“Why the West Rules for Now” — and How to Profit When It No Longer Will

Investment Ideas —

 

iShares MSCI Pacific ex-Japan Index Fund (EPP)
iShares S&P Global Technology (IXN)
Claymore China Technology ETF (CQQQ)
Global X China Technology ETF (CHIB)

I’ve just come back from a long weekend at my hedge fund guru friend Gunther’s mansion overlooking the Mediterranean on Spain’s Costa del Sol. From this locale, he runs one of the most successful hedge funds on the planet that you never heard of. Gunther is a smart and driven guy, and he is as obsessed with the global financial markets as he was with his earlier athletic career at Harvard. But after a weekend of endless debates on the impact of today’s U.S. elections and the Fed’s latest bout of quantitative easing on global financial markets, I was ready to transcend the day-to-day minutia of the markets for a longer perspective.

That’s exactly what I got when I came back to London, as I set off to meet with Stanford’s Ian Morris for a discussion of his new book, “Why the West Rules—For Now: The Patterns of History and What They Reveal About the Future.” Much like Yale’s Paul Kennedy did in “The Rise and Fall of the Great Powers,” published in 1987, Morris tries to make sense of our rapidly changing world by recognizing broad historical patterns that explain the rise and fall of civilizations the best. By popular — and no doubt the publisher’s demands — Morris also takes a stab at predicting the future.

Although Morris isn’t about next week’s top stock pick, his insights can provide you with a valuable perspective, taking you above the fray of the over-communicated financial media.

A Quick Overview of Past and Future

Morris traces human history from about 50,000 years ago, through the modern era’s rise of Western Europe, United States and Asia. Morris’ overarching argument is that geography — “maps not chaps” or alternatively, “latitude, not attitude” — is what matters most. One hundred years ago, it was the European Colossus that bestrode the world. For the next hundred years, it was the United States that took the mantle from Europe. But the West’s dominance of the past 200 years neither was inevitable nor is it destined to prevail forever. The world’s center of gravity is shifting eastward across the Pacific. And according to Morris’ Index of Social Development, Asia’s living standards will match those of the West by (exactly) 2103 — a precise date Morris shares with his tongue firmly in his cheek.

Morris traces human history from about 50,000 years ago, through the modern era’s rise of Western Europe, United States and Asia. Morris’ overarching argument is that geography — “maps not chaps” or alternatively, “latitude, not attitude” — is what matters most. One hundred years ago, it was the European Colossus that bestrode the world. For the next hundred years, it was the United States that took the mantle from Europe. But the West’s dominance of the past 200 years neither was inevitable nor is it destined to prevail forever. The world’s center of gravity is shifting eastward across the Pacific. And according to Morris’ Index of Social Development, Asia’s living standards will match those of the West by (exactly) 2103 — a precise date Morris shares with his tongue firmly in his cheek.

What about the future? Ensconced for the last 15 years in Silicon Valley, Morris has left behind his Stoke-on-Trent (England) based industrial roots and puts a decidedly technological spin on humanity’s future. Morris noted that the U.S. Defense Advanced Research Projects Agency (DARPA) — the folks that brought us the Internet 40 years ago — now are on the verge of putting the Internet in your head. Tiny robots injected into your blood stream can attack cancer cells. Genetic engineering will make designer babies as common as today’s test-tube counterparts. All this is a step toward the “singularity” of man and machine. The unified concerns of humanity eventually will make even the question posed as the title of the book, “Why the West Rules,” quaint and irrelevant. East and West become irrelevant concepts on our spinning blue dot.

Investments for the 21st Century?

Big-picture discussions like Morris’ would have my hedge fund manager friend Gunther impatiently muttering “Show me the money!”

Well, Morris is a serious classical scholar and historian. He is not an investment guru. But the investment advice you can cull from his insights is nonetheless important.

Between now and that fateful day in 2103 when Asia catches up with the West, invest in Asia — China, in particular — and technology.

Invest in the Future


 

Translating that into investment recommendations, you’d invest in the iShares MSCI Pacific ex-Japan Index Fund (EPP) and the iShares S&P Global Technology (IXN). If you want to combine both dominant themes, China AND technology, you’ve now got two (although illiquid) choices in the form of Claymore China Technology ETF (CQQQ) and Global X China Technology ETF (CHIB). And if Morris’ predictions of an integration of technology into our own life form through singularity are anywhere near on the mark, look for an Asian biotechnology exchange-traded fund to invest in during the coming years.

But it takes more than identifying big trends to make money in the markets. Even if Asia and technology are the places to be during the next two or three generations, fortunes both will be made and lost. As Morris points out, the United States went from being 50% the size of the U.K. economy in 1840 to twice its size by 1900. (Note how similar this is to current predictions about China versus the United States.) But that 60-year period also was punctuated by a nasty Civil War in the United States and more than its share of serious financial crises — including the first deep depression in the United States starting in 1873 that lasted for six long years. Only a few lucky holders of the “technology” stocks of the day — canals, railroads and steel — made any money over the period that the United States overtook the United Kingdom. Most canal and railroad stocks went the way of Internet sensation pets.com. The same will happen with investors piling blindly into Chinese small caps.

Making accurate predictions about the future is harder than it looks. In my generation, college students studied Japanese and later Russian. The idea of focusing on China, whose economy was the size of Taiwan’s in 1990, wasn’t even on the radar screens of most students. And just think how different the 21st century looks from popular depictions like “The Jetsons” (1962). George Jetson may have been flying around in space — but he wasn’t texting, surfing or trading stocks on his iPhone.

Morris is gracious enough to admit that anything that smacks of prediction in his book likely will be wrong. That intellectual modesty is well-placed. After all, it wasn’t that long ago that another Stanford professor, Paul Ehrlich, warned of the mass starvation of humans in the 1970s and 1980s due to overpopulation in his 1968 mega best-seller, “The Population Bomb.”

So go ahead and invest in Asia, China and technology. It’s a sure thing until 2103 — unless it isn’t…



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