Driving back from lunch today, listened to this podcast interview of Ruchir Sharma here, global strategist for Morgan Stanley, manager of $20 billion of assets. Well-spoken, very clear point of view about the world economy after the 2007 crisis:
- It is a new normal of slower, and lower growth – in part driven by population slow down
- Loose monetary policy is creating a widening income inequality gap
- Increasing anti-government sentiment: people less happy with the status quo
Growth is slowing. Get used to it. According to Sharma, this is the weakest economic recovery in history. Currently, economic growth is 2.5% . .vs. 3.5% in the past. As another data point, he notes that in 2007, 60 countries were growing at 7% or more. . now only 8 or 9 countries are growing like that. Growth rates dropping everywhere.
He saw this coming. His first book called Breakout Nations (affiliate link) was about the over-hype of the BRIC (Brazil, Russia, India, China) countries. His current book Rise and Fall of Nations (affiliate link) details 10 metrics he uses to evaluate the growth potential of a country.
Gemba investing. Sharma goes on numerous “road trips” to emerging markets for 1 week out of a month to meet with companies and get a feel for life on the ground stating that “the locals are the first to know”. In this 2 min video, he notes that in the last 3 currency crises (Russia, Mexico, China), the locals were taking their money out first. The locals knew. For those who remember Mark Mobius (Franklin Templeton Funds) or Jim Rogers (commodities guru, author of Investment Biker (affiliate link)), it is the same type of hands-on emerging market due diligence that simultaneously sounds exciting and exhausting.
Too much loose money floating around. Sharma notes that after the crisis, governments understandably used monetary policy (i.e., printing more money, lowering reserve requirements) to pump liquidity into the global system to get it going again. The problem is that 8-10 years later, those bad habits are still around. You cannot control where that money goes, and bankers – a smart breed of people – will take that cheap money and do something with it. Yes, America is not the only country that needs to go on a fiscal diet.
Asset prices on the rise. It’s unprecedented that all asset classes are going up – stocks, bonds, house prices – at the same time. This is helping the rich (yeah! for some), but not helping out the bottom half of the class pyramid. Wages have been stagnant, asset prices help the rich, creating greater income inequality. This is driving the “populist revolt” as Sharma explains.
So what does this mean for us consultants?
- Be knowledgeable on in the economy and the drivers of economic growth (hint: population)
- Beware of the hype; when a country is highlighted on the cover of TIME, it’s usually a sign of a market top for that country
- Read and listen widely about places other than the country you are from
- Follow your curiosity; here are Sharma’s 10 indicators of a country’s growth prospects
- Tap into the research of investment banks and asset manager – they do great work
- Don’t write boring platitudes; do the research like Sharma, and develop a point of view; it’s refreshing to hear
- Do great work. . . Sharma was writing for a local paper in India, when Morgan Stanley identified his talent and recruited
- Gemba. Go to the place where the action is happening; develop your first-hand perspective.