Interregnum

Executive summary

We are in a period of rapid transition. The forces that have shaped our world since the Second World War are in decline, while the forces likely to shape our future are as yet unclear

Global disruption is intensifying and it's caused by more than technology

  • There is evidence that the post-war institutional framework is unravelling
  • Globalization is coming under increasing pressure, with tariffs and other forms of trade barriers returning to the foreign policy agenda
  • China is emerging at a time the US is retreating, and is actively creating an alternative institutional framework

Globalization is peaking3

Globalization is peaking

Underlying issues will make this regime shift more difficult

  • Debt has grown at an unsustainable pace since the mid-1970s, creating issues in terms of both debt sustainability and productivity
  • The demographic dividend brought about by the Baby Boomer generation is turning into a headwind. The working-age population is in almost universal decline in developed economies and this will weigh on long-term economic growth

This shift is already having consequences

  • Rising inequality and labour’s diminished share of productivity gains are leading to mounting social discontent and political divisiveness, bringing key issues such as globalization and immigration to the fore
  • Ultimately, we believe populists will tire of blaming globalization and immigration and will instead start to call for a return to demand-driven economic ideologies, such as Modern Monetary Theory (MMT)
  • We are in a phase of critical slowdown. Creative destruction, balance sheet debt saturation and worsening demographics appear to be preventing the economy from returning to the growth levels achieved prior to this period of disruption
  • Economic and social buffers are declining given surging debt levels, minimal scope for monetary easing, rising inequality and populist tensions

The roadmap for this interregnum

  • We have been in a state of artificial resilience for some time, which has been stabilized by ongoing government and central bank intervention.
  • Yet this resilience is being tested – we are moving closer to a tipping point into a new economic regime. For us the big question is whether this will be an inflationary or deflationary event.
  • In order for investors to position for this, we think there are three things to consider – certainty of outcome, tail risk insurance and asset selection

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