New World Order - So What?We have seen over a number of years and particularly in the last couple of years some dramatic changes in the alignment of the world's power balance. The question as investors is the answer to the question - Does any of this matter?
At the best of times this is a tough question to answer so let's break it down a bit into smaller bite-sized chunks.
The GDP of the BRIC countries is now bigger than that of the G7 for the first time in history so the economic balance in the world has now shifted. What is also important here is that these countries are becoming more politically unified with the goal of destroying or minimizing the power of the G7 and particularly the US. Many are now using their own currencies to trade as opposed to using the US dollar as the medium of exchange. Many of these countries produce goods that are vital to the economy of the G7 and could significantly impact economic activity if they wished to do so.
Over the weekend we saw the impact of essentially a warming/alliance between oil producers in the Middle East with Russia and the cut in oil production and the resultant pop in oil prices today. What this also means is that countries like Saudi Arabia with its refinery deal with the Chinese and a possible detente with Iran is moving into the Chinese orbit and away from the G7, especially the US (this is not a good thing). This pop in oil prices is good news to investors in oil, especially if you did what I did today and take your profits. But this development will have other consequences that may not bring a smile to others.
This increase in oil prices will have an impact on inflation and by extension put increased pressure on the Fed and the European Central Bank to increase interest rates and thus raising the probability of a recession later this year. While I have been predicting a recession later this year, even higher interest rates resulting from higher energy prices increases the chances of an even deeper recession and possibly resulting in the recession coming sooner. Part of my decision today to take my profits on my short term investment in oil stocks was increase my cash position to be better positioned for a recession.
All that said, the key message here is that, increasingly, the economy of the Western World will be dependent on what others who are not our friends decide to do and thereby increases the risk for investing in Western based companies. In turn that means that as investors we will need to keep an even more diligent eye on international developments as they will increasingly become more important as time goes on.
As some have mentioned here, we are witnessing the decline of the American Empire in real time - as view of share. This decline will also have impacts for us investors and especially for those of you much younger than I am.
So what can you do about it?
Great question!
A couple of things..
1....take a hard look at your portfolio and assess which companies can be most impacted by this change in the world power structure and make changes to minimize this risk
2.... be open minded about what could happen and be willing to challenge conventional thinking since most likely that type of thinking will be outdated. This means looking at the companies that you own and saying to yourself -"That was a great investment but perhaps less so going forward".