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President Trump at the White House on Tuesday. (Mike Theiler/Pool/Epa-Efe)
Two years ago, at the World Economic Forum in Davos, Switzerland, it seemed inconceivable that Donald Trump would be elected president of the United States. One year ago, it seemed inconceivable that he would ever come to Davos in that role. This week, the worst nightmare of Davos Man is coming true. President Trump — the personification of all that the “globalists” fear and loathe — is coming to town.
No part of the world — perhaps not even Washington — misses former president Barack Obama more than Davos. Trump wants tighter controls on immigration, and he has only recently referred to African countries in scatological terms. He is openly protectionist and has repeatedly threatened to scrap free-trade agreements such as NAFTA. He has shown little respect for the European political elite that sets the tone at Davos, leaning on them to contribute more to NATO. Above all, the president has come to exemplify the Ugly American in European eyes.
Yet to imagine that Davos is all about liberal principles is to misunderstand it. There’s a reason Obama never showed up. There’s a reason Trump will not be pelted with Swiss rolls when he does.
The forum was founded in 1971 by a bespectacled Harvard-trained German academic named Klaus Schwab with the idea that a regular conference of international business leaders could realize his vision of “corporations as stakeholders in global society, together with government and civil society.” The result has been described as a name-dropper’s paradise, populated not only by the chief executives of multinationals and selected politicians, but also, as the New Yorker’s Nick Paumgarten described the sprawling scene, by “central bankers, industrial chiefs, hedge-fund titans, gloomy forecasters, astrophysicists, monks, rabbis, tech wizards, museum curators, university presidents, financial bloggers [and] virtuous heirs.”
Thanks to Schwab, Davos now truly deserves the name Thomas Mann once gave the mountain that towers above it: der Zauberberg, the Magic Mountain.
Those who mock the World Economic Forum — and there are many, most of whom would drop everything and rush there if they were ever invited — underestimate its power. Think only of Nelson Mandela’s 1992 speech in which he ditched one of the core commitments of the African National Congress’s Freedom Charter: the nationalization of South Africa’s key industries.
But what matters at Davos is not the speeches given by world leaders, much less the panels with worthy titles such as “Rethinking Climate Change and Work-Life Balance in the Sixth Industrial Revolution.” It is the meetings behind the scenes, in the well-guarded private rooms of the resort’s main hotels: meetings like the ones that changed Mandela’s mind on state ownership of the economy. The really interesting question is whether or not Trump and his entourage will be taking such meetings — and with whom.
The media will probably focus their coverage on handshakes and other body language with the other world leaders on this year’s Davos list. Will he and the French President Emmanuel Macron reenact the longest handshake in Franco-American diplomatic history? Will he do the opposite with German Chancellor Angela Merkel, whose hand he declined to shake last year? Will Indian Prime Minister Narendra Modi get some Trump time?
None of this will matter. The real issue is the message Trump chooses to communicate to a global business elite that has an embarrassing little secret they would rather not say too much about: They may hate his tweets and his politically incorrect rhetoric, but they have spent the past year loving his economic policy to bits. Deregulation plus corporate tax cuts have helped to drive the price of nearly every stock represented at Davos to record highs. Forget the public handshakes; it’s the private high-fives that will matter. As I prophesied two years ago: Trump was always going to come to Davos if he was elected president, in order to remind his fellow billionaires that, when all is said and done, he is really one of them.
The reason Obama never went to Davos is that, aside from raising campaign funds from them, he had little real use for businessmen. Trump, by contrast, is a businessman, whose network of business ties — not least to Russia — remains a focal point of an investigation that may yet determine the fate of his presidency.
That is not to say I expect him to turn up at Russian oligarch Oleg Deripaska’s legendary Davos party. But he would not be wholly out of place there: After all, Deripaska employed Paul Manafort before Trump did.
One of my favorite lines about Davos comes from JP Morgan boss Jamie Dimon: “Davos is where billionaires tell millionaires how the middle class feels.” The events of 2016 revealed that Trump knew a lot more than most members of his class about how the American middle — and working — class felt. For that reason, if no other, he can expect more than a cold shoulder from the globalists this week.
A little more than three years ago I made the worst investment decision of my entire life. It was October. “You know, Dad,” my then 15-year-old son said, “you really ought to buy some bitcoin.” Yes, that’s right, bitcoin: the newfangled “crypto-currency” based on some weird thing called blockchain technology, invented back in 2008 by a mysterious individual using the alias Satoshi Nakamoto.
Listen, son, said the omniscient historian of finance, that is no way to invest my hard-earned pounds, shillings and pence.
Son: Dad, what are shillings?
Me: Never mind. The point is that since ancient Mesopotamia, money has tended to be monopolised by states. That’s why the Queen’s head appears on the notes in my wallet and the coins in your pocket.
Son: Actually, I don’t bother with notes and coins these days, I can pay with my phone — look, I’ll show you . . .
Me: Trust me, the governments of the world are not about to let their monopolies on national currencies be undermined by a currency that’s already being used for nefarious purposes by criminals and money launderers.
Son: Yes, but . . .
Me: No buts — and no bits, for that matter — I’m not throwing real money down the virtual drain.
On October 7, 2014 — when something like that exchange took place — the dollar price of one bitcoin was $334. As I write, it is $15,150 (£11,323). Yes, you read that correctly. If I had listened to my son, I would have increased the dollar value of my investment by a factor of 45 — or, if you prefer, I’d have made a return on the investment of 4,436%.
The moral of the story is clear: when it comes to technology, pay heed to teenagers.
It’s never too late to recover from an investment blunder, of course. But now the terrible question arises: what if buying bitcoin now would make me the “greater fool” — the last man in, who gets left holding the bitcoin when the bubble bursts and the price plummets back to $334, if not $0?
That fear is not groundless. Financial history is full of examples of investment manias that at some point turned into panics and crashes. Like the five stages of grief (denial, anger, bargaining, depression and acceptance), there are five stages to most financial bubbles.
1 Displacement: a change in economic circumstances creates new and profitable opportunities. A new financial asset is born.
2 Euphoria: a feedback process sets in: expectations of rising profits lead to a rapid growth in the price of the new asset.
3 Mania: the prospect of easy money attracts first-time investors as well as swindlers eager to part them from their cash.
4 Distress: the insiders discern no future gains can possibly justify the now exorbitant prices and begin to take profits by selling.
5 Revulsion or discredit: as prices fall, the outsiders all stampede for the exits, causing the bubble to burst altogether.
Typically, in other words, the insiders make the money by selling at the 11th hour to the outsiders, otherwise known as suckers. Precisely this fear was what caused me to hold back when my prescient son, now 18, came to visit me in September this year. The price of bitcoin was $3,672 at that point. If I’d taken his advice and bought then, I’d still have quadrupled my money. Did I do it? Is the moon made of green cheese?
The analogy favoured by bitcoin sceptics is the mania for tulip bulbs that swept Holland between 1634 and 1637. Bitcoin is “worse than tulip bulbs”, said Jamie Dimon, JP Morgan’s chief executive, at a conference in September. “It’s a fraud,” he declared.
“Bitcoin is a sort of tulip,” observed European Central Bank vice-president Vitor Constancio at around the same time. “It’s . . . an instrument of speculation for those that want to bet on something that can go up and down 50% or 40% in a few days, but certainly not a currency.”
The Nobel laureate and vituperative New York Times columnist Paul Krugman has been taking bites at bitcoin since December 2013. “Can [it] actually work?” he asked then. “I have to say that I’m still deeply unconvinced.” Ten months later he dismissed “bitcoin fever” as the product of “libertarian anti-government fantasies”.
That should have been my signal to buy. After all, this was the same Krugman who in 1998 predicted that “the growth of the internet [would] slow drastically” as “most people have nothing to say to each other”.
“By 2005 or so,” Krugman famously predicted, “it will become clear that the internet’s impact on the economy has been no greater than the fax machine’s.”
Tulip mania is not the right analogy for understanding bitcoin, any more than the fax machine was the right analogy for understanding the internet. As the South Sea Bubble of 1719-21 revealed, financial innovations are often accompanied in their initial stages by bubbles; the inevitable bust doesn’t necessarily kill the innovation. The price of shares in the South Sea Company may have inflated and then collapsed, but that didn’t spell the end of tradable shares as financial instruments. On the contrary, shares went on to become the foundation of corporate finance.
Something similar, I now believe, will prove to be true of bitcoin and crypto-currencies in general. It’s not so much that blockchain-based coins and tokens will replace the fiat money we have grown accustomed to using since the demise of the gold standard. Rather, there are at least three other uses for the new financial technology that will persist even after this bubble bursts.
First, bitcoin has established itself as a kind of digital gold: a store of value for wealthy investors, especially those located in countries with weak rule of law and high political risk.
Second, “initial coin offerings” that raise money in bitcoin and another big crypto-currency, ethereum, have emerged as a quick and easy way to finance innovation — a digital alternative to issuing shares.
Third, because blockchains are a near-unhackable, cryptographic method for preserving data across a computer network, they can be used for a whole variety of transactions. In future the title deeds for property will take this form. Indeed, this is already happening in the republic of Georgia. Meanwhile, Estonia is planning to store its citizens’ medical records on blockchain.
At some point, no doubt, regulatory changes in the US will deflate the current bitcoin bubble. But they will not halt, much less undo, this financial revolution.
Think about it this way. The maximum number of bitcoins that can be created is 21m. The number of millionaires in the world, according to Credit Suisse, is 36m. Their total wealth is $128.7 trillion. If millionaires collectively decided to hold just 1% of their wealth as bitcoin, the price would be not $15,000 but north of $60,000. If they raised that to 5%, the right price for bitcoin would be above $300,000.
I am not saying this is certain to happen. I’m just saying my teenage son thinks it could.
Niall Ferguson’s new book is The Square and the Tower: Networks, Hierarchies and the Struggle for Global Power (Allen Lane)
The thing about which I have been most right in my career is the thing for which I have received the least credit. Beginning in June 2006, I wrote a series of articles and gave numerous speeches that predicted, with considerable precision, the global financial crisis.
I began in June 2006 by observing that interest rate increases by the Federal Reserve would sooner or later have an effect on heavily indebted American households. “Over the next two years,” I noted, “the monthly payments on about $600bn of mortgages taken out by borrowers in the so-called subprime market . . . will increase by as much as 50%.”
In November 2006 I was all but pelted with bread rolls at a Morgan Stanley conference for arguing that the developed world as a whole might end up in the same mess that Japan had been in since the 1990s, fending off deflation with monetary and fiscal expedients and stagnating in terms of growth. The Fed’s habit of intervening to prop up asset markets, I warned, had “encouraged speculative behaviour” and spread the dangerous belief that “everyone is too big to fail”.
Two months later, I found it “perfectly possible to imagine a liquidity crisis too big for the monetary authorities to handle alone . . . Governments would need to step in . . . Federal bailouts for the likes of Goldman Sachs may seem unimaginable to us now. But financial history reminds us that [such] events do happen. And, when they do, liquidity can ebb much more quickly than it previously flowed.”
By the autumn of 2007, it was becoming apparent to the professionals, if not to the public, that something was indeed amiss. But still people underestimated the danger. I argued that we confronted “a more toxic cocktail than many investors still want to believe”, and that the crisis would be global and not just confined to America.
In December 2007, I predicted a “great dying” of financial institutions as a “man-made disaster — the subprime mortgage crisis — works its way through the global financial system”. On August 7, 2008, more than a month before the bankruptcy of Lehman Brothers, I anticipated a “global tempest” that would swiftly make the term “credit crunch” an absurd understatement.
Looking back, I now realise I should have kept all of the above to myself, set up a hedge fund and short-sold everything in sight, beginning with US mortgage lenders. Instead, like the fool of an academic that I am, I wrote a book (The Ascent of Money) that was published just as my predictions were coming true.
I tell you all this only so that you will read attentively my current thoughts on the global economy. After all, there is a lot about the present time that is reminiscent of those pre-crisis days. Almost every asset class is up. In all but a handful of housing markets (notably Ireland), inflation-adjusted home prices are above where they were on the eve of the crisis. From peak to trough, US home prices plunged by a quarter between 2006 and 2012. They have now recovered all that and added some on top. New York condos are 19% above their pre-crisis high. And real estate isn’t the best performer of 2017.
Back on January 1, you would have done even better to invest in emerging market equities. Another winner for the year was the Fang tech companies: shares in Facebook, Amazon, Netflix and Google are up between 30% and 60%. And the best trade of all? Bitcoin, up by a factor of seven since the year began.
Altogether now: “Thanks, Fed!” For it was the Federal Reserve, with its bold policies of zero interest rates and “quantitative easing”, that saved the world from deflation and a second Great Depression.
Now consider the following four reasons to be nervous. First, the monetary policy party is drawing to a close. The Fed and now the Bank of England are raising rates. The combined assets of the big four central banks — the Fed, European Central Bank, Bank of Japan and Bank of England — will peak in December 2018, but the rate of expansion has already started to slow. Moreover, global credit growth in aggregate is slowing.
History shows that monetary tightening acts with long and variable lags. But it does act, often on stock markets.
Second, as the economist Charles Goodhart and others have argued, we are at a demographic inflection point. Globally, the ratio of workers to consumers has peaked. Between now and 2100, China’s working-age population is projected to shrink from 1bn to below 600m. Already many labour markets look tight, with unemployment rates and other measures of slack leading economists to expect a surge in wages and inflation. Countries such as Germany that think immigration will help matters will be disappointed as many newcomers lack the skills to be easily absorbed into a modern workforce. What is more, the rising dependency ratio as populations age doesn’t translate into higher saving but into higher consumption, especially on healthcare. Welfare safety nets have encouraged many retirees not to provide completely for the costs of a prolonged old age.
This leads to the conclusion that the end of the 35-year bond bull market is nigh. Bonds will sell off; long-term rates will rise. The question is whether inflation will increase as much or more. If not, then real (inflation-adjusted) interest rates will rise, with serious implications for highly indebted entities. The Bank for International Settlements recently published “early-warning indicators for stress in domestic banking systems”. Two big economies with flashing red lights are China and Canada.
Point three: regardless of monetary policy, a networked world — whose biggest companies are dedicated to reducing the cost of everything from shopping to searching to social networking — is a structurally deflationary world.
According to the World Bank, a bewildering range of occupations — from food processors to finance professionals — have a 50% or higher probability of being “computerised”, with technology entirely or largely replacing human workers. Already Waymo’s driverless cars are on the streets of Phoenix, Arizona. Last week, Elon Musk unveiled the spectacularly cool Tesla truck, which no doubt shares the self-driving features of Tesla cars. I have seen the future and it drives itself. Today’s drivers need to retrain as nurses.
Oh, and if you debtors were pinning your hopes for an inflation surprise on a new Middle Eastern crisis, as in 1973, 1979 and 1990, I have to disappoint you. According to the International Energy Agency, America is halfway through the biggest expansion in oil output by any country in history — an additional 8m barrels of oil a day between 2010 and 2025 — thanks to the ingenuity of shale oil drillers. Even without electric cars, we would avoid a serious oil shock even if Iran and Saudi Arabia went to war tomorrow.
No two financial crises are the same. The next one will not be like the last one. But there will be a next one and, as the monetary medication begins to be withdrawn, it draws nearer. This time, mark my words.
Niall Ferguson’s new book is The Square and the Tower: Networks, Hierarchies and the Struggle for Global Power (Allen Lane)