Is investing in the global economy really that important?
Andrew Vonnegut, author of Inside the Global Economy: A Practical Guide, is an expert in global economics. He explains why global economics should matter to individual investors. Events like wars and market crashes affect every corner of the world. How can investors best prepare for the ripple effect to reach their portfolio?
Andrew gives practical advice on how to pick investments in an ever-changing global economy. If you ever wondered about why you should worry if a foreign currency falls, listen to this episode to learn about the interconnected global economy.
Is global investing a path to wealth?
Doug emphasizes the importance of diversification and explains what that means in the context of the global market. Refer to his free resource called Is Long-Term Global Investing Still a Path to Wealth?
To learn more about diversification, listen to The Goldstein on Gelt Show episode called How to Make Good Investment Choices, featuring Paul Merriman.
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Watch Why You Should Care About the Global Economy on YouTube.Read the Transcript
Interview with Andrew Vonnegut
Andrew Vonnegut teaches global economics at the University of California at Santa Barbara. He expounds on such economic concepts as “disruptions” and “discontinuities” and their impact on the global economy and long-term investors.
Concepts of Global Economy: Breaking Down the Terms
Douglas Goldstein: I am very excited to have on The Goldstein on Gelt Show Andrew Vonnegut, who is the author of Inside the Global Economy: A Practical Guide, a very new book that just came out. He also teaches global economics. One of the things Andrew talks about is the concept of disruptions in the global economy.
Some people think of disruptions as major issues, but I actually think there are a lot of subtleties to what goes on in the global economy. A lot of people wonder, “Why do we really need to care about this?” Andrew, maybe we could just start with that. Why are these disruptions in the global economy important to people who are just long-term investors?
Andrew Vonnegut: The simplest answer to that is because they happen. In fact, most of what happens in the global economy that’s of interest to any investor are types of disruptions, or continuities that are not just a simple follow-up from what happened the day, the week, or the month before.
Therefore, anybody who’s investing over the long term really should be concerned about major shifts that can happen. They shouldn’t be so concerned about fluctuations of the market.
Anybody in his or her 20s, 30s, or 40s who’s looking toward retirement is, in fact, investing over the long term. They should be more concerned about broad trends rather than what’s happening on a daily basis in the market.
Douglas Goldstein: Let’s break this down to some real definitions. What do you mean when you talk about shifts in the market that people should worry about?
Andrew Vonnegut: I’ll use two terms that are in my book. One is “discontinuities,” which are things that we refer to also as black-swan events. They’re just crazy things that come out of nowhere and just kind of smack you on your portfolio.
By definition, these are the unknowable unknowns, and it’s almost impossible to try and figure out what they are.
Douglas Goldstein: Would these be things like war or a real-estate crash?
Andrew Vonnegut: These would be wars or a real-estate crash that the large part of the market certainly does not anticipate or see. In any crash, you always find out about people who had figured it out beforehand, but the unfortunate reality of it is that most people basically don’t know.
These are major disruptions that you have a very difficult, if not impossible, time really understanding and also knowing when they’re going to happen. There are ways that you can try to bulletproof your portfolio to them, but those also affect your returns.
“Disruptions” is the other term that I use. Those are not necessarily black-swan events, but they can trigger black-swan events. Disruptions, which are longer-term trends that are sitting out there in the global economy, will drive large changes in the economy over time.
These are things that we know about, but we don’t know how they’re going to affect our portfolio. We do need to think about those and try to come up with ways to be defensive against them or possibly take advantage of them.
The main disruptions that I talk about are demographic trends—both the increase in global population and the slowing down of the population trends—but also ecological change, which includes climate change, the depletion of fisheries, the extinction of species, and other ecologically related events.
Then the other ones that I look at are the emerging markets—growth, inequality trends, and technological change. These are all very broad, and it’s very difficult to understand how these trends, which are actually occurring right now, are going to bump into the overall trends in the global economy. But it’s worth trying to understand those when you’re thinking about a 20-, 30-, 40-year timeframe.
Douglas Goldstein: The biggest trend that I think has really changed things would be the Internet because business has so radically changed as a result. I would think it’s fair to say that business looks different today from how it looked 30 years ago.
But are there other such major changes? Even things like self-driving cars, which really could be a game changer, are they going to fundamentally change what investing is all about like the Internet did?
Andrew Vonnegut: There are a couple. People talk about AI and robotics. Those are two areas that are definitely worth looking at. I think the world can look very different in 20 or 30 years as a result of these technologies, in the same way that it looks different now than it did 30 years ago.
People blame trade transfer, for example, for the loss of manufacturing jobs. But, in fact, about 80% of all the loss in manufacturing jobs has come about through technology, and if anything, that is accelerating.
It’s not just how these technologies play into manufacturing jobs but how the loss of those jobs, and the creation of other jobs, affects politics, which then affects economics and global events.
Technological Change and Its Effects on Manufacturing Jobs
Douglas Goldstein: Andrew, I want to dig into something you’re talking about. That is, this loss of manufacturing jobs because of technology, and which really could be a major disruption in the world.
I kind of feel that that sort of change is something that happens over time, right? For example, in the United States over 100 years ago, probably 90% to 95% of all work done was agricultural. Now it’s probably only about 2% or 3%.
The market has been able to absorb these changes without really getting a lot of politics involved. Do you think it’s going to be possible for the markets to be able to develop a new place for people who are losing their current jobs as a result of technology, such as artificial intelligence and robotics? Or is this just the end of work as we know it?
Andrew Vonnegut: Well, there has been talk about how technological change is going to throw people out of work for centuries now. So far, it hasn’t happened. In fact, most likely it won’t happen to the degree that the most concerned people are worried about.
However, what does seem to be happening is that the rate of change is accelerating. The previous changes from job type to job type happened over generations or half generations. People’s ability to not only adjust their work but also their portfolios to changing technological conditions is going to accelerate. So we have to be a little bit more on our toes.
I don’t think we’re heading to that sort of nightmare where everybody is going to be out of work. But certainly the nature of work is going to be changing, and the nature of our portfolios may need to change as well.
Douglas Goldstein: As we’re wrapping up, let’s bring the conversation now to something a little practical, to see if we can give people some ideas of what they should be thinking about when they are investing. Given the types of disruptions and discontinuities that we are seeing already, and that will probably accelerate, as you’re saying, what should someone who wants to develop a long-term portfolio be thinking?
Disruption and Your Long-Term Portfolio
Andrew Vonnegut: Most people focus on trying to understand what the technology is going to be in the future and trying to make bets on those technologies. Certainly, conversations are full of stories of people who bet early on Google or one of the other main companies.
But one of the best strategies for investing over the long term is to try to be a little bit more defensive about it. Instead of trying to focus on who the winners are—and possibly investing a lot of money in a bunch of stocks that are bound to be delisted—try to figure out who’s positioned to survive rather than just thrive.
Anybody who’s looking at a 20-, 30-, or 40-year timeframe for their investments, again, shouldn’t be trying to find out where the hot stock next year is going to be, but rather, how to survive over the next 10 or 20 years.
That long-term capital accumulation—and not getting blindsided by a new technology—is more important than trying to identify what that new technology is.
Douglas Goldstein: If someone had thought about that and used that model, say, 30 years ago, what kind of companies would he have bought, right? He would have bought medical care companies or pharmaceuticals or beverages. Is that the space? Because everyone always seems to drink, although that also seems to be changing.
Andrew Vonnegut: Yes. I think 20 or 30 years ago, as the Internet was taking off, it’s as hard to forecast then as it is now. But I’d certainly be looking at not getting into companies that are going to be further affected by virtualization and AI.
For example, retail was one of those great calls that was going to get decimated by the Internet, and it finally did. The timeframe on those can be difficult to forecast, but if you’re looking at a 10- or 20-year timeframe, you probably don’t want to be getting into traditional retail, for example.
A big part of that challenge is trying to figure out what those losing industries might be.
Douglas Goldstein: Right. And look at the ones that people will continue to need all the time. That’s a smart way to invest at any point in history and is, certainly, for the core portfolio. That’s the way that people should really focus.
Then for the satellite portfolio, where they’re taking more risk and looking to swing for the bleachers, see if there’s a technology you like and you want to invest in, with money that you realize is much more high risk. That might be a place to go.
Follow Andrew Vonnegut
Andrew, this has really been fascinating, but unfortunately, we’re just about out of time. Tell me, in the last few seconds, how can people follow you?
Andrew Vonnegut: I have a website. It’s wolandia.com, named after my favorite demon from one of my favorite books, The Master and Margarita. A lot of the stuff that I write, Doug, is about trying to avoid the kinds of risks that could potentially come up in the future rather than trying to identify the kinds of investments that’ll make you rich.
Douglas Goldstein: If we direct people there, they can find out about you and about your book as well?
Andrew Vonnegut: That’s right, and like any blog out there, it’s a work in progress. As soon as new ideas come up, I put them out there. And I am always looking for people to comment.
Douglas Goldstein: We will put a link to that at the show notes of today’s show at GoldsteinOnGelt.com. Andrew Vonnegut, thanks so much for taking the time.
Andrew Vonnegut: Thanks very much. It was a pleasure speaking with you.