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Research & Insights
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Is the increased frequency of geopolitical conflict is such a terrible thing for investors? In previous bouts of multipolarity, globalization remained at an elevated – if not apex – state, inflation was relatively tame, and technological innovation was at its highest level. We think that the 1970s are a poor analogy for growth and inflation. Rather, the world may enter the golden era reminiscent of 1870-1914 – a time when geopolitical conflict between great powers was at a high level, but also a time when nearly every great invention was discovered.
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In this report, we focus on inflation. We dare to bring up the 1970s and draw some parallels with that era. Namely, the Fed is again threatening to fight transitory inflation at the cost of scuttling the capex-led response that is necessary given the mounting supply-side problems facing the world. These supply issues are self-inflicted. The national security redundancy prerogative is optional. The world could simply let China maintain its current share of global manufacturing. Similarly, the focus on the green agenda and climate change mitigation is self-inflicted. Policymakers could simply let temperatures rise, damn the consequences. We do not see both prerogatives easing any time soon. And a Fed-induced recession – à la the 1973-1975 one – is not going to change the geopolitical imperatives underpinning both paradigm shifts. As such, is it that controversial to expect inflation to surprise to the upside given current long term inflation expectations? If expecting core CPI to average 3% over the next five years makes us “hyperinflationistas,” then we think the disinflationistas have been swinging at the windmills for so long they have gone mad.
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The Race to Zero – an epochal endeavor to embrace efficiency over scale – is a fulcrum paradigm that carves out policy space for both populism and multipolarity. It is driven by a confluence of technological innovation, low cost of capital, domestic populism, geopolitical rivalry, and concerns over climate change. As R&D spending on new technologies becomes a matter of national security again, the world will see a rise in productivity in the back end of the 2020s. The Race to Zero is the new Space Race.