After a decade of reasonable tranquility — and disappointment — global equity markets have hit another “black swan,” and trust me I use that word with fearful caution. The coronavirus is truly a black swan in the sense of being both unpredictable and an event of massive consequence. I believe it is also likely going to significantly change behavior and approaches at fractal levels across society and culture, including demand for greater state capacity and governance. As Nassim Taleb explained to us in his book The Black Swan, history is seemingly smooth and linear, until it is not. And when it is not — black swans are responsible for much of what we call history, those large disconnects where big change happens.
Healthy stressors are vital for developing less fragility (or anti-fragility). The suppression of these stresses has been occurring for decades, since the tenure of “The Greenspan Put,”1 by trying to avoid healthy recession. This has been further amplified in the aftermath of the Global Financial Crisis (GFC), with central banks around the world suppressing natural interest rates levels along with other fiscal stimulus in the big economies such as the US and China. This has created fragility by constraining volatility against nature, depriving markets and corporations of the ability to be stronger and more vigilant. It also has encouraged complacency, buybacks by professional CEOs and leverage. One can easily find the analog in public health care — where efficiency has trumped preparation for pandemics and now, we are witnessing the dire consequences.
Although I am an investor, I can also be a speculator about the broader world. Beyond elections and markets, I imagine that many, many things may change in response to this Black Swan event. At the level of global relations, we can hope for greater collaboration and understanding. Perhaps a renewal of the Pax-Americana era, which followed the demise of the Soviet Empire, an era of globalization and liberalization, with more equitable and tolerant leadership in an increasingly multi-polar world. My bet, however, would be the opposite, and that the endogenous forces of national chauvinism and parochial interest we have witnessed over the past decade will get further reinforced. But outside of obvious triage improvements in public health, I suspect the most profound changes at the abstract level are likely going to be about a big shift in the orientation of capitalism. I see a few potential developments:
- The pursuit of shareholder capitalism will come under greater attack. A milder form of capitalism, with less pronounced focus on meritocracy (a “winner take-all” approach), and a greater focus on fairness: re-establishing an ethos of equality of opportunity (which is not the same thing as equality of outcome). After the second massive economic crisis in a decade, the pendulum will shift in the ongoing balance between the state and the market. I also suspect that social demands for greater accountability of governance will grow as state capacity expands. I believe we are moving towards a better world, where redundancy will be more appreciated vs the MBA-orientation of efficiency at all costs.
- Oligopolies will be under pressure. This implies not just technology, which has some level of meritocracy associated with it, but also politically prominent oligopolies which under-deliver innovation and unfairly tax society.
- Corporate empires will face internal pressures to find focus. The behemoths will struggle to overcome the inevitable diseconomies of scale that lodge in as corporate complexity overwhelms efficiency gains. Bureaucracy and process at extreme scale overwhelm competitiveness as these behemoths get disrupted. Leverage is often a catalyst and a bane amongst such companies. Glencore, HSBC, and Anheuser Busch are not in many ways different than Citi and GE at the turn of the century.
Beyond speculation about the world, I have some thoughts on some likely proximate consequences for emerging market equity investors.
1. Contrary to conventional wisdom, Russia may just be one of the great places to invest now.
Russia is the strongest of any major oil economies with a fortress balance sheet, strong fiscal position and a flexible currency (and cost structure).