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Good morning. Today is the second of three Unhedged x Chartbook collaborations with Adam Tooze. Adam is on the cover of New York magazine this week, which means Ethan and I are famous by proxy.
The topic this week is “The End of Globalisation As We Know It”. There has been a loose nexus of arguments cutting across geopolitics, finance and economics in recent years, which suggests that the status quo of the past 30 or 40 years is changing. Old: liberal democracy and free trade rising, low interest rates, low inflation and high equity valuations, especially for technology. New: populism, trade barriers, higher rates and inflation and valuations under pressure.
Are we in a true moment of transition? Below, Adam expresses scepticism about the conventional wisdom, most recently expressed in Larry Fink’s annual letter to BlackRock shareholders. Over on Chartbook, Ethan and I argue that there are good reasons to think that tectonic plates are shifting beneath markets and the economy. The changes may be nascent and it is impossible to predict just where they will lead, but all the same, the ground is rumbling.
Adam Tooze: Deglobalisation may be more talk than substance
Larry Fink’s annual letter to BlackRock shareholders stirred a flurry of debate last week about Vladimir Putin’s invasion of Ukraine, the future of globalisation, supply chains, inflation and the implications for investors. It is a sign of the times. Fink’s previous letters had been more famous for focusing on the climate crisis and ESG.
Now, like the rest of us, Fink and the asset manager feel compelled to react to Russia’s war on Ukraine.
The letter diagnoses what I called the “polycrisis” of our times in my book Shutdown (borrowing the phrase from former European Commission president Jean-Claude Juncker).
“The ramifications of this war are not limited to eastern Europe,” Fink opines. “They are layered on top of a pandemic that has already had profound effects on political, economic and social trends. The impact will reverberate for decades to come in ways we can’t yet predict.”
For Fink, Putin’s aggression puts in question the history that has framed his company’s entire development:
In the early 1990s, as the world emerged from the Cold War, Russia was welcomed into the global financial system and given access to global capital markets . . . The world benefited from a global peace dividend and the expansion of globalisation. These were powerful trends that accelerated international trade, expanded global capital markets, increased economic growth and helped to dramatically reduce poverty in nations around the world.
It was during this time that we started, 34 years ago, to build BlackRock. We saw the rise of globalisation and growth of the capital markets fuelling a need for the kind of technology-driven asset management that we believed we could bring to our clients.
BlackRock launched an initial public offering in 1999, months after the 1998 financial crisis in Russia that helped to bring Putin to power.
Now, Fink declares, Russia’s attack on Ukraine “has put an end to the globalisation we have experienced over the last three decades. We had already seen connectivity between nations, companies and even people strained by two years of the pandemic. It has left many communities and people feeling isolated and looking inward. I believe this has exacerbated the polarisation and extremist behaviour we are seeing across society today.”
Fink has championed the responsibility of investors to counter these ominous trends through a long-term approach to ESG issues. In reaction to Putin’s aggression, he now advocates something far more radical: a deliberately orchestrated global capital strike.
“The invasion has catalysed nations and governments to come together to sever financial and business ties with Russia,” Fink declares. “United in their steadfast commitment to support the Ukrainian people, they launched an ‘economic war’ against Russia . . . These actions taken by the private sector demonstrate the power of the capital markets: how the markets can provide capital to those who constructively work within the system and how quickly they can deny it to those who operate outside of it . . . This ‘economic war’ shows what we can achieve when companies, supported by their stakeholders, come together in the face of violence and aggression.”
It is a remarkable call to arms but Fink does not linger over the awesome responsibility it implies. After all, if you call for an economic war against Putin’s regime, why stop there?
Instead, he steers us back to more familiar and less edgy territory:
Russia’s aggression in Ukraine and its subsequent decoupling from the global economy is going to prompt companies and governments worldwide to re-evaluate their dependencies and reanalyse their manufacturing and assembly footprints — something that Covid had already spurred many to start doing.
And while dependence on Russian energy is in the spotlight, companies and governments will also be looking more broadly at their dependencies on other nations.
Which “other nations” Fink has in mind is left unspoken. But he goes on to argue that “Mexico, Brazil, the United States, or manufacturing hubs in south-east Asia”, all of which are presumably safe bets, may stand to benefit from the relocation of production.
“This decoupling will inevitably create challenges for companies, including higher costs and margin pressures,” Fink warns. This will be “inherently” inflationary.
As Fink notes, inflation in the US is at levels not seen in 40 years, which puts huge pressure on lower-wage workers in particular. This leaves central banks facing a “dilemma they haven’t faced in decades. Central banks must choose whether to live with higher inflation or slow economic activity and employment to lower inflation quickly.”
Over at Chartbook this morning, Robert Armstrong and Ethan Wu pick up where Fink leaves off. They provide a powerful summary of the forces that promise an end to globalisation as we know it and to accelerate inflation.
But, contrasting Unhedged’s data-rich take with Fink’s hand-waving, I was left wondering whether Fink’s vagueness was not actually the point. What if we read the BlackRock letter less as a piece of analysis than as an exercise in corporate diplomacy, which in its evasions signals the opposite of what the headlines suggest?
Do we really believe that BlackRock is giving up on globalisation as we know it? After all, Putin with his blatant aggression and angry tirades makes an all-too-convenient hook on which to hang a narrative of the crisis of globalisation.
Russia’s actions may be outrageous. But its economic weight is limited. As Fink is only too happy to remind his shareholders, BlackRock has very little money at stake there. From the global point of view, how much is really at stake in an economic war against Russia?
Meanwhile, talking about Putin spares Fink the embarrassment of having to talk about the real faultline in the global economy: between China and the US. And if you are, in fact, interested in maintaining your business in China, as BlackRock surely is, the less said about that antagonism, the better.
In talking about supply chains, what does Putin’s war in Ukraine really have to do with it? The economic flows which the war put at risk are in commodities (wheat, corn, etc) and energy. As far as supply chains are concerned, the most dramatic disruption is to the provision of wiring harnesses from Ukrainian factories to German carmakers BMW and Mercedes. Important components, no doubt, but hardly the marker of a new era in economic history.
As Armstrong and Wu note, we are facing a significant threat to a truly essential supply chain, but in microelectronics, and the challenge is posed not by Russia, but by the US government, which has decided to make tech in to a battleground with China. Like its competitor Vanguard, BlackRock was forced by US sanctions into making painful asset disposals.
Much of the US business lobby, Armstrong and Wu point out, has turned against China. But that cannot be said for BlackRock or any other big player in American finance. George Soros may insist that BlackRock is making a strategic mistake in continuing its investment in China, but the asset manager has shown no sign of backing down. Perhaps, then, the talk of the end of globalisation in the wake of Ukraine is smoke and mirrors.
Unhedged finishes with a fascinating exchange with Larry Summers (a longstanding supporter of both Unhedged and Chartbook).
As Summers pointed out to Armstrong and Wu, however wise or dumb their (pessimistic) view of the future of globalisation and inflation may be, it is not shared by the big players in the markets:
Current prices strongly imply the current spike in inflation and rates will subside before very long, and the old world of “secular stagnation” will reassert itself. This is most easily visible in the Fed funds futures curve, which suggests rate increases will stop below 3 per cent some time next year, and that policy will weaken thereafter.
BlackRock, in its most recent macro outlook for the second quarter of 2022, shares that common-market perspective.
It is a weird form of cognitive dissonance: to talk as though you recognise the headwinds and not price them in. Hoping, perhaps, that they will not, after all, materialise.
I would argue that something similar holds for globalisation more generally. There is a lot of talk about reshoring and rebuilding supply chains, but far less action on the substance. Apple, to cite the most prominent example, actually increased its reliance on China last year.
For now at least, feverish talk about Russia’s attack on Ukraine ending globalisation as we know it should be taken with a pinch of salt.
Imagine Fink championing an economic war against China! When that no longer seems “non-planetary”, we will know that we are really in a new world.
One good read
Don’t sleep on the US housing market. People looking to buy a home this year “are going to be facing the biggest payment shock that we’ve seen in the last 40-plus years”.
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