying expectations of the effect on U.S. companies. While that crisis will continue, the forced disconnection of Russia from the world economy is the first step of a longer process.

With the world now more globalized and interconnected than in the past, a correction was overdue. Russia is one example of this; another is China, which is attempting to shift from export-driven growth to growth supported by domestic demand. Another way to look at this is a pullback from global markets.

The same thing is happening in the U.S. With the growth of the U.S. energy industry, as well as the ongoing reshoring of manufacturing here, the U.S.—never heavily dependent on other countries for trade, apart from energy—is once again decoupling.

In Europe, the model for international integration, the same trends are apparent. Financial systems have renationalized in the aftermath of 2008, nationalist and anti-euro parties are gaining strength in almost all countries, and Germany’s trade advantages are coming under increasing scrutiny.

The U.S. should largely benefit from this process. While the advantages of trade are real, they accrue most directly to the countries that get employment—over the past decades, the emerging economies. As this trend pauses or reverses, we’re seeing employment migrate back. The newfound U.S. energy production is an unalloyed economic good as well, with employment and investment staying here.

The ones who suffer will be less developed countries. Russia itself has already taken an enormous financial hit, which will continue. China remains largely dependent on exports, which are unlikely to resume their previous growth path, and faces a future of slower growth. Emerging markets, especially those driven by commodities, will also suffer.

For investors, this means a renewed focus on U.S. markets and U.S. companies. As one of the largest markets in the world, the U.S. has always held primacy. The refocusing of U.S. investment on growth and employment here rather than abroad should only make them more attractive. I’ve written before about rising protectionism, and the place to hide from it is here in the U.S.

U.S. advantages go beyond the economic. Geographically, we have perhaps the most secure position in the world, with Canada and Mexico as neighbors rather than, say, Russia or China. Demographically, the rising Echo Boom generation should start supercharging our growth in the next 10 years or so—as compared with demographic decline in Japan, Europe, and Russia. Even China has already hit its peak working-age population. For natural resources, we have more water and food capacity than almost any other nation. The list goes on and on.

The last advantage is political stability. As we have seen in Russia, will see in Europe, and may see in China, the ability to say tomorrow will be like today is an inestimable boon to business and investment. Despite all of the conflict in Washington, DC, no one is talking about collapse of the state or even significant changes. This is an advantage we shouldn’t take for granted.

With all of this, Russia, Europe, and Ukraine point out where the global economy is headed—and when we see that, we should be very glad to be in the U.S.

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