5 mega-trends that will shape the next 10 years
In business strategy, we don’t try to predict the future through a crystal ball. But we can anticipate the future by studying the past.
In his book, Principles for Coping with the Changing World Order, Ray Dalio points out that long-term debt/equity cycles last 50 to 100 years. He said that “a lot of money and credit 90 years ago drove up the prices of financial assets, which widened the wealth gap and led to an era of populism and conflict. We are now seeing the same forces at play in the post-2008 era.”
The next decade will likely be shaped by high public debt, transformative technologies, and conflict between haves and have-nots. Consider the facts already highlighted as early indicators of the change to come:
The new world order promotes two world economies
China and the United States are embroiled in technological, geopolitical, economic and military competition. In almost every way, the influence of the United States on the world order is diminishing in direct proportion to the rise of China.
Military experts point out that the United States still holds a global military advantage. But the United States has not been dominant in the wars fought in Asia, such as in Korea, Vietnam and Afghanistan. It is highly likely that there will be military skirmishes in the years to come as China tests American resolve in Taiwan and the South China Sea.
This will then result in economic competition that will fall in similar lines. Given the position of the United States on tariffs, the world is divided into two economies, the east and the west.
Amplified by the pandemic and supply chain shocks, companies are looking for partners closer to home, managed by just-in-time and vertically integrated solutions. In the Americas, Mexico and South America will be the preferred sources of supply.
Redistribution of wealth
There are, as Dalio points out, two American economies divided between the poorest 60% and the richest 40% of American workers. Although the US government has provided incentives to those in need, the pandemic has only amplified income inequality. The Federal Reserve’s actions to boost liquidity have disproportionately benefited investors in public markets. The US stock market tracks the size of the Federal Reserve’s balance sheet:
Fed Balance Sheet vs. S&P 500
Source: Current Market Assessments
Much of the nationalism that has defined European and American politics over the past six or seven years is a function of shifts in wealth and power. Just as there is an economic cycle, there is also a “disorder cycle”. In the United States, there is a level of disorder not seen since the end of the Vietnam War. It has manifested itself in the form of protests, crimes, attacks on the US Capitol, and vaccine controversies.
Part of the cycle of disorder will be the old versus the young and the rich versus the poor. Calls for higher tax rates for the wealthiest Americans are sure to continue as civil unrest grows only greater.
The end of an economic cycle
Throughout history, central banks have stimulated struggling economies by lowering interest rates and providing liquidity. They then reverse course once inflation becomes evident. Economic cycles are directly linked to monetary policy cycles.
By 2026, national debt is expected to reach $38 trillion. In about 10 years, the United States will reach a tipping point, where annual tax revenues will roughly equal entitlements (such as Medicare and Social Security) and interest payments increasing. All other government spending such as military spending, homeland security, the Department of Energy, and the Department of Education will not be funded without increasing deficits. Undoubtedly, the bonds sold by the US government in the future will be at a higher rate, as the creditworthiness of the government will decline. The US government will be forced into a corner where it will have to print more money, leading to dollar devaluation and higher inflation.
The war for AI supremacy
Digital technologies will soon be the hub of advanced analytics that will increase economic value, agility and speed. According to McKinsey, AI will generate $13 trillion in economic output by 2030, increasing global GDP by around 1.2% per year.
AI will become a mainstream technology, facilitating everything from energy grids, smart cities, autonomous driving, disease detection and diagnosis to genomic protocols. Google, Amazon and others are squabbling over who can deliver AI as a service en masse.
Perhaps the most nebulous consequence of AI will be a change in the world order. Military Experts point to China’s gains in AI research and the training of graduate engineers as a threat, but suggest that current military spending on AI is roughly equal. AI will be at the center of the US-China conflict. And the advantage of AI will bring economic and military supremacy.
Changes in American demographics
The United States is experiencing a significant demographic shift from baby boomers to millennials. Along with this shift comes a fundamental divide between older Americans who tend to be more affluent and conservative, and younger Americans who tend to be more liberal.
US voter by age
Source: Center for American Progress
Every year between now and 2036, the electorate will get younger and tilt control towards the candidates they prefer. If recent history is any indicator, they will support candidates who support higher social spending.
These facts offer a scenario where the United States will be in a less dominant position in terms of technological, economic and military prowess. China will pressure the United States, and rising US debt will limit the government’s ability to manipulate the economy with lower interest rates.
Business owners and investors will need to recalibrate their expectations and thinking. Talk to your advisor about inflation-resistant investments that are safe havens. If you run a business, look for ways to reduce risk, such as currency hedging and a tighter supply chain that you control.
Beware of upcoming changes.