In an interview at the Sage Advisory Perspectives on the Future 2015 conference in Austin, geopolitical strategist Peter Zeihan drew a pretty bleak picture of the future for investors — except American investors.
“There are three big things going on in the international system right now, all of which are pushing us toward a complete divorce from what we’re used to,” he told ThinkAdvisor on Monday.
One is that free trade is less important to the United States, he said.
“The United States created the free trade order back at the end of World War II, not in order to advance the economy but in order to buy an alliance with the Soviets, and it worked great. [However], for the United States, it was never an economic program, it was a security program,” he said.
“The Cold War ended 25 years ago. Now the system that we were willing to subsidize for 70 years is really no longer of use for the Americans, so it’s only a matter of time before the Americans have something happen either internationally or at home and they walk away from [the free trade agreement].”
The second influence is demographics. The baby boom following World War II happened around the world, and in fact was bigger in other countries than in the United States, according to Zeihan. But the second baby boom in the ‘80s and ‘90s (the more than 83 million millennials in the U.S outnumber the 75.4 million boomers, according to the Census Bureau) doesn’t have a corresponding cohort in other countries.
“Gen Y right now is producing consumption-led growth, and that’s one of the reasons why the U.S. economy is doing relatively well right now,” Zeihan said. “In 15 years, Gen Y will be investing, but that doesn’t happen anywhere else. So we’re in the process of segueing into a world where the United States is the world’s largest financial power [and the] largest consuming power, to one 15 years from now where we’re the only consuming power and the only financial power.”
Finally, a series of technological breakthroughs over the last year have given U.S. shale a break-even cost of about $45 a barrel, according to Zeihan, who said that cost will probably approach $30 a barrel by the end of next year, making it “cost competitive with everyone outside of the Persian Gulf.”
The demographic and shale situations make it possible for the United States to settle in for a retrenchment, according to Zeihan.
“You’ve got the economy that runs the global system but doesn’t use it; that has global consumption, global finance and can keep that all at home; and now is energy independent, all happening at the same time,” he said. “All it takes is a bad hair day and that’s the end of the world that we know – North America goes one way and the rest of the world goes the other, and that’s really bad for the rest of the world.”
The United States has a lot of choices, he said, noting that he would like to see the country remain engaged in the global economy.
“I would like to see us back up the Europeans against the Russians. I would like to see us refabricating the alliances that we have in Asia, but I don’t think any of that’s going to happen. The U.S. politically is set for a very serious retrenchment. We’re tired of the wars in the Middle East. We don’t trust the Chinese. We don’t trust the Russians, and we just don’t want to deal with it anymore.”
He noted that if the U.S. does adopt a retrenchment policy (and he believes it will), “it won’t be forever, but if it’s for 15 years, which is about how long our normal retrenchments take, that’s enough for the rest of the world to fall apart.”
The current stable of presidential nominees doesn’t offer much optimism, either. “You can watch the republican debates and see the contest is over who’s going to be more retrenching,” he said. “On the Democrats’ side, you’ve got Bernie Sanders, who is an old-fashioned socialist who thinks we should withdraw from global trade anyway, and Hillary Clinton, who wasn’t able to successfully push the negotiation of a single free-trade agreement when she was secretary of state.”
Zeihan acknowledged that he’s not a financial advisor, but suggested looking for opportunities in sectors that are consumption-based and led by demographics. “When you look at the United States, there’s very little in the American corporate space that doesn’t touch that,” he said. “Around the world you have to be much more careful.”
He said that there are “only a few countries that have liquid stock markets and are immune to currency risk and I think will do well in the future, and that really limits you to Southeast Asian countries, maybe to a certain degree the United Kingdom.”
Shale-adjacent industries are another area advisors might consider looking for opportunity, but Zeihan warned against investing directly in shale. “Shale production – wow, what a nightmare, there’s blood on the floor,” he said.
He noted that “50% of the natural gas that’s consumed in the United States is a waste product of oil production. It’s the highest number in the world by, like, a factor of four, so we have free natural gas. We nearly have free electricity, so I look at the sectors that are very electricity- and natural-gas-intensive. That’s everything from fire extinguishers to water for purification to petrochemicals to steel.”
Despite consumers’ interest in clean energy technology, Zeihan said it’s not yet a good investment. “Until we have a battery solution, you are putting your money behind a fad or a subsidy. It doesn’t mean there isn’t money to be made; there is. But if you can’t store it, it makes no economic sense except in very specific markets.”
Those markets include places where “peak demand and peak supply line up. That is not Minneapolis, because peak demand is February at night.”
For solar, that means Texas, Southern California, Arizona and Hawaii. For wind, the Bay Area is a “fantastic” place to look for opportunity. “You need to remember that transmission matters and storage matters. Those are two very expensive things, and we cannot yet generate a battery that is cost effective over a five-year period. Until we can, the only thing that’s pushing green tech outside of those specific markets is mood and regulation.”