28 Oct

EPIQ Blog: Globalization & the Shrinking World

Technological advancements have given us greater capabilities in just about every human endeavor. Today we enjoy unprecedented levels of productivity and, consequently, society as a whole has never been healthier or wealthier. However, these benefits are not shared by all equally. This has been true in the past and will be true in the future. Those who do not prosper as trends shift will feel a sense of discontent that manifests in the protest of the day.

Three months ago financial markets were rocked by the unexpected results of the UK referendum on leaving the European Union, the same union that the Brits strongly supported forming a generation ago. An examination of history draws parallels to many events where a population expresses dissatisfaction with the status quo and moves in an opposite direction in an attempt to better the situation. Unfortunately, other issues, sometimes unexpected, often arise when attempting to fix the original problem. 

Until recently, the life that one generation experienced did not materially differ from the one that it followed. Those who learned a trade applied that skill in a similar fashion to those who came before. The tools may improve, but the process was similar. This held true until the 20th century when progress in just about every industry accelerated at exponential rates. In the past, societies were able to adapt to change because it took place at a measured pace. Today, transformation takes place at a blistering stride. There are careers in fields that did not exist even a few years ago. Millennials live, operate and communicate in a fashion that those from the Greatest Generation or Baby Boomers find hard to even comprehend. And work can be performed by just about anyone from anywhere in the world.

This rate of change provides great opportunities and also paves the way for new forms of conflict. The challenge to all societies today is how to best adapt in an ever-changing world.

The referendum in the UK last June to exit the European Union is one major sign of a society voting to slow down the trend of globalization. We suspect that it will be very difficult, if not impossible, to put the proverbial genie back in the bottle. However, this vote directly reflects a now widespread discontent and anxiety among those who do not see their lots in life improving.

While recently in London, we found, by speaking to locals, that the people of England are no more racist or even xenophobic than the rest of the world. Rather, they feel that their personal economic security is threatened from those seeking to move to the UK for a better life. Their insecurity is more likely due to innovation reducing the value of human capital. Nevertheless, by leaving the European Union, British Parliament will regain control of its borders and be able to restrict immigration. Sound familiar?

The implications for economic and investment strategy is more challenged than ever. On the surface, the winners, once again, appear to be the 'white collar' crowd as resources otherwise used to provide goods and services will be diverted to the lawyers and consultants who will negotiate and rewrite laws and treaties. At the end of the process we suspect that the relationship between the UK and the EU will look remarkably similar to what we have today. However, economic activity will be impacted by an increase in structural costs which on the margin will hinder growth. The big story globally, now unfolding, will be whether this protectionist posturing will spread to continental Europe, the US or beyond.

The issues exemplified by Brexit lead us to maintain our muted expectations for stocks, bonds and commodities. Capital markets in the developed world, such as the United States, appear fully valued, leaving little room for significant appreciation from current levels. The best opportunities continue to exist in less liquid, less followed investments where the chance for the mispricing of intrinsic value remains. This is an area where we seek to identify potential investments to augment core holdings.

EPIQ Happenings
As we approach the end of another the year, we would like to take this opportunity to express our heartfelt gratitude to all of our partners who have helped make EPIQ the special firm that it is today. We extend our best wishes and hope for enjoyment and meaning during this upcoming holiday season.

Thank you and we look forward to our next conversation.

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