By Mike Larson
Mike Ryan, vice chairman of UBS Global Wealth Management, discusses the four powerful forces impacting the economy and the markets – and how investors should adapt to their growing influences.
Transcript
Larson: Hi there. I’m Mike Larson, editor-in-chief at Money Show, and I’m coming to you from the MoneyShow Money Masters Symposium in Las Vegas. Today, I have some time to speak with Mike Ryan, Vice Chairman at UBS Global Wealth Management. Mike, welcome to the show.
Ryan: Thanks, Mike. Great to be here.
Larson: A lot of people loved what you had to say here. Great presentation. So, thank you for that. Could you – briefly for people who weren’t able to watch you live – talk about the four main points that you think are driving this market and economic environment?
Ryan: So, the way I view this is that every secular cycle has many different trends or drivers, right? There’s almost an infinite amount of things you can focus on. But I think there are four that are really consequential that we need to think about.
The first is what I define as geopolitical fracturing. And this is the notion that we lived through this period where, at the end of the Cold War, we saw sort of what I’ll say was the coming together of the world.
Barriers to trade fell. You saw the divide between free market and authoritarian governments fall. You saw increasing multilateral cooperation. And it really was an extraordinary period defined by incredible wealth being created. Poverty rates plummeted to historic lows. You had fewer fatalities in conflict than any time in U.S. history. Trade expanded exponentially.
And importantly, you also saw the embrace of Western values becoming global norms. That meant the democratic process became the norm. The problem is, I think that’s ended now. And we have now entered this much more fractious geopolitical environment. And therefore it means now that the world is becoming a more contentious place. There are competitors emerging to the U.S.
There are alternative views of how the world order should work. And I think what you’re going to see now is a much more frictioned world, where cooperation is going to be harder to come by. New alliances will form. There will be trade relationships that will evolve. It’ll become narrower and more focused geographically. And then lastly, I think what you also see is new threats or adversaries will emerge that will challenge, especially, places like the United States.
So, that’s the first one. The second one is what I call social factioning. And I have to sometimes explain that factioning is literally people separating into factions. You think about it, for most of our lives, or at least my life, we thought of ourselves, our identity was born by being Americans. The institutions we had reinforced that, whether it was educational institutions, government itself, religious entities… they sort of reinforced our identity.
What you’ve seen is the faith or the confidence in those institutions has declined. And what you’re seeing is a polarization, and I’d say almost an alienation across society. So, we’re seeing not only the frictions across borders that happens in geopolitics, but within borders from a social dimension where you’re seeing identity politics. People are separating into camps of increased tribalism. And it’s leading then to this split and this continued dividing within countries.
A third element is what I call economic calcification. Look, the world has always been an unequal place. There has always been disparities of wealth. There have been “haves” and “have nots.” That has existed since time immemorial. I suspect we’re not going to cure that, to solve that in our lifetime.
However, one of the things we’ve always had is economic mobility. Where you started wasn’t where you ended. I use the example of myself. My father was a construction worker. I became chief investment officer and vice chairman at UBS. So, my outcome, or where my destination was, wasn’t defined by where I began.
I think what you see now is this calcification. It means that there’s less of that economic mobility. There’s a lot of predetermination of where you start is where you end. It means we’re seeing almost permanently, perpetually entrenched underclasses, and I think that breeds social resentment.
The last dynamic is the one that I think we’ve heard most about more recently and that’s this notion of technological transformation, or what I call it technology factoring. And it’s most apparent in what we’ve seen is this absolute explosion in AI and machine learning. But it’s not limited to that. It’s also synthetic biology and quantum computing. This is going to be a truly transformational application of technology that will yield exponential rates of change.
We are linear thinkers, Mike. We tend to think of things happening incrementally. This will be change that will be driven exponentially, and it will be incredibly disruptive, from political, geopolitical, macroeconomic, commercial, and social dimensions. It will create enormous opportunities but also create some consequences.
I think we’re only at the beginning of this process, and I don’t think we have a grasp yet on exactly how profound this change will be. But we better get a grasp on it and get an understanding of it because it’s going to have such a huge impact, especially in investment markets.
Larson: I know with your last point there, first, I found it really interesting. You had mentioned that none of us really understand where this thing is going, and it can go down this very positive track or a negative track, and we just have to try and ride it as best as possible, right?
Ryan: Well, I’ll use an example about how we think something will play out. And I think it’s a great example – the internal combustion engine. So, when the internal combustion engine was first developed, the view was that this would be a supplemental source of power, fixed-site power. That this would be sort of a way of generating power.
When it was first originated, the architects of it never envisioned this being a form of locomotion. But think about the internal combustion engine now, and it has become such a profound game changer. So, its application, its primary application, was not envisioned when the technology was first developed. We have to think of similar pathways for AI and machine learning.
We may think we know how it’ll go out. But the way it will progress and the way it will evolve will be very different from our original conception of it.
Larson: Absolutely. We’re here at an investment conference. You talked about some of the implications from a strategic level or an asset allocation level. But I think one of the interesting things you talked about was that maybe there would be a little bit more of a demand for safety? And that things like defense are going to prosper or do better in this environment, yes?
Ryan: First of all, when you have more geopolitical friction and you have this increasingly polarized world, it means there’s a higher risk of conflict. There’s certainly a higher risk of disruption. When you have more competing interests, when you are kind of moving away from what we consider to be the unipolar world to a more multipolar, more complex world, there are different agendas, different priorities.
Therefore, that could lead to greater, as I said before, friction that results in conflict. So, you have to understand that there will be more potential hotspots around the world from a geopolitical standpoint and you have to prepare for that. A couple ways of doing that is by making sure you have safe haven assets, more balanced portfolios. Fixed income will play a prominent role going forward.
You can’t predict where geopolitics will play out – it’s impossible to forecast. But you have to prepare for it by having more balanced portfolios that include safe haven assets.
Larson: One of the things you had mentioned was “national champions,” companies that in this multipolar world are going to have more government support in some industries or some locations. Can you expand on that point a little bit?
Ryan: So, if you think about this area, what we lived through from, let’s say, 1989 through 2015, this was the era of globalization. This was where the the barriers to trade collapsed, and where capital and goods and services flowed across borders, just as ideas did. It really was the the domain of multinationals and what I call the global power brands.
When there’s less friction globally, people gravitate to the things that interest them the most or have the most appeal. When you have this increased friction, suddenly you become more focused on national brand. You focus more on, okay, what’s in our borders? You become a little more, I won’t use the word xenophobic, but I will say you become a little more domestically focused in terms of your priorities, and therefore you promote national brands.
So, I think these national champions, both through policy and through preference of consumers, are going to play an increasingly important role in the in the world we see, this more fractious geopolitical world.
Larson: Understood. I guess in the last few minutes that we have left, any parting advice? As we’re recording this, we’ve had more geopolitical issues. We’re had questions about what the Fed’s going to do and what it means for the economy. Any final thoughts on that?
Ryan: Look, I mentioned those four trends. And yes, there is a whole host of other things that are impacting markets, one of which you just sort of alluded to, and that’s policy. We went through an era where policy played such a dominant role – in the aftermath both of the financial crisis and Covid. I think the biggest challenge and the process we have to go through now is, how does the world readjust as policy becomes less prominent? As it comes to dominate outcomes less so? And how do we do it, because we became so dependent upon it?
I think obviously now the Fed is beginning the process of, as we believe in September, pivoting and cutting rates – but after an extensive tightening cycle. And then as fiscal policy becomes less supportive because the stimulus packages are all worn off, we have to understand now that policy is in a dynamic where it’s no longer going to be uniformly and consistently positive for economic growth and financial markets.
Larson: Excellent. Well, Mike, thank you again for taking some time out here.
Ryan: Thanks, Mike.
Originally published on MoneyShow.com
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