If you’re traveling down the highway at 55 miles per hour and need to slam on the brakes, it will take your vehicle about six seconds and roughly 300 feet — a football field — to come to a stop.
A loaded supertanker needs about 15 minutes and anywhere from two to five miles to come to a stop.
The more mass something has, the harder it is to alter its course.
The same is true of the world’s dominant trends. They are so massive that you can’t stop them or alter their courses in an instant.
That said, Russia’s invasion of Ukraine appears to have accelerated the reversal of a megatrend that has shaped the world’s economy during the last three decades.
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It’s actually closer to 40 years since economist Theodore Levitt first used the term “globalization” in a 1983 Harvard Business Review article. He argued that changes in consumer behavior and technology would allow companies to sell the same products around the world.
He was right, and in the decades since, the world became one big marketplace. Globalization resulted in cheaper and more convenient goods and raw materials for the world. It also resulted in dangerous overdependence on other nations for critical goods.
Russia’s invasion of Ukraine has made more people aware that the decades-long globalization trend may now be reversing to one of “deglobalization,” or “localization.”
As companies and governments sever ties with Russia, they need to develop new supply lines within their own borders, or at least rely on more reliable foreign supplies and partners.
Eric Fry identified the beginnings of this trend nearly two years ago, well before the war in Ukraine. Most recently, BlackRock (NYSE:BLK) CEO Larry Fink stated it in very plain terms.
In his letter to shareholders, the head of the largest asset management company in the world ($10 trillion under management) wrote…
“In the early 1990s, as the world emerged from the Cold War, Russia was welcomed into the global financial system and given access to global capital markets. In time, Russia became interconnected with the world and deeply linked to Western Europe. The world benefited from a global peace dividend and the expansion of globalization. These were powerful trends that accelerated international trade, expanded global capital markets, increased economic growth, and helped to dramatically reduce poverty in nations around the world…
“But the Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades.”
Eric noticed deglobalization not because of a war but rather the Covid-19 pandemic. As supply chains around the world were disrupted, it became frighteningly clear how dependent the U.S. was on other nations for critical goods and materials — specifically China.
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As China opened up its economy to the rest of the world in the 1990s, its huge population went to work in factories where they produced goods far cheaper than they could be made in America.
And now, just look around your house and you’ll find probably hundreds of things with “Made In China” stamped on them. Clothing. Furniture. Toys. Electronics. You name it.
Even medicine. More than half of the medicine consumed in the U.S. comes from ingredients made in China. The U.S. also depends on China for rare-earth minerals crucial to military and high-tech equipment that are key parts of our lives.
To Eric, the pandemic laid bare the dangers of being overly dependent on China and other foreign supply chains. Everything from a war to a global health crisis to the changing whims of a nation’s leaders could choke off sources of critical goods and ingredients.
As a result, Eric foresaw a shift back to “Made in America” a year-and-a-half ago Or, as he said, at the very least “NOT Made in China.”
“‘Made in China’ is becoming both a political and supply-chain risk for numerous companies in the United States and elsewhere… [A] growing number of Western companies are moving to eliminate or reduce Chinese production from their supply chains, if they can do so responsibly and cost-effectively.
“A shift to ‘Made in America’ would be the optimal outcome for many of these companies, but the first order of business is simply to establish production that is ‘Not Made in China.’
“Prior to the Covid-19 pandemic, America’s growing reliance on China-based production of numerous goods seemed mildly galling, but convenient.
“Although we certainly didn’t like exporting manufacturing jobs overseas, we didn’t mind buying China-made goods for a fraction of what the U.S.-made equivalent would cost.
“Then came Covid-19.
“Suddenly, our conveniently low-priced supply of China-made goods seemed much less convenient. Costume jewelry, cat toys, and action figures from China continued to flood Walmart shelves, but many basic, and/or essential China-made products like facemasks, syringes and antibiotics were nowhere to be found.
“Suddenly, we Americans discovered that we had become overly reliant on China for various products. Because of this realization, ramping up U.S. production of key raw materials and products became ‘priority #1’ in boardrooms across America.
“The renewable energy sector is leading the movement… and could capture a ‘Made in America’ premium in the stock market.”
We’re used to technology driving many of today’s investing megatrends, but the return to American self-reliance looks to be a growing theme that will results in trillions of dollars of investment and will play out over a period of years, if not decades.
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As Eric noted, energy security is at the top of the list. Europe is facing this crisis right now, as it became highly dependent on Russia for energy resources.
Russia supplies about 40% of Europe’s natural gas. The U.S. is trying to help and announced it would send an extra 15 billion cubic meters of liquified natural gas (LNG) to ease dependence on Russia, but even then it will only amount to about 10% of what Russia supplies.
This is a big problem around the world. We’ll talk more in the next Smart Money about the war’s impact on oil production and exports around the world and the ripple effects for investors.
Regards,
Dave Gilbert
Editor, Smart Money
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