Customer Reviews

Our Brave New World

5 star:		(9)
4 star:		(0)
3 star:		(1)
2 star:		(0)
1 star:		(1)

 

 

This book shows once again that GaveKal is a fountain of original thinking. Unlike many financial advisory firms, they are not content to repackage popular thinking.

The most important attribute to note regarding this book is that it is for relatively sophisticated financial readers. This book is a counter-argument to a counter-argument. That is, if the main argument is that US equities are still on track for satisfactory performance (the view from mainstream retail investors), the counter-argument is that the history of bubbles (of which the NASDAQ in March 2000 is the most recent example) is very clear and that all end in the same way. "Our Brave New World" is a counter-argument to the counter-argument that asserts that this time truly is different and that we are not destined for a post-bubble bust. If you are not familiar with the thesis regarding the history of speculative bubbles or the thesis from the dollar-bear crowd, this book is of significantly less intellectual interest. On the other hand, if you have already read Marc Faber's "Tomorrow's Gold" or Richard Duncan's "Dollar Crisis", then this book is a perfect foil.

As I have the greatest respect for the intellectual creativity behind GaveKal, I would consider the following points not a critique, but rather an open letter to GaveKal regarding points that I feel are not resolved in this book and deserve clarification.

1) The continuing expansion of free trade is a critical element in the thesis. While you acknowledge recent protectionist measures, you see these as temporary blips on the radar rather than the emergence of a trend. Perhaps some research evidence is required here. Marc Faber, whom you quote more than once, offers sophisticated arguments why protectionism can rise.
2) Many of the financial data graphs date back only to 1960 or 1980. To some thinkers, this may represent as little as one "long wave" economic cycle. What does the inclusion of data back to 1900 do to muddle the main thesis if at all?
3) The assertion is made that housing is not currently in a bubble as evidenced by its lack of acceleration compared to zero-coupon bonds. This would seem to imply, without data or argument, that zero coupons are not in a bubble. Furthermore, you compare housing against GDP. What happens when it is compared against a proxy for Net Domestic Product?
4) A distinction is made between bubbles of productive and non-productive assets. However, only a few examples from history are placed into these categories. What about the examples of US equities in 1929 and 1971?
5) Regarding US asset prices, it is argued that US dollars should naturally flow towards US assets as they begin to appear incredibly cheap and that this will be supportive of US asset prices. However, as the recent failed acquisitions of Unocal and Noranda show, politics can trump economics, which returns to the assumption (hope?) of continued expansion of free trade.
6) The VIX is presented as evidence of reduced volatility of earnings. However, my understanding is that your thesis is a decade or multiple-decade trend while the collapse of the VIX is a recent two year trend. Has the trend really asserted itself so rapidly?
7) The reduction of tax revenue is cited as a reason for the eventual reduction of government. Since this is the same reason used to argue for the eventual rise of inflation, some elaboration may be required here.
8) Regarding the criteria for a deflationary bust, an argument can be made that the US is already satisfying at least three out of the five criteria listed. Perhaps elaboration is required here as well to explain why these are not so or are expected to be fleeting.

Please discount the five star rating-since i wrote the book, I am obviously biased!

I first want to thank Dave and Orson for their kind and generous reviews, and their complimentary words about our research. And now, to answer Orson's points:

1) On protectionism: it is very true that the entire "platform company" concept relies on free trade. Should protectionism carry the day, then obviously we would live in a very different world in which nearly everyone would be a loser. But who would be the bigger losers? The Asian or Eastern European manufacturers? Or the platform companies able to expand, or shrink, their balance sheets as business requires? Even in a protectionist world, it is likely that the platform company model will manage to thrive; granted, not as much as in a free trade world. But platform companies will still do OK. meanwhile, emerging market manufacturers, and western consumers/voters, will be the biggest losers.

2) Why does the data we use only go back to 1980 or 1960? For most data series, we do not have reliable History going back to the 1900s... so we need to use what we have. But even beyond that, we are not fussed about using data starting in 1980 for the whole premise to book is to show that, starting around the mid 1990s, something changed in the structure of our economies. Our starting point is, very immodestly, the end of Alfin Toffler's book called The Third Wave.

Alvin Toffler described three types of societies, based on the concept of 'waves' - where each wave pushes the older societies and cultures aside. The `First Wave' was the society that followed the agrarian revolution and replaced the first hunter-gatherer cultures. The `Second Wave' was based on industrial mass production, mass distribution, mass consumption, mass education, mass media, mass recreation, mass entertainment, and weapons of mass destruction. The `Third Wave' is the post-industrial society.

Today, all the above seems pretty evident. But what is quite impressive is that Toffler wrote Future Shock in 1970 and The Third Wave in 1980. What is depressing, however, is that economics has yet to adjust to the world of the third wave. Indeed, wherever you care to look, economists are talking about industrial production numbers, inventory levels, trade balances ... When all these measures, for third wave economies, are increasingly becoming irrelevant.

In a sense, economists today are the mirror image of the very first economists: the physiocrats. Back in the late XVIIIth century, the physiocrats (Quesnay, Dupont de Nemours ...) explained how value-added could only come from agriculture (you planted a seed, and got a plant). They were `first-wave' economists completely blind to the entire economic re-organisation of the industrial revolution taking off in front of their eyes. They could easily see that agriculture created value, but could not see that the value created by industry would dwarf that of agriculture.

Today, as the physiocrats before them, too many market participants are stuck in previous-wave thinking mode and miss the current social and economic revolution. As Toffler had predicted, successful companies no longer operate on the business models used a generation ago. Relationships between countries have evolved. Social structures are transforming themselves at a rapid pace.

In short, the world has changed. So shouldn't our way of analysing it evolve as well? Why should we shy away from exclaiming that `things are different this time'? And if so, is data from the early XXth century, second wave economies that relevant?

3) On Housing: Our assertion is more that housing is a very long dated asset and that, in places like the US or the UK, housing has behaved exactly like other very long dated assets, i.e.: a twenty year zero coupon. What we show in the book is that over the past twenty years, the returns on housing and the returns on a twenty year zero have been exactly the same! So, in essence, to be bearish on housing, one needs to be massively bearish on bonds. Which we are not...

4) When we focused on bubbles, we focused on assets that reached prices that they will likely NEVER see again (i.e.: tulips in holland, railways in Britain, land in tokyo...). Equities are a more specific case since, after a while (which can be a very long while: i.e.: 1929-1954 in the US), new highs are usually reached...

5) What if the US government prevents take-overs: granted. that would be very bad news. And note that the US$ weakend during the whole month of the Unocal fiasco.

6) I think we use the Vix as one of many examples of the slowdown in volatility. But yes: we believe that in recent years, this platform company phenomenon has really picked up its pace. After all, was it not surprising to see the Vix barely move higher when Refco went bust?

7) I am not sure I get this one- I don't think we argue for the eventual rise of inflation? Our argument there is that, as more companies adopt the platform model, they will base themselves in tax havens (i.e.: hedge funds, Electronic Arts, Tyco...). This means that income tax based systems will no longer be able to take their pound of flesh from either companies or high net worth individuals. Instead, tax revenue will have to be based on a) property, and b) sales taxes. Countries such as Hk are already thinking about making this switch...

8) Very true-cyclically, a period of deflationary bust might be in the cards. But the very long term trend of capitalism remains the deflationary boom!

Thanks for your input and taking the time to write a review-glad to hear you liked the book.

As a long-time reader of the work of GaveKal, I have found that their work has always stood out for its originality of thought and acuity of observation. This book is no exception and summarizes the thoughtful reflections of some of the brightest macroeconomists that I have encountered. I could not recommend their work more to anyone who has an interest in understanding the "tidal waves" in history and the financial markets as opposed to the day-to-day ripples.

GaveKal is the only investment research provider that I read daily to stay abreast of the most influential economic, capital markets and political developments impacting my (and my firm's) investments.

Brave New World is a terrific synthesis of the unique frameworks and concepts that the firm has developed over the past several years. For old GaveKal readers (like myself), the book ties everything together that we read on a daily, weekly and monthly basis into a tight package that we can reference in our daily work. For new Gavekal readers, the book is a terrific opportunity to get all the learnings from some of the best minds in the investment field in a short sitting (i'm jealous for that! It's taken me years to try to pull it all together!)

I highly recommend Brave New World to all readers, from professional to retail investors, from social scientists to the average interested reader of world developments. I can state from experience that GaveKal is the most widely read publication in our office from arbitrage traders to private equity investors to staff that simply use the research to guide their personal investing.

It's really quite stunning to go through the pages of a book 4 years after it was published and to see how incredibly wrong the authors were regarding the dynamics that propel the US and other debt-dependent nations. The book basically argues that trade imbalances can be financed perpetually by ever increasing asset prices in "developed" nations (which, to the Authors, are best embodied by Anglo Saxon, post-industrial states.) It argues that capitalism has entered a new era where stability is almost a certainty (the brave new world) and a deflationary boom is the likely steady state. In this regime, as theorized by the book, the wisest investment choices are real estate, financial instruments (especially local banks), "platform companies" (read flexible, outsourcing multinationals), and currency.

The arguments made in the book are sublime, constantly poking at the naysayers (like the Economist and the Financial Times who were mild critics of asset bubbles back in 2004-2005) and most generally the academic economic community as a whole who weren't willing to drink the kool-aid that was on offer here.

All in all, I would recommend reading the book because I think it captures the thinking of much of the money management community back then and helps to explain how certain markets failed miserably. It provides some historical perspective.

There are few books printed with such contrarian views and Our Brave New World is worth a read just to give the brain a work out on a very different line of reasoning.

I would not go so far as to say that the US deficit no longer matters, but Gavekal, along with a few other thinkers out there, raise a key concept that it is more important to focus on higher long term returns generated by key companies (the platform companies which produce nowhere and sell everywhere as opposed to the older MNCs which produce everywhere) driving the US and developed world economies.

If the Chinese economy wants to produce goods below or just about at their economic cost, then let them, because it will be developed countries that reap the quality of life improvements.

The real gains, from my perspective as a transport analyst, are generated in the supply chain. And the supply chain is made up of global organizations which increase the value of the goods as they head to their destinations, designed, packaged and distributed the way western consumers want the goods.

But this also begs the question how long this value creation imbalance can persist? Aren't Chinese and Asians some of the smartest people around? Isn't this stage of production a stepping stone somewhat modeled on Japan's industrialization? When will they catch on that the part of the industrial and capitalist process they have chosen to dominate doesn't provide the same returns as controlling the product further down the supply chain? Shouldn't this competitive advantage get whittled away over time? When?

Perhaps Gavekal can work on this topic next? Instead of telling us the current situation, please get on to the next book or project, and get on with the investigation of where to look next. Another method to use while conducting the search is to alternate between the macro top down approach, which Gavekal excel at, and the bottom up micro approach. Time to focus on Asia company analysis and identifying companies and organizations seeking to generate excess returns.

When it comes to economics, there are two kinds of books : the thick and heavy ones, boring as hell, who most usually repeat the same kind of stuff one of your teachers tried to pour onto your head - without success, needless to say. And there are small books whose authors have seen something new. Something so simple that no-one had dared to see it before. So simple that anyone, with a minimum amount of curiosity, will read it from head to toe... and much more: one will get it and remember it.

It is one of the most enlightening description of the new economics society we are entering into. The authors - who by the way are so good that they can afford to be really funny - are screening the information revolution, analyse what is changing, why the things are different indeed from ten years ago; the irruption of China (and tomorrow India, Brazil, Russia), the explosion of free trade... all of this have consequences: on our life, on our future, on our money.
Whether you are willing to learn more, you want to invest wisely, read it, and you'll never regret nor look back.
My only regret: this reading should be compulsory for every government and central bankers worldwide.

I keep coming across people who deplore that sad state of America, people who pine for the good old days when America was the industrial capital of the world. They might as well pine for sailing ships and the horse and buggy. They really need to read "Our Brave New World," a clear and concise explanation of how the new Knowledge Revolution works. It explains why so many of the old metrics no longer apply. There is a wonderful comparison between the accounting view and the economic view of an international transaction such as the design, manufacture and sale of a PC.

After reading this book, you might want to also read their follow-up, "The End Is Not Nigh"

You will know GaveKal's analysis is correct when China becomes the USA's most valued, outspoken and supportive ally. (I wrote this review before I had a chance to visit China on business so that observation was influenced by the sheer volume of trade that China does w/ America and hence naive). The reality on the ground is much more nuanced. While it is possible for Chinese and American business relationships to be cordial and mutually beneficial, the governments of both countries have calcified attitudes toward each other. Cf. "Marketing Dictatorship: Propaganda and Thought Work in Contemporary China" by Anne-Marie Brady. In it she summarizes the guidelines that the Chinese government uses to direct opinion, one of which is to "Demonize the United States." So even if the opening sentence never comes to pass (or takes a lot longer than I originally thought) that takes nothing away from the original thinking contained in Our Brave New World. You can hear GavKal in the thoughts and opinions of Tom Friedman, Fareed Zakaria, et al. Our Brave New World is short but dense so it's worth reading more than once.
And Louis-Vincent Gave's "Roadmap For Troubling Times" is great also...
Both represent original thinking backed up by solid on-the-ground research from GaveKal-Dragonomics, and both are highly recommended.

Gotta read it. This book is an eye opener..none of Bonner's dismal thinking here.