How a Hyper-Flat World Could Transform the Global Economy

Yesterday, we dove into the economics of Brexit…and the impact that it could have on New Zealand’s seat in the world of trade…

(If you haven’t seen it already, check it out here.)

But we realised we may have put the cart before the horse…

Globalisation is a much bigger theme than Brexit or any free-trade agreement. It’s a worldwide phenomenon that has changed the lives of nearly every person on Earth.

And up until recently, it’s been growing…but a recent article by Patrick Watson of Mauldin Economics suggests an interesting counter-idea — that globalisation is dying.

We’ll explore that…and how it’s going to affect Kiwis…in a moment.

But, first, two quick updates worth mentioning…

Firstly, on Wednesday, we summarised the ongoing investigation into now-liquidated CBL Insurance. It involved a potential money-laundering scheme through Samoa, some fishy decisions by the RBNZ, and a gold mine in Peru called El Toro.

Yesterday, National Business Review’s Tim Hunter revealed some more juicy info on the mystery of El Toro…the alleged drug-ring and money-laundering façade hidden away in the Andes mountains.

He found, among other damning evidence, that El Toro’s documented $600,000 dividend paid to CBL never arrived.

It vanished in transit…and investigator Nathan Gedye is on the hunt…

If he finds the missing money, it could be the foundation of an international case that brings down one of the world’s most wanted drug lords, Fidel Sanchez Alayo.

And it all started with a little audit by the RBNZ here in New Zealand…

We’ll keep you updated.

The other interesting update comes from Quinovic Property Management. They operate New Zealand’s largest property management company, managing over 7,000 properties.

When the government banned letting fees (Which comes into effect in about a month), Quinovic realised that a big chunk of their revenue would disappear too.

So they did as we predicted. They made up a new fee in its place — the ‘New Tenancy Fee’.

Like a letting fee, this new fee will be charged to tenants, even though it’s the landlord who orders the service and reaps the benefit.

Even though it’s not exactly the most honourable way to conduct business, you see why they’d do it, don’t you?

They’re caught between a rock and a hard place. They can either charge landlords for the service and potentially lose customers…or they eliminate the fee altogether and lose out on a central revenue source.

The real problem is that the rental market here has been a property manager’s dream for the past few decades. It’s given them plenty of power to charge whatever fees they want…and now that they’ve become accustomed to the extra cash, it’s going to be hard to give it up.

Speaking of giving up the dream, let’s talk about globalisation.

In the past century, nearly every country in the world has seen an incredible increase in the standard of living, wages, and availability of affordable goods.

All due to the explosive trend of globalisation.

If you’re unfamiliar with the term, it means:

 ‘…A phenomenon driven by technology and the movement of ideas, people, and goods.

Klaus Schwab, Interest.co.nz

In other words, trading stuff internationally. It’s the reason you can buy moist towelettes made in France, cocoa powder produced in Colombia, and a Winston Peters bobblehead made in China. [openx slug=inpost]

It’s what economist Thomas Friedman details in his famous book, The World Is Flat.

He basically suggests that — because of the globalising power of the internet and inexpensive transportation — a toymaker in Shenzhen can easily compete with a toymaker in Auckland; or an IT worker in Wellington competes for work with an IT worker in Mumbai.

Everybody around the world is now on a level playing ground.

That’s globalisation.

Not to be confused with globalism…which is the ideology that supports a supranational global authority over all things trade. Think World Economic Forum…or the World Trade Organisation.

Right now, we’re experiencing an odd moment in the history of globalisation. We’ve seen trade across borders become as easy and cheap as it’s ever been. There are hundreds of free-trade agreements around the world facilitating that trend…

But, suddenly, we’ve seen a resurgence of protectionism around the world.

Namely, the China-US dynamic.

And now, after several months of the squabble, it’s starting to take a toll…mainly on China.

The Wall Street Journal reports:

Global Economy Shows Strain as U.S. Steams Ahead

Signs are mounting of a slowdown in the global economy, indicating a deceleration in China and trade tensions are beginning to take a broader toll on much of the rest of the world.

It’s the consequence of a growing trend away from globalism and towards domestic independence…and self-sustenance.

Trump, for example, wants the US to manufacture its own goods instead of importing.

Walls going up instead of being torn down.

And it’s happening as we speak…but maybe not how Trump hoped.

Patrick Watson of Mauldin Economics has isolated a couple reasons why this trend is happening…and what it means for us.

Firstly, globalisation first thrived on finding cheap labour overseas. If you could build your iPhone in China for $25 instead of California for $1,300…why not? And it’s been great for the businesses that took advantage.

But the bittersweet consequence is that globalisation has caused the wages in these low-wage economies to rise dramatically. The factory workers in Longhua are making more, so it makes less sense to use them for labour.

And as these wage differentials narrow, it means that the successful dynamic of globalisation might be shifting towards re-localised production.

Secondly, but in the same vein, the rise of automation and robotics has also accelerated this trend.

If a robot can build iPhones better, faster and cheaper, then Apple is going to automate as much production as it can.

And a robot in Cupertino costs just the same as a robot in China, but with the added benefit of lower shipping costs.

So now the factories overseas have a much smaller advantage…if any.

The world has flattened even further.

It means that we’re at another turning point in the world of international business. And Watson believes it’s going to have significant impacts on your life and your investments. He says:

For instance, as manufacturing moves closer to consumers, there will be less need for those giant container ships and all the infrastructure to service them.

But localized manufacturing will still need raw materials, which may have to travel from afar. So cargo shipping won’t disappear completely.

Energy will have a similar change. Solar, wind, and other renewable sources will keep getting more cost effective – and they don’t need constant fuel deliveries.

That means fewer oil tankers crossing the sea and less capital tied up financing in-transit oil inventory… not to mention big geopolitical and defense-spending changes when OPEC countries no longer have an energy stranglehold on the rest of the world.

As factory automation improves and moves closer to consumers, we’ll increasingly make products on demand instead of keeping vast quantities on store shelves and in warehouses. That will affect real estate and construction.

Houses on demand? Wouldn’t that rock New Zealand right now…

What Patrick has just predicted is monumental. We’re talking about cheaper goods, better availability, less global conflict and less pollution. And the best part? He reckons we’re already well on our way towards this transformation.

But with these new developments will come an important moment for New Zealand to re-evaluate how it does business, with whom and what products…

Finding a niche in the hyper-flat world will be paramount to the continued prosperity of each and every Kiwi…

Best,

Taylor Kee
Editor, Money Morning New Zealand

PS: You can read Patrick Watson’s original article here. And, if you like what he has to say, feel free to check out more commentary on the Mauldin Economics website. It’s a site that I’ve had bookmarked for a long time…


Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.


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