With oil hovering around $30 a barrel, commodities prices in free fall, and China continuing to confront a series of market-rattling growing pains, global equities have entered full correction mode. The commodities-based global economy that has developed over the past 20 plus years is collapsing, and that’s a great thing over the long run for America and investors.
Indeed, what we are seeing today could be the first phase of an eventual return to normality: A return to a time before China’s unsustainable economic surge, combined with its thirst for commodities, enormously distorted the prices of raw materials and energy resources, helping to prop up a host of troublesome regimes around the world, from Russia, to Saudi Arabia, to Venezuela while giving China outsize influence in world affairs.
Think about it this way: Who are some of the biggest immediate and long-term losers out of this collapse of global commodities prices?
• Vladimir Putin
• Repressive regimes across the Middle East and Africa.
• Shale oil companies using environmentally damaging processes like fracking.
• Commodities-focused hedge-fund investors
• Wall Street investment banks holding large bond issuances from commodity-based economies and companies
Does anyone feel sorry for these people? Hardly.
The collapse of the commodities-based economic model means that markets can once again more fully reward those who deserve it the most: The people and companies that, inspired by a unique vision, create innovative products and services that transform our everyday lives. We’re moving back to a global economic model that is more purely driven by skills, knowledge, innovation and technology, packaged under a transparent rule of law and supported by educated consumers.
At the same time, unstable nations and despots that owe their influence to the simple fact that they have access to large oil and commodity reserves will see their power considerably diminished.
A good illustration of this is a story that was a bit of an afterthought as markets raged in recent weeks. The U.S. recently delivered its first oil shipment to Europe in over 40 years, an important development, since Europe is almost totally reliant on Russia for energy sources. This dependence has tilted the balance of power in Russia’s favor, filling its coffers with oil money and fueling Putin’s increasingly aggressive posture, as evidenced by the bloodshed in Ukraine and the annexation of Crimea. If Europe has other energy options, Putin becomes marginalized, which is undoubtedly a positive development.
China’s slowdown, meanwhile, is also driving this potential return to normality. Make no mistake, the Chinese growth story is still intact, but it’s very clearly entering a new era, one characterized by lower, slower and more modest growth rates. Some of the reasons behind this are well-documented, from a struggle to transition from an export-based to a consumption-based economy, to real estate bubbles caused by rampant overbuilding.
Another, largely unnoticed factor has played a part as well. China has systematically sought to drive away its wealthiest citizens. This effort, ostensibly, flows from an anti-corruption crackdown aimed at reducing bribery and other forms of abuse of power. Whether such a crackdown is genuine or an excuse to further consolidate power at the government’s highest levels is an interesting question. Whatever the case, it has resulted in a huge, destabilizing capital flight out of China, with the rich leaving and finding homes in Europe or the U.S.
For capitalism to work effectively economic stratifications must exist. They give many segments of the population upward social mobility goals, and in the process, drive a greater level of innovation, productivity and hard work from the bottom up. By eliminating its super-rich, China might become a ‘fairer’ society, but it certainly won’t become a more productive one, which will continue to result in a drag on “one-trick pony” commodity-producing markets like Saudi Arabia, Venezuela, Brazil, India and Russia, among others, that rely on runaway Chinese economic growth.
The obvious winners under the new normal we are transitioning to will the Amazons, Apple, Netflix, Facebook and Googles of the world, entrepreneurial businesses that transform the way we consume goods and services across the board, and redefine how we live.
The biggest winner, however, will be the United States. Despite its flaws and deep political divisions, America is and will continue to be the premier destination for capital, consumption and game-changing technological innovations. Investors should consider taking advantage of this temporary period of market dislocation to re-align their portfolios to reflect this new reality.
Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki, an investment advisory with approximately $410 million in assets under advisement. Clients and employees may own positions in various companies mentioned in the article, but readers shouldn’t buy anything without doing their own research.
By Ross Gerber
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.
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