Throwing The Baby (Globalization) Out With The Bath Water (Deflation)

At BCA Research, we do not travel along aimlessly with events. Rather, we fit geopolitical, economic, and market events into structural themes. Our job is to identify these themes and their investment relevance before they produce major "surprises" like the Brexit vote.

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The secular theme underpinning Brexit is that globalization has reached its apex and that the path of least resistance is towards less, not more, of it in the future. We introduced this theme in 2014, well before the explosion of anti-globalization rhetoric in the U.S. presidential elections and the collapse of support for EU membership in Britain.

What is the problem with globalization? In our 2014 report titled "The Apex Of Globalization - All Downhill From Here," we argued that globalization was under assault due to three dynamics: structural, cyclical, and geopolitical.

Chart 1

Globalization is a major supply-side shock and a massive deflationary force (Chart 1). Unlike technological supply-side shocks, however, it mainly impacts the global economy by increasing the supply of labor, driving down real wages across the developed world. Technology has played a role in stagnant wages as well, but it is easier, politically speaking, to blame free trade and faceless global elites than robots and Microsoft Office. As wages stagnated, costs of education, healthcare, childcare, and housing kept rising (Chart 2).

Chart 2

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