How the US-China Rivalry Is Reshaping the Global Economy with Neil Shearing | Merryn Talks Money
Summary
Geopolitical Shift: Neil Shearing discusses the end of the era of hyper-globalization and the emergence of a "fractured age" where geopolitics and strategic rivalries, particularly between the US and China, shape global economic outcomes.
US-China Rivalry: The podcast highlights the deepening superpower rivalry between the US and China, with both countries imposing tariffs and controls, leading to a potential division of the world into two economic blocks centered around these nations.
Globalization's Impact: Despite the rhetoric of de-globalization, data shows globalization continues, but with a shift in focus towards strategic sectors like semiconductors and technology, which could lead to a reorientation of supply chains.
Economic Consequences: The fracturing could lead to a 1% reduction in global GDP if contained to strategic areas, but a broader split could result in a loss similar to the global financial crisis, affecting 2-4% of global GDP.
Inflation and Volatility: The rollback of globalization may lead to more volatile inflation rather than consistently higher inflation rates, with potential impacts on commodity prices and supply chain security.
Investment Strategy: Investors should be cautious about investing in Chinese equities due to geopolitical risks, but global diversification remains important. Commodities and critical minerals may present opportunities amid these shifts.
US Market Outlook: While US tech stocks and AI offer growth potential, the outperformance of US equities may narrow compared to other developed markets, suggesting a potential mean reversion.
Transcript
[Music] Bloomberg Audio Studios. Podcasts, radio, news. [Music] Welcome to Marin Talks Money, the podcast in which the people who know the markets explain the markets. I'm Marin Zamset Webb. This week I'm speaking with Neil Shearing, group chief economist at capital economics and author of the fractured age, how the return of geopolitics will splinter the global economy. Neil's book argues that the era of hyper globalization marked by relatively free movement goods, capital and ideas and people as well from the 1990s through the 2000s is over. Now, we are entering something he refers to as a fractured age where geopolitics, national security, and strategic rivalries increasingly shape global economic outcomes. So, we're going to unpack that argument and we're going to talk about why this book is particularly timely in our conversation. And we'll also get Neil to explain to us how researching this book has helped him to understand the global economic picture at the moment and how that can help you with your portfolio. I hope you are going to tell us that Neil by the way. Uh Neil, Neil, welcome to Marin Talks Money. >> Thanks for having me. Great to be here. >> Thank you. Now listen, I tell you what, I think we should start off just by setting the scene and talking a little bit more. Not a great length because I think most people are relatively familiar with this discussion, but this era of hyper globalization, where did it come from? How long did it last? >> There's various points at which you could date the start of the kind of globalization period. I think u by the way this is nothing new. We've had waves of globalization in the past, the late 19th century. You could argue that there was a period of integration after the second world war. But in the book I date the most recent wave of globalization h as having started at the fall of the the Berlin wall. So 1989. And the idea behind this this wave of globalization was that not only would economic integration bring prosperity to all economies but it would also be a means of spreading common values and therefore peace as well. The idea being that if you bought Russia, if you bought China, if you bought the economies in Latin America into the global economy, into the global fold, they would probably become a bit more western. But also there would be economic gains for the west as well. Of course, we've had low inflation as partly as a result of globalization and gains from trade. And there's lots of quotes I have in the book from Clinton and Barack Obama and Kofi and about the kind of virtues of globalization. So 1989 is where I date the start of this period of globalization. It starts to fragment. I think actually not with Trump in 2016, but actually I go back a bit before that in the book and say it's partly the global financial crisis where I think some of the vulnerabilities that were a function of this globalized world was starting to be exposed. But then really in 2012 when she became leader of China and really set China about a very different course of development challenging US agy abroad and and reasserting the primacy of the party at home. >> Yeah. And that's where we got that made in China 2025 project right which was a bit of a a turning point. And so up until then there had been this general belief that if you make the economy more global and everyone becomes a bit of a capitalist. Capitalism automatically leads somehow to democracy and to the shared values that the west thought everyone begin to to join in. And it became increasingly clear into the 2010s that that wasn't the case. And also increasingly clear that there were quite a lot of downsides to globalization that we had sort of refused to discuss in the run-up to it. >> Exactly. And I think there's a sense in which globalization also became a convenient scapegoat for a lot of the problems that the west was facing. Globalization is not the only reason indeed is not even the most important reason why there's been a loss of manufacturing jobs in the US and in the UK for example in my view. There's it's mainly that's mainly about technological change. But it became a convenient scapegoat for some of the particularly kind of right-wing populists Trump and so on and so forth. It became easy to kind of bash uh globalization. But there were genuine kind of costs to to globalization too that that were also not part of the the discourse in the 2000s. I came came up through the Treasury in the kind of late 90s early 2000s and then it was really about kind of integration is a kind of one-way bet. Everyone would be better off uh as a result of of global integration and clearly that has not been the case. >> Yeah. I interesting one of the things that you noted that in the beginning of your book is the fall off in in global tariff levels. In 1994 you have global tariffs at about 8.6% 6% then coming down 5% in 2000 and then down to 3% in 2006. So you can kind of track the whole thing by tariff rates which of course have now turned back up again. >> Exactly. Turned back up for the US but not necessarily turned back up for other countries as well. So we're getting some push back on the trade front particularly from the US but not from from other countries. And of course the big sea change in the 2000s was China's entry to the WTO. And that was really the moment that kind of heralded China's and particularly the integration of Chinese producers into the global economy. And since then, of course, China's share of global exports has only gone in one direction. Despite push back from the US through Trump's first administration, then Biden and now today with extremely high levels of tariffs, China's share of global exports has continued to go in one direction, which is up. >> Yeah. And would you look back on that and say that it was a mistake to let China into the WTO or a mistake to let them in on the terms that they came in? What I mean that does seem to be that one of the flash points? >> Well, hindsight's a wonderful thing, isn't it? And I think that with the benefit of hindsight, we can see that really China, but particularly under shei, I think I think 2012 was was the the moment where things changed because that was the moment I think where China signaled really that it was not going to use kind of openness to trade and openness to technology to really integrate within the to within the global economy, but to kind of harness those as means to to really challenge us. So it was kind of in the club and it wasn't necessarily going to play by the rules. So yeah, I think clearly with with hindsight you can say that mistakes were made, but I think they were made with the best of intentions um in in the early 2000s. >> Okay. So here we are in a much more adversarial position and a lot of chat about how globalization is over and we're turning to a a much more nationalistic era. But one of the things you point out that there is no sign in the data in the trade data that globalization is retreating at all. Um it it is pretty much as it was. So that bit isn't true. >> Exactly. The genesis of the book really was in some thinking that we started at capital economics probably five or six years ago in the first Trump administration where there's lots of headlines about the US imposing tariffs on the rest of the world and China in particular other countries pushing back countries turning inwards. We obviously had the Brexit vote in 2016 here in the UK and a sense that the countries were turning inward. They were pushing back against globalization. lots of kind of images of the 1930s being in invoked and this idea that the world was delobalizing. The rhetoric was everywhere but we saw no evidence of this in the data. >> So like all good ideas really it started by challenging the consensus. So we asked ourselves well what has changed cuz clearly something was changing. And when we started to unpack what was going on became clear to me that the key change shift in the global economy over the past 10 years has been the emergence of China as a strategic rival to the US rather than a strategic partner as as Clinton and others had had thought it might be and this deepening superpower rivalry between the the US and China and that has cut through the actions of the first Trump administration but then also the Biden administration which of course kept Trump's tariffs from the first administration in place, even expanded them and augmented them with technology controls. And now, of course, we have Trump's second round of tariffs. And it's not just one ways traffic, right? It's not just the US imposing tariffs on China. China is pushing back against the US, too. So, just this year, we've had controls on outflows of FDI from China to the US, for example. And in the last couple of weeks, uh, we've had the US finally saying to Nvidia, you can sell some of your advanced chips to to China, not the most advanced ones, but some of the some of some some of the kind of second tier, if you like. And China saying, well, thanks very much, but but we're not interested. We want uh we want domestic producers to use domestically produced chips because we want to develop some self-sufficiency and we see some vulnerabilities in becoming too imshed in the US technological ecosystem. I think there's a danger that we view this through a western lens that it's all Trump and it's all US push back. But this is happening in China too. >> Okay. So we now have this situation where you've effectively got China and and the US as the two economic greats in the world. They're not cooperating anymore in the way that we had hoped that they might. They're separate. So what you call fracturing is the next bit where the world effectively divides into two blocks. One circling around the US and one circling around China. >> Exactly. So the idea, the thesis if you like is not that the world turns inwards, not every country kind of erects trade barriers and indeed for that matter capital controls because capital flows are still extremely high by historic standards too as our as our people flows. Uh but rather that the world breaks into to two blocks. One that is broadly aligned with the the US and centered on the US and another that is centered upon China. So these blocks centered upon the two great economic superpowers within the world. Now a key point I make in the book is the exact shape of this fracturing, the form it takes is yet to be decided and the economic consequences will be determined by both how deep the split between these two blocks becomes. You know, can we confine it to areas that are of strategic importance and let the rest of kind of global trade kind of get on with it and and leave it relatively untouched or is it a much broader split? And the second factor that's really going to determine the economic consequences of this fracturing will be how other countries align. Alliances are going to really matter in this fractured world. And of course, there's a big danger to the US is that through Trump's actions, they're pushing away allies rather than pulling them closer towards the US. >> Yeah. Well, let's talk about the alliances first and then talk about the depth. It's quite interesting to think about who who might go where. Obviously there are sort of natural partners for each country and then there are floating areas where you can't be absolutely sure which way they're going to jump. So who do you think would definitely be on the US side and definitely on the Chinese side and who's floating? >> If you look at this kind of shape of the fractured world at the start of this year about half of the world in my estimation kind of fell into the the China block and about half of the world fell into the US block by population. And this is based on some work that we've done at capital economics that looks at trade flows, capital flows, defense and security alliances, how different countries vote at the UN for example as a kind of sense of political alliance alliances. So about half of the world's population in the China block, half the world's population in the US block. But if you look by GDP, about 2/3 of the world G world's GDP is in the US block and only about 25% of the world's GDP is in the China block. and the remainder is kind of in these the handful of unaligned countries. So who's in the US block at the start of this year? Well, Europe, Japan, Korea, Taiwan, Mexico, Canada, Australia, India leans towards the US in our estimation. Indeed, is potentially one of the biggest beneficiaries of fracturing because the to the extent that manufacturing is moved out of China, it moves to another lowcost producer like India, Vietnam, the Philippines and so on and so forth. So >> is India is India a given? Well, no. Exactly. So, so this is this is a key point, right? So, so that's the US block and then the China block you have the usual suspects you Russia, Venezuela, Iran, North Korea, a lot of subsahara and Africa is in the China block and then there's a handful of countries like Brazil, Indonesia that I think kind of float between the two blocks and try to remain unaligned >> and then India is the the key question here. Now I think if you'd have wind the clock back three months and said well what does Trump's return to the White House mean for US India relations I think we would have all said well it strengthens them right two strong men they're kind of nationalistic in their views they get on personally so we're told and there's a whole load of economic reasons why India will seek stronger ties with the US they're deeply skeptical of Chinese technology they're concerned about Chinese competition they have a long-running border dispute with China that's as yet unresolved and and of course India potentially as I was just saying stands to be one of the economic beneficiaries of this fracturing and yet we have a situation where because of supposedly because of India's purchases of Russian oil these enormous tariffs slapped on India by by Trump uh and and a souring of the the relationship between Delhi and Washington. out. It remains to be seen exactly how that plays out. But I think a reasonable base case might be that India obviously has a tradition of being unaligned through the cold war. Maybe it doesn't lean towards the US. Maybe it starts to try to to the extent is possible bridge these two blocks. It's equally possible I think such as the kind of volatile unpredictable nature of of US foreign policy at the moment. It's possible that we get some kind of deal and repromod between Delhi and Washington over the next six months and all of this kind of quickly becomes water under the bridge. >> Okay. So there's a there's a bit of wait and see to come on who goes where. But let's then talk about the the depth of the fracturing because the hope I I think or your hope looking at this would be that an awful lot of the global economy continues as was everything from you know clothing to telephones laptops to fridges etc continues to be traded in exactly the same way and it's only a relatively small percent of the global economy things that the American block and the Chinese block would consider to be of strategic importance that would be affected So while that's that's a big deal, it wouldn't make that much difference to global trade. >> Exactly. That's the kind of central thesis that I set out in the book and is consistent with the idea that ran through the Biden administration of there being a kind of small yard high fence approach to trade. So in other words, the small yard being the areas of goods and services and frankly capital for those too that you decide that are so strategically important that you want to hem off from China and you build a high fence around that. So small yard, high fence. And in the book, I I essentially sketch out three areas where I think will comprise that yard, if you like. It's anything that compromises supply chain security, anything that compromises national security and anything that compromises global technological leadership. So semiconductors, battery technology, pharmaceuticals, biotech, dual use goods, smartphones, the >> dual use goods. The dual use goods being goods that have applications in both civilian and military life. So turbine engines, drones being an obvious one. These are the areas where I think we can be reasonably sure that over the next decade there's going to be a pulling apart of supply chains, a d-risking of supply chains in the west and in China. A push to self-sufficiency in those areas by China and a d-risking in the west from China reorientation of supply chains. The question becomes really I think is can we limit it to those just those areas and clearly Trump's tariffs indiscriminate across the board that raises the spectre of a much wider split and this really matters. So the estimates that I have in the book are that if we can contain this fracturing to areas of strategic importance, so those three areas that I I just set out, then there will be an economic cost, right? There will be about 1% of global GDP. If that happens over a relatively long period of time, this happens in a gradual and managed way about 1% of GD global GDP. So it's not nothing but it's it's manageable. But does it not become more than more than that over time if it affects productivity growth and affects technological exchange and advancement etc. If you have the two major blocks operating separately on high- techch areas, there's got to be a long-term effect that goes beyond the initial. >> I know that's really hard to quantify, but >> it's difficult to quantify and it's difficult to know what the counterfactual is as well, right? But if fracturing is contained to those areas, then it only affects about 10 to 15% of global trade. And of course, most global technological development is happening within blocks rather than the exchange of ideas between blocks. So at a global level, it could be more limited than many people might suppose. But there will be an asymmetry in terms of who's affected. So I think if the US can keep its block together, doesn't push India away, can keep the EU on side, then most of the costs are going to be borne by China because the economic diversity of its block is pretty limited. It's a smaller block. it dominates its block to a much greater extent than the US does its block. But coming back to your point about can we contain it to these areas if we can't and it's a much broader split between the the two blocks then the economic costs become much greater maybe something in the order of 2 to 4% of of global GDP which again might not sound very much but that's about the losses that were imposed by the global financial crisis. you know, we now think that the glo global GDP is about 2 to 4% below its pre GFC trend. So that's potentially the permanent hip from the GFC. So we're looking at potentially if you get a much wider split, another global financial crisis, albeit clearly spread over a number of years rather than all happening at once. So the form that fracturing takes will really determine the the economic consequences. >> Okay. Well, let's stick with the optimistic view that it only affects this 10 to 15% of of global trade, 1% of global GDP. If that were to happen, how does that affect say inflation? Everything feeds into inflation, but things like say for example energy prices, rare earth prices. We know we're already seeing the beginning of a new commodity super cycle, right? And that could be massively exacerbated by, for example, more restrictions. There are really quite a lot of restrictions, but restrictions on processed rare earths from China or restrictions on the West's ability to get um raw rare earths from subsahara and Africa, etc., etc. There's all sorts of things here that could feed into a very volatile inflationary environment. >> Indeed. And I think volatility is the key point here. If you said to most economists, we're going to roll back some elements of globalization, uh what's the impact on inflation? I think the response would be, well, it's going to be inflationary clearly. And I think a bit of context is important here. Globalization was only one element that pulled down inflation through the 80s and 90s and 2000s. And I suspect it probably wasn't the most important either. The most important was reform of labor markets, product markets, independent central banks, inflation targeting, all of that stuff, running fiscal policy more responsibly. They had that had by far the bigger impact in my judgment on bringing down inflation than globalization. Globalization, if you like, was the the icing on the cake, the cherry on the top. So, if a bit of that globalization gets rolled back and some trade barriers go up and it only affects 15% of global trade, and to the extent that uh in the west we're moving production out of China and we're putting it in Vietnam and India and Mexico for these strategically important goods, then it's going to another lowcost producer. And if it happens gradually, we know from other firms that have shifted supply chains to to d-risk them. So if you look at Toyota after the 2011 Fukushima disaster, it rejected its supply chains to derisk them and have removed single points of failure. Didn't contribute much to to overall costs. So I think the the inflationary consequences might be more limited than one supposes. I think volatility though is the key point. So I think we're going to head into a world where inflation is more volatile. And you mentioned rare earths in critical minerals more generally. But if you think about how that's playing out, what's happening is China's putting on export controls. And what's that that's doing effectively is restricting the global supply of these minerals. The price therefore goes up and as the price goes up that's then incentivizing the production and the exploitation of other sources. Right? So we're seeing rare earth mines reopen in California, in Arkansas, in Romania, and so on and so forth. And so the global supply will go up and that will then bring the price back down. >> Back to the old um the solution to high prices is high prices. >> Exactly. So so the consequence there is that you end up with more volatile inflation, a period of high inflation that essentially is cure cures itself by by allowing supply to respond. So my my supposition is that you we've been through this kind of nice period where you know non-inflationary constant expansion etc etc low inflation stable inflation. I think we're going not necessarily to a world where inflation is structurally higher 3 or 4% but just that it's more volatile you know 3% one year 1 and a half% the next year etc etc >> I want to move on to talking about how this might affect asset classes and ordinary investors in a minute but we're talking very much as though this is a bit like an economic cold war for a small part of the global economy but obviously we're now talking about a world in which geopolitics has a much bigger influence than previously not just on resources but also on the way politicians interact. Is there a danger do you think of geopolitical situation getting worse and worse and this economic division becoming not just an economic division but a risk of further conflict a risk of war. >> Exactly. Yeah. And and if you're of a particularly cheerful disposition and you need down to earth, then there's a whole chapter in the book, chapter 8, that talks about how could it all go wrong. >> And there's lots of different ways in which you can visage that the this fractured world could evolve in a much more malign way. We've talked about some of them that there's a deeper split between the two blocks. The big risk for America is that it turns inwards, pushes away its allies. In that sense, America first would really be America last because it would be the biggest loser. But the one that should keep us all awake at night is the risk of conflict between the two blocks. And you know that can emerge from there several flash points clearly the South China Sea and China's presence there and disputed islands and lands and so on. But in Taiwan the other obvious flash point. Now I'm a lowly macroeconomist. I'm not necessarily going to tell you the the possibility or probability of the two sides come into conflict. I do know that if the two sides do come into conflict, then the least of our concerns is going to be what the impact is going to be on global GDP. But there are some estimates in the book, some people have done some work looking at this, maybe including your colleagues at Bloomberg actually, possibly, you know, knocks 10% off of global GDP if the US and China come to blows over Taiwan primarily through repercussions through through the the global chip industry. But of course, it doesn't necessarily need to be a full-blown war. Or it could be a blockade that restricts the flow of these semiconductors and that that would having a knock- on impact too to to to kind of risk appetite in markets and etc etc. >> Yeah. Or a cyber war. >> Exactly. A cyber war again particularly when it comes to Taiwan images of conflict over Taiwan conjure up this um this kind of image of the kind of amphibious land is kind of a D-Day type conflict from China the PLA >> storming the beaches. I don't think that's probably how in all likelihood how things would play out. It was much more likely to be, you know, blockades, cyber cyber war, etc., etc., etc. >> Well, none of this is pleasant. Let me ask you one thing we haven't talked about again is capital flows. So, we've talked about physical goods and the end of cutting back of trade in those areas, but what about the way that capital moves around the world in a fractured system? >> Well, a couple of really important points to to make from the start here. If you think about things through the lens of macro rather than the markets, then really cap global capital flows are just the flip side of global trade flows. >> Mhm. >> Right. And so if China is running these large trade surpluses, which is a the a kind of fundamental source of tension between the US and China and a driver of this fracturing, then it must also be amassing large amounts of external assets. That's just the logic of running a trade surplus. And those assets have to go somewhere. uh and the the sheer size of the accumulation of China's external assets. So now uh close to $9 trillion on some estimates is a bit opaque but about $9 trillion means that dollar markets are the only place that they could they can really go. So I suspect that there's going to be greater friction in global capital flows in future. I think there's now a widespread acceptance amongst policy makers even the IMF saying that unfeted free flows of capital is not necessarily a good thing. But I'm deeply skeptical of the idea that we're going again back to the kind of 1930s with the kind of big restrictions on global capital flows, a big drop in global capital flows in total and also that China can disentangle itself from from US dollar markets. I don't think it can just because of the sheer size of its external assets. >> Okay. So we can put that aside as a big worry. That's going to be all right. >> I think so. I mean I I think to the extent the global capital flows in future are going to be smaller as a share of global GDP I think it's more likely to be because policy makers come to the conclusion that actually some of the kind of frothy hot money is not necessarily a good thing right it creates financial vulnerabilities embedded in the system and there there's a bit of a that there's a push back against some of the kind of Washington consensus idea of unfettered free capital flows being an unaloyed positive rather than it being China and the US pulling apart part and erecting a big kind of capital wall between these two blocks. I think that will happen in some areas. So I think in particularly in private markets where rules around foreign investment are a bit more opaque. I think there's going to be much greater reticence on behalf of western investors in in getting involved in in China and investing in China and we see some of that already in the data. But I think generally at a global level capital flows remaining relatively high would be my would be my base case. >> Okay. So on to the key point for this podcast anyway. What does all this mean for our portfolios? What does it mean for the future of investment? We have been taught, haven't we, relentlessly over the last however many years that a globalized portfolio is the best portfolio and that our pension money and our ISA money can flow all over the world. In fact, everywhere is better than the UK. So that's been the last couple of decades. What now? What does this mean for the ordinary person looking at their SIP and their ISA and saying, "Okay, we're not globalized anymore. We're fractured. Where do I move my money?" >> Well, you're right that a key aspect of uh the latest wave of globalization, most recent wave of globalization, has been massive financial integration. And that was something that was not necessarily present in previous waves of globalization. And part of that was this idea that we should all be investing our ISIS and SIPs etc etc across the world in fast growing emerging economies too. My suspicion is that some of the gloss has come off of that already not least because returns in some emerging economies have been pretty weak but that's the direction of travel and it's the direction of travel that we're heading towards. Now a lot will depend upon the form that fracturing takes as I as I as I've said in terms of the macro consequences. If we get a more limited contained form of fracturing, then I suspect what it means in practice is that you and I were thinking twice before we invest significant portions of our SIP and ISA in Chinese equities. But it doesn't really affect the extent to which we put our money in the S&P or for that matter European stocks. And I think when it comes to private flows, um you capital economics, we're speaking to clients all the time in in private markets. There's there's already some reticence about in investing in China and China's allies. Sanctions risk as as much as anything else. And I think that that that continues to intensify too. So much greater reticence, reluctance to invest in China itself, I suspect. But it does mean that we we stop investing globally? No, I don't think so. >> Does it mean that we should allocate more to commodities and to gold, for example? Well, I think that's happened already to some extent with gold. So, gold is seen by some emerging market central banks, particularly chi China central bank as a way of kind of mitigating some risk of exposure to the to the dollar and limiting sanctions risks and that's been a key factor behind the rise in the price of of gold over the past 18 months to two years in my view. So, some of that is already in the market. Yeah, clearly if you're a savvy investor that can identify those particular critical minerals that China has a chokeold over and there's different rare earths the the names of which we've never heard of. Geranium and gallium were two big ones last year uh that I'd never heard of but turns out China has a strangle hold over these these rare earths and then now uh a scramble to to to develop alternative sources. >> It's the processing they have a strangle hold of. >> Exactly. rather rather than the mining of >> rather than the deposits of them. Exactly. So that you the key point about rare earths is that they're not that rare. They're pretty prevalent is that is the the mining and the processing particularly the processing. The processing is really dirty work which is essentially we outsource that to China for environmental reasons. And now you know if you can work out where those choke points lie and and develop domestic sources of them then then there's clearly opportunities uh opportunities there too. >> That sounded so wrong that sentence by the way. You know it's it's dirty work. So we've outsourced it to China for environmental reasons. The environmental impact is exactly the same. It's just happening somewhere else. >> Exactly the same. At a global level the environmental impact is exactly the same but for domestic political reasons we've decided that we took a decision kind of 15 20 years ago that someone else could do that. Thanks very much. >> And not just on that. Interesting. Okay. Can I just ask you briefly then about the US market partly in connection to to your ideas about the fractured age but also in general a lot of our listeners will be holding global tracker funds global ETFs whatever else they'll be very very exposed to the US and still very exposed to big tech companies is that a reasonable place to be >> well I think it's a reasonable place to be in terms of future growth when it comes to kind of big tech and AI in particular I'm pretty bullish I have to say in terms of the kind productivity benefits that that's going to eventually deliver. It's not delivering them right now, but I think if we wind the clock forward 5 10 years, then it will start to have delivered them. Clearly, some of that's reflected in the price of these hyperscalers and and and big tech stocks or already. Now, the question we always get is, is this a bubble? And it does look pretty frothy, doesn't it? When you look at some of the kind of valuations that these these firms are trading on and then the question becomes for investors, if you're already invested, do you hang on? if you're not invested, do you try and ride the coattails of the the kind of the of this bubble and and when do you get out? And that that's an incredibly difficult uh question to answer and one that will depend upon individuals preferences and risk appetites and and and particular circumstances. My sense would be that we've been through a period where returns on US equities have outperformed those comfortably uh those of other developed markets particularly here in the UK. I suspect that that outperformance will narrow over the the the coming years just because a lot of that the valuations are extremely high. I don't see that there's the same scope for price gains. So I suspect that it's going to be impossible to ignore some exposure to the US just because the sheer scale, but that the relative outperformance of the US compared to say European markets and markets in the UK will start to diminish. >> Okay. So expect a little mean reversion in relative terms at least. >> Yeah, indeed. >> Brilliant. Um Neil, thank you. Thank you so much. Can I just ask you one last question? Obviously, we are recommending that everybody buys this book and reads it like immediately. The Fractured Age, everybody go out, buy it, read it, >> and leave a fivestar review as well. >> Leave five star reviews. And um once you've done that, don't forget to leave your five star review for the podcast cuz that matters too. >> Indeed. Indeed. >> Neil, you've written this. What are you reading? >> I'm halfway through Dan Wang's book um Break Neck on China, which is really good. Um Chokepoint again. uh on the global economy and China's strangle hold in in certain parts of it. It's really really good too. Uh I'd recommend both of those books to to listeners again about the future of the global economy and and the relationship of the US and and and China within it. >> Okay. Excellent. Thank you. Although we must remember by the way that books aren't always right. I was telling I think John on podcast the other day about going through my bookshelves to deliver some books to the library of mistakes and there's quite a lot called things like the end of China and that kind of thing written in the early '90s. >> I do mean that. So, you never know. >> Maybe maybe version two, the the second edition of this will be the kind of unfratched age or something like that. >> Maybe. Who knows? Anyway, thank you so much for joining us today. That was absolutely fascinating. >> Thanks for having me. [Music] >> Thanks for listening to this week's Marin Talks Money. If you like our show, rate, review, and subscribe wherever you listen to podcasts. And keep sending questions or comments to memoney@ bloomberg.net. You can also follow me and John on Twitter or X. I'm @ marinus w and john is john_steepic. This episode was hosted by me, Marinet web. It was produced by some Moses and sound designed by Blake Maples, Kelly Garry, and Aaron Caspers. Special thanks of course to Neil Shearing.
How the US-China Rivalry Is Reshaping the Global Economy with Neil Shearing | Merryn Talks Money
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[Music] Bloomberg Audio Studios. Podcasts, radio, news. [Music] Welcome to Marin Talks Money, the podcast in which the people who know the markets explain the markets. I'm Marin Zamset Webb. This week I'm speaking with Neil Shearing, group chief economist at capital economics and author of the fractured age, how the return of geopolitics will splinter the global economy. Neil's book argues that the era of hyper globalization marked by relatively free movement goods, capital and ideas and people as well from the 1990s through the 2000s is over. Now, we are entering something he refers to as a fractured age where geopolitics, national security, and strategic rivalries increasingly shape global economic outcomes. So, we're going to unpack that argument and we're going to talk about why this book is particularly timely in our conversation. And we'll also get Neil to explain to us how researching this book has helped him to understand the global economic picture at the moment and how that can help you with your portfolio. I hope you are going to tell us that Neil by the way. Uh Neil, Neil, welcome to Marin Talks Money. >> Thanks for having me. Great to be here. >> Thank you. Now listen, I tell you what, I think we should start off just by setting the scene and talking a little bit more. Not a great length because I think most people are relatively familiar with this discussion, but this era of hyper globalization, where did it come from? How long did it last? >> There's various points at which you could date the start of the kind of globalization period. I think u by the way this is nothing new. We've had waves of globalization in the past, the late 19th century. You could argue that there was a period of integration after the second world war. But in the book I date the most recent wave of globalization h as having started at the fall of the the Berlin wall. So 1989. And the idea behind this this wave of globalization was that not only would economic integration bring prosperity to all economies but it would also be a means of spreading common values and therefore peace as well. The idea being that if you bought Russia, if you bought China, if you bought the economies in Latin America into the global economy, into the global fold, they would probably become a bit more western. But also there would be economic gains for the west as well. Of course, we've had low inflation as partly as a result of globalization and gains from trade. And there's lots of quotes I have in the book from Clinton and Barack Obama and Kofi and about the kind of virtues of globalization. So 1989 is where I date the start of this period of globalization. It starts to fragment. I think actually not with Trump in 2016, but actually I go back a bit before that in the book and say it's partly the global financial crisis where I think some of the vulnerabilities that were a function of this globalized world was starting to be exposed. But then really in 2012 when she became leader of China and really set China about a very different course of development challenging US agy abroad and and reasserting the primacy of the party at home. >> Yeah. And that's where we got that made in China 2025 project right which was a bit of a a turning point. And so up until then there had been this general belief that if you make the economy more global and everyone becomes a bit of a capitalist. Capitalism automatically leads somehow to democracy and to the shared values that the west thought everyone begin to to join in. And it became increasingly clear into the 2010s that that wasn't the case. And also increasingly clear that there were quite a lot of downsides to globalization that we had sort of refused to discuss in the run-up to it. >> Exactly. And I think there's a sense in which globalization also became a convenient scapegoat for a lot of the problems that the west was facing. Globalization is not the only reason indeed is not even the most important reason why there's been a loss of manufacturing jobs in the US and in the UK for example in my view. There's it's mainly that's mainly about technological change. But it became a convenient scapegoat for some of the particularly kind of right-wing populists Trump and so on and so forth. It became easy to kind of bash uh globalization. But there were genuine kind of costs to to globalization too that that were also not part of the the discourse in the 2000s. I came came up through the Treasury in the kind of late 90s early 2000s and then it was really about kind of integration is a kind of one-way bet. Everyone would be better off uh as a result of of global integration and clearly that has not been the case. >> Yeah. I interesting one of the things that you noted that in the beginning of your book is the fall off in in global tariff levels. In 1994 you have global tariffs at about 8.6% 6% then coming down 5% in 2000 and then down to 3% in 2006. So you can kind of track the whole thing by tariff rates which of course have now turned back up again. >> Exactly. Turned back up for the US but not necessarily turned back up for other countries as well. So we're getting some push back on the trade front particularly from the US but not from from other countries. And of course the big sea change in the 2000s was China's entry to the WTO. And that was really the moment that kind of heralded China's and particularly the integration of Chinese producers into the global economy. And since then, of course, China's share of global exports has only gone in one direction. Despite push back from the US through Trump's first administration, then Biden and now today with extremely high levels of tariffs, China's share of global exports has continued to go in one direction, which is up. >> Yeah. And would you look back on that and say that it was a mistake to let China into the WTO or a mistake to let them in on the terms that they came in? What I mean that does seem to be that one of the flash points? >> Well, hindsight's a wonderful thing, isn't it? And I think that with the benefit of hindsight, we can see that really China, but particularly under shei, I think I think 2012 was was the the moment where things changed because that was the moment I think where China signaled really that it was not going to use kind of openness to trade and openness to technology to really integrate within the to within the global economy, but to kind of harness those as means to to really challenge us. So it was kind of in the club and it wasn't necessarily going to play by the rules. So yeah, I think clearly with with hindsight you can say that mistakes were made, but I think they were made with the best of intentions um in in the early 2000s. >> Okay. So here we are in a much more adversarial position and a lot of chat about how globalization is over and we're turning to a a much more nationalistic era. But one of the things you point out that there is no sign in the data in the trade data that globalization is retreating at all. Um it it is pretty much as it was. So that bit isn't true. >> Exactly. The genesis of the book really was in some thinking that we started at capital economics probably five or six years ago in the first Trump administration where there's lots of headlines about the US imposing tariffs on the rest of the world and China in particular other countries pushing back countries turning inwards. We obviously had the Brexit vote in 2016 here in the UK and a sense that the countries were turning inward. They were pushing back against globalization. lots of kind of images of the 1930s being in invoked and this idea that the world was delobalizing. The rhetoric was everywhere but we saw no evidence of this in the data. >> So like all good ideas really it started by challenging the consensus. So we asked ourselves well what has changed cuz clearly something was changing. And when we started to unpack what was going on became clear to me that the key change shift in the global economy over the past 10 years has been the emergence of China as a strategic rival to the US rather than a strategic partner as as Clinton and others had had thought it might be and this deepening superpower rivalry between the the US and China and that has cut through the actions of the first Trump administration but then also the Biden administration which of course kept Trump's tariffs from the first administration in place, even expanded them and augmented them with technology controls. And now, of course, we have Trump's second round of tariffs. And it's not just one ways traffic, right? It's not just the US imposing tariffs on China. China is pushing back against the US, too. So, just this year, we've had controls on outflows of FDI from China to the US, for example. And in the last couple of weeks, uh, we've had the US finally saying to Nvidia, you can sell some of your advanced chips to to China, not the most advanced ones, but some of the some of some some of the kind of second tier, if you like. And China saying, well, thanks very much, but but we're not interested. We want uh we want domestic producers to use domestically produced chips because we want to develop some self-sufficiency and we see some vulnerabilities in becoming too imshed in the US technological ecosystem. I think there's a danger that we view this through a western lens that it's all Trump and it's all US push back. But this is happening in China too. >> Okay. So we now have this situation where you've effectively got China and and the US as the two economic greats in the world. They're not cooperating anymore in the way that we had hoped that they might. They're separate. So what you call fracturing is the next bit where the world effectively divides into two blocks. One circling around the US and one circling around China. >> Exactly. So the idea, the thesis if you like is not that the world turns inwards, not every country kind of erects trade barriers and indeed for that matter capital controls because capital flows are still extremely high by historic standards too as our as our people flows. Uh but rather that the world breaks into to two blocks. One that is broadly aligned with the the US and centered on the US and another that is centered upon China. So these blocks centered upon the two great economic superpowers within the world. Now a key point I make in the book is the exact shape of this fracturing, the form it takes is yet to be decided and the economic consequences will be determined by both how deep the split between these two blocks becomes. You know, can we confine it to areas that are of strategic importance and let the rest of kind of global trade kind of get on with it and and leave it relatively untouched or is it a much broader split? And the second factor that's really going to determine the economic consequences of this fracturing will be how other countries align. Alliances are going to really matter in this fractured world. And of course, there's a big danger to the US is that through Trump's actions, they're pushing away allies rather than pulling them closer towards the US. >> Yeah. Well, let's talk about the alliances first and then talk about the depth. It's quite interesting to think about who who might go where. Obviously there are sort of natural partners for each country and then there are floating areas where you can't be absolutely sure which way they're going to jump. So who do you think would definitely be on the US side and definitely on the Chinese side and who's floating? >> If you look at this kind of shape of the fractured world at the start of this year about half of the world in my estimation kind of fell into the the China block and about half of the world fell into the US block by population. And this is based on some work that we've done at capital economics that looks at trade flows, capital flows, defense and security alliances, how different countries vote at the UN for example as a kind of sense of political alliance alliances. So about half of the world's population in the China block, half the world's population in the US block. But if you look by GDP, about 2/3 of the world G world's GDP is in the US block and only about 25% of the world's GDP is in the China block. and the remainder is kind of in these the handful of unaligned countries. So who's in the US block at the start of this year? Well, Europe, Japan, Korea, Taiwan, Mexico, Canada, Australia, India leans towards the US in our estimation. Indeed, is potentially one of the biggest beneficiaries of fracturing because the to the extent that manufacturing is moved out of China, it moves to another lowcost producer like India, Vietnam, the Philippines and so on and so forth. So >> is India is India a given? Well, no. Exactly. So, so this is this is a key point, right? So, so that's the US block and then the China block you have the usual suspects you Russia, Venezuela, Iran, North Korea, a lot of subsahara and Africa is in the China block and then there's a handful of countries like Brazil, Indonesia that I think kind of float between the two blocks and try to remain unaligned >> and then India is the the key question here. Now I think if you'd have wind the clock back three months and said well what does Trump's return to the White House mean for US India relations I think we would have all said well it strengthens them right two strong men they're kind of nationalistic in their views they get on personally so we're told and there's a whole load of economic reasons why India will seek stronger ties with the US they're deeply skeptical of Chinese technology they're concerned about Chinese competition they have a long-running border dispute with China that's as yet unresolved and and of course India potentially as I was just saying stands to be one of the economic beneficiaries of this fracturing and yet we have a situation where because of supposedly because of India's purchases of Russian oil these enormous tariffs slapped on India by by Trump uh and and a souring of the the relationship between Delhi and Washington. out. It remains to be seen exactly how that plays out. But I think a reasonable base case might be that India obviously has a tradition of being unaligned through the cold war. Maybe it doesn't lean towards the US. Maybe it starts to try to to the extent is possible bridge these two blocks. It's equally possible I think such as the kind of volatile unpredictable nature of of US foreign policy at the moment. It's possible that we get some kind of deal and repromod between Delhi and Washington over the next six months and all of this kind of quickly becomes water under the bridge. >> Okay. So there's a there's a bit of wait and see to come on who goes where. But let's then talk about the the depth of the fracturing because the hope I I think or your hope looking at this would be that an awful lot of the global economy continues as was everything from you know clothing to telephones laptops to fridges etc continues to be traded in exactly the same way and it's only a relatively small percent of the global economy things that the American block and the Chinese block would consider to be of strategic importance that would be affected So while that's that's a big deal, it wouldn't make that much difference to global trade. >> Exactly. That's the kind of central thesis that I set out in the book and is consistent with the idea that ran through the Biden administration of there being a kind of small yard high fence approach to trade. So in other words, the small yard being the areas of goods and services and frankly capital for those too that you decide that are so strategically important that you want to hem off from China and you build a high fence around that. So small yard, high fence. And in the book, I I essentially sketch out three areas where I think will comprise that yard, if you like. It's anything that compromises supply chain security, anything that compromises national security and anything that compromises global technological leadership. So semiconductors, battery technology, pharmaceuticals, biotech, dual use goods, smartphones, the >> dual use goods. The dual use goods being goods that have applications in both civilian and military life. So turbine engines, drones being an obvious one. These are the areas where I think we can be reasonably sure that over the next decade there's going to be a pulling apart of supply chains, a d-risking of supply chains in the west and in China. A push to self-sufficiency in those areas by China and a d-risking in the west from China reorientation of supply chains. The question becomes really I think is can we limit it to those just those areas and clearly Trump's tariffs indiscriminate across the board that raises the spectre of a much wider split and this really matters. So the estimates that I have in the book are that if we can contain this fracturing to areas of strategic importance, so those three areas that I I just set out, then there will be an economic cost, right? There will be about 1% of global GDP. If that happens over a relatively long period of time, this happens in a gradual and managed way about 1% of GD global GDP. So it's not nothing but it's it's manageable. But does it not become more than more than that over time if it affects productivity growth and affects technological exchange and advancement etc. If you have the two major blocks operating separately on high- techch areas, there's got to be a long-term effect that goes beyond the initial. >> I know that's really hard to quantify, but >> it's difficult to quantify and it's difficult to know what the counterfactual is as well, right? But if fracturing is contained to those areas, then it only affects about 10 to 15% of global trade. And of course, most global technological development is happening within blocks rather than the exchange of ideas between blocks. So at a global level, it could be more limited than many people might suppose. But there will be an asymmetry in terms of who's affected. So I think if the US can keep its block together, doesn't push India away, can keep the EU on side, then most of the costs are going to be borne by China because the economic diversity of its block is pretty limited. It's a smaller block. it dominates its block to a much greater extent than the US does its block. But coming back to your point about can we contain it to these areas if we can't and it's a much broader split between the the two blocks then the economic costs become much greater maybe something in the order of 2 to 4% of of global GDP which again might not sound very much but that's about the losses that were imposed by the global financial crisis. you know, we now think that the glo global GDP is about 2 to 4% below its pre GFC trend. So that's potentially the permanent hip from the GFC. So we're looking at potentially if you get a much wider split, another global financial crisis, albeit clearly spread over a number of years rather than all happening at once. So the form that fracturing takes will really determine the the economic consequences. >> Okay. Well, let's stick with the optimistic view that it only affects this 10 to 15% of of global trade, 1% of global GDP. If that were to happen, how does that affect say inflation? Everything feeds into inflation, but things like say for example energy prices, rare earth prices. We know we're already seeing the beginning of a new commodity super cycle, right? And that could be massively exacerbated by, for example, more restrictions. There are really quite a lot of restrictions, but restrictions on processed rare earths from China or restrictions on the West's ability to get um raw rare earths from subsahara and Africa, etc., etc. There's all sorts of things here that could feed into a very volatile inflationary environment. >> Indeed. And I think volatility is the key point here. If you said to most economists, we're going to roll back some elements of globalization, uh what's the impact on inflation? I think the response would be, well, it's going to be inflationary clearly. And I think a bit of context is important here. Globalization was only one element that pulled down inflation through the 80s and 90s and 2000s. And I suspect it probably wasn't the most important either. The most important was reform of labor markets, product markets, independent central banks, inflation targeting, all of that stuff, running fiscal policy more responsibly. They had that had by far the bigger impact in my judgment on bringing down inflation than globalization. Globalization, if you like, was the the icing on the cake, the cherry on the top. So, if a bit of that globalization gets rolled back and some trade barriers go up and it only affects 15% of global trade, and to the extent that uh in the west we're moving production out of China and we're putting it in Vietnam and India and Mexico for these strategically important goods, then it's going to another lowcost producer. And if it happens gradually, we know from other firms that have shifted supply chains to to d-risk them. So if you look at Toyota after the 2011 Fukushima disaster, it rejected its supply chains to derisk them and have removed single points of failure. Didn't contribute much to to overall costs. So I think the the inflationary consequences might be more limited than one supposes. I think volatility though is the key point. So I think we're going to head into a world where inflation is more volatile. And you mentioned rare earths in critical minerals more generally. But if you think about how that's playing out, what's happening is China's putting on export controls. And what's that that's doing effectively is restricting the global supply of these minerals. The price therefore goes up and as the price goes up that's then incentivizing the production and the exploitation of other sources. Right? So we're seeing rare earth mines reopen in California, in Arkansas, in Romania, and so on and so forth. And so the global supply will go up and that will then bring the price back down. >> Back to the old um the solution to high prices is high prices. >> Exactly. So so the consequence there is that you end up with more volatile inflation, a period of high inflation that essentially is cure cures itself by by allowing supply to respond. So my my supposition is that you we've been through this kind of nice period where you know non-inflationary constant expansion etc etc low inflation stable inflation. I think we're going not necessarily to a world where inflation is structurally higher 3 or 4% but just that it's more volatile you know 3% one year 1 and a half% the next year etc etc >> I want to move on to talking about how this might affect asset classes and ordinary investors in a minute but we're talking very much as though this is a bit like an economic cold war for a small part of the global economy but obviously we're now talking about a world in which geopolitics has a much bigger influence than previously not just on resources but also on the way politicians interact. Is there a danger do you think of geopolitical situation getting worse and worse and this economic division becoming not just an economic division but a risk of further conflict a risk of war. >> Exactly. Yeah. And and if you're of a particularly cheerful disposition and you need down to earth, then there's a whole chapter in the book, chapter 8, that talks about how could it all go wrong. >> And there's lots of different ways in which you can visage that the this fractured world could evolve in a much more malign way. We've talked about some of them that there's a deeper split between the two blocks. The big risk for America is that it turns inwards, pushes away its allies. In that sense, America first would really be America last because it would be the biggest loser. But the one that should keep us all awake at night is the risk of conflict between the two blocks. And you know that can emerge from there several flash points clearly the South China Sea and China's presence there and disputed islands and lands and so on. But in Taiwan the other obvious flash point. Now I'm a lowly macroeconomist. I'm not necessarily going to tell you the the possibility or probability of the two sides come into conflict. I do know that if the two sides do come into conflict, then the least of our concerns is going to be what the impact is going to be on global GDP. But there are some estimates in the book, some people have done some work looking at this, maybe including your colleagues at Bloomberg actually, possibly, you know, knocks 10% off of global GDP if the US and China come to blows over Taiwan primarily through repercussions through through the the global chip industry. But of course, it doesn't necessarily need to be a full-blown war. Or it could be a blockade that restricts the flow of these semiconductors and that that would having a knock- on impact too to to to kind of risk appetite in markets and etc etc. >> Yeah. Or a cyber war. >> Exactly. A cyber war again particularly when it comes to Taiwan images of conflict over Taiwan conjure up this um this kind of image of the kind of amphibious land is kind of a D-Day type conflict from China the PLA >> storming the beaches. I don't think that's probably how in all likelihood how things would play out. It was much more likely to be, you know, blockades, cyber cyber war, etc., etc., etc. >> Well, none of this is pleasant. Let me ask you one thing we haven't talked about again is capital flows. So, we've talked about physical goods and the end of cutting back of trade in those areas, but what about the way that capital moves around the world in a fractured system? >> Well, a couple of really important points to to make from the start here. If you think about things through the lens of macro rather than the markets, then really cap global capital flows are just the flip side of global trade flows. >> Mhm. >> Right. And so if China is running these large trade surpluses, which is a the a kind of fundamental source of tension between the US and China and a driver of this fracturing, then it must also be amassing large amounts of external assets. That's just the logic of running a trade surplus. And those assets have to go somewhere. uh and the the sheer size of the accumulation of China's external assets. So now uh close to $9 trillion on some estimates is a bit opaque but about $9 trillion means that dollar markets are the only place that they could they can really go. So I suspect that there's going to be greater friction in global capital flows in future. I think there's now a widespread acceptance amongst policy makers even the IMF saying that unfeted free flows of capital is not necessarily a good thing. But I'm deeply skeptical of the idea that we're going again back to the kind of 1930s with the kind of big restrictions on global capital flows, a big drop in global capital flows in total and also that China can disentangle itself from from US dollar markets. I don't think it can just because of the sheer size of its external assets. >> Okay. So we can put that aside as a big worry. That's going to be all right. >> I think so. I mean I I think to the extent the global capital flows in future are going to be smaller as a share of global GDP I think it's more likely to be because policy makers come to the conclusion that actually some of the kind of frothy hot money is not necessarily a good thing right it creates financial vulnerabilities embedded in the system and there there's a bit of a that there's a push back against some of the kind of Washington consensus idea of unfettered free capital flows being an unaloyed positive rather than it being China and the US pulling apart part and erecting a big kind of capital wall between these two blocks. I think that will happen in some areas. So I think in particularly in private markets where rules around foreign investment are a bit more opaque. I think there's going to be much greater reticence on behalf of western investors in in getting involved in in China and investing in China and we see some of that already in the data. But I think generally at a global level capital flows remaining relatively high would be my would be my base case. >> Okay. So on to the key point for this podcast anyway. What does all this mean for our portfolios? What does it mean for the future of investment? We have been taught, haven't we, relentlessly over the last however many years that a globalized portfolio is the best portfolio and that our pension money and our ISA money can flow all over the world. In fact, everywhere is better than the UK. So that's been the last couple of decades. What now? What does this mean for the ordinary person looking at their SIP and their ISA and saying, "Okay, we're not globalized anymore. We're fractured. Where do I move my money?" >> Well, you're right that a key aspect of uh the latest wave of globalization, most recent wave of globalization, has been massive financial integration. And that was something that was not necessarily present in previous waves of globalization. And part of that was this idea that we should all be investing our ISIS and SIPs etc etc across the world in fast growing emerging economies too. My suspicion is that some of the gloss has come off of that already not least because returns in some emerging economies have been pretty weak but that's the direction of travel and it's the direction of travel that we're heading towards. Now a lot will depend upon the form that fracturing takes as I as I as I've said in terms of the macro consequences. If we get a more limited contained form of fracturing, then I suspect what it means in practice is that you and I were thinking twice before we invest significant portions of our SIP and ISA in Chinese equities. But it doesn't really affect the extent to which we put our money in the S&P or for that matter European stocks. And I think when it comes to private flows, um you capital economics, we're speaking to clients all the time in in private markets. There's there's already some reticence about in investing in China and China's allies. Sanctions risk as as much as anything else. And I think that that that continues to intensify too. So much greater reticence, reluctance to invest in China itself, I suspect. But it does mean that we we stop investing globally? No, I don't think so. >> Does it mean that we should allocate more to commodities and to gold, for example? Well, I think that's happened already to some extent with gold. So, gold is seen by some emerging market central banks, particularly chi China central bank as a way of kind of mitigating some risk of exposure to the to the dollar and limiting sanctions risks and that's been a key factor behind the rise in the price of of gold over the past 18 months to two years in my view. So, some of that is already in the market. Yeah, clearly if you're a savvy investor that can identify those particular critical minerals that China has a chokeold over and there's different rare earths the the names of which we've never heard of. Geranium and gallium were two big ones last year uh that I'd never heard of but turns out China has a strangle hold over these these rare earths and then now uh a scramble to to to develop alternative sources. >> It's the processing they have a strangle hold of. >> Exactly. rather rather than the mining of >> rather than the deposits of them. Exactly. So that you the key point about rare earths is that they're not that rare. They're pretty prevalent is that is the the mining and the processing particularly the processing. The processing is really dirty work which is essentially we outsource that to China for environmental reasons. And now you know if you can work out where those choke points lie and and develop domestic sources of them then then there's clearly opportunities uh opportunities there too. >> That sounded so wrong that sentence by the way. You know it's it's dirty work. So we've outsourced it to China for environmental reasons. The environmental impact is exactly the same. It's just happening somewhere else. >> Exactly the same. At a global level the environmental impact is exactly the same but for domestic political reasons we've decided that we took a decision kind of 15 20 years ago that someone else could do that. Thanks very much. >> And not just on that. Interesting. Okay. Can I just ask you briefly then about the US market partly in connection to to your ideas about the fractured age but also in general a lot of our listeners will be holding global tracker funds global ETFs whatever else they'll be very very exposed to the US and still very exposed to big tech companies is that a reasonable place to be >> well I think it's a reasonable place to be in terms of future growth when it comes to kind of big tech and AI in particular I'm pretty bullish I have to say in terms of the kind productivity benefits that that's going to eventually deliver. It's not delivering them right now, but I think if we wind the clock forward 5 10 years, then it will start to have delivered them. Clearly, some of that's reflected in the price of these hyperscalers and and and big tech stocks or already. Now, the question we always get is, is this a bubble? And it does look pretty frothy, doesn't it? When you look at some of the kind of valuations that these these firms are trading on and then the question becomes for investors, if you're already invested, do you hang on? if you're not invested, do you try and ride the coattails of the the kind of the of this bubble and and when do you get out? And that that's an incredibly difficult uh question to answer and one that will depend upon individuals preferences and risk appetites and and and particular circumstances. My sense would be that we've been through a period where returns on US equities have outperformed those comfortably uh those of other developed markets particularly here in the UK. I suspect that that outperformance will narrow over the the the coming years just because a lot of that the valuations are extremely high. I don't see that there's the same scope for price gains. So I suspect that it's going to be impossible to ignore some exposure to the US just because the sheer scale, but that the relative outperformance of the US compared to say European markets and markets in the UK will start to diminish. >> Okay. So expect a little mean reversion in relative terms at least. >> Yeah, indeed. >> Brilliant. Um Neil, thank you. Thank you so much. Can I just ask you one last question? Obviously, we are recommending that everybody buys this book and reads it like immediately. The Fractured Age, everybody go out, buy it, read it, >> and leave a fivestar review as well. >> Leave five star reviews. And um once you've done that, don't forget to leave your five star review for the podcast cuz that matters too. >> Indeed. Indeed. >> Neil, you've written this. What are you reading? >> I'm halfway through Dan Wang's book um Break Neck on China, which is really good. Um Chokepoint again. uh on the global economy and China's strangle hold in in certain parts of it. It's really really good too. Uh I'd recommend both of those books to to listeners again about the future of the global economy and and the relationship of the US and and and China within it. >> Okay. Excellent. Thank you. Although we must remember by the way that books aren't always right. I was telling I think John on podcast the other day about going through my bookshelves to deliver some books to the library of mistakes and there's quite a lot called things like the end of China and that kind of thing written in the early '90s. >> I do mean that. So, you never know. >> Maybe maybe version two, the the second edition of this will be the kind of unfratched age or something like that. >> Maybe. Who knows? Anyway, thank you so much for joining us today. That was absolutely fascinating. >> Thanks for having me. [Music] >> Thanks for listening to this week's Marin Talks Money. If you like our show, rate, review, and subscribe wherever you listen to podcasts. And keep sending questions or comments to memoney@ bloomberg.net. You can also follow me and John on Twitter or X. I'm @ marinus w and john is john_steepic. This episode was hosted by me, Marinet web. It was produced by some Moses and sound designed by Blake Maples, Kelly Garry, and Aaron Caspers. Special thanks of course to Neil Shearing.