Building a Robust Model: What You Can Gain from Understanding Globalization

 

The War to End All Wars?

On June 28th, 1914, Archduke Franz Ferdinand of the Austro-Hungarian Empire, was assassinated by a group of Yugoslavian separatists in Sarajevo.

Exactly one month later, the world’s costliest war began. World War 1, or the Great War, would end with more than 30 million military causalities. 

The cause? An incessant drive towards empire-building, an increase in nationalism, and a rapid increase in military technology.

States were looking inwards, towards their own national sovereignty at the cost of weaker nations, in a incessant grab for more resources, more production capabilities, and more wealth.   

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The Rise of Globalization

After the end of two crippling global wars, the world had a paradigm shift. Politics and economics revolved around a bipolar political system, with the Soviet Union and the Eastern Bloc on one side, and the United States and NATO on the other. 

The United States and her allies led efforts to revive international trade and investment under negotiated ground rules, which lead to a wave of globalization.

As these developed nation-states began working together, shouldering the burden of security and economics together, trade pacts were established alongside the WTO and the UN.

The result was a shift in politics and economics, as the west leaned heavily on soft-power and manufacturing and other menial industries slowly diverted away from leading economies towards developing nations. 

Globalization, the growing interdependence of the world’s economies and populations, has planted firm roots.

And the USA and her allies used this shift to their advantage during the post-WW2 rebuilding era across western Europe and Japan, setting up inter-connected economies from "ground zero."

Capitalism and a robust, symbiotic economy eventually lead the West to eventually triumph over the Eastern Bloc with the collapse of the Soviet Union in 1991, thanks in part to the vigor and support of capitalism and globalism.

This inter-reliance of economies is a theme continuing to happen across the world — from here in South East Asia, to Africa, to South America. Manufacturing jobs are transferring towards newly emerging economies across the globe, and being replaced by growing service industries in more "developed"  nations.

Essentially a macro-level healthy economy, but on a global scale.

But problems arise when not all the groups involved are on the same page, or receiving the same level of benefits.

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Local vs Global Populations

The majority of the world is held within their localized community, not directly benefiting from the international-focused community. 

However, there is a segment of the population that have been able to take advantage, or rather profit and benefit from, globalization.

And for our purposes this can be considered from the perspective of companies…which also tend to follow this same division of local vs global.

Domestic companies, which fit the local mold, and multi-national companies (or MNC’s). 

When you understand that there is a globalist initiative driven by countries, leaders, and companies, you realize that the parties that can take advantage are the ones that operate an international revenue component and therefore are already poised to capture any emerging benefits.

And on the other hand, when you discover that nations and leaders are focusing inwards, domestically in a protectionist fashion…you can make the connection that “local” companies are poised to benefit. 

It's all about understanding the context with the right perspective. 

Tools of a New War

Nations now need to juggle this internal vs external viewpoint. Essentially reaping the economic benefits of globalization while still supporting their own domestic interests.

The answer? Tools such as sanctions, tariffs, and stimulus.

Think about it this way — globalization is a central tenant to international economics and politics.

Let's take the US-China trade war as an example. It’s a representation of the ongoing “feud” between the local vs the international.

As is the case with globalized economies, trade is unevenly flowing towards China, and therefore benefiting one party over the other.

Like many others, the Trump Administration is looking inwards.

The rise of these protectionist politics represents a reaction to the rapid globalization that has occurred — the general populace, or local group, is trying to regain their power. 

The tools of destruction have evolved  to fit this new paradigm — economic warfare.

How You Can Benefit

I grew up in the “developed west”, while currently living and operating remotely out of South East Asia. My goal — to develop models and thought trains that help uncover and highlight good investment opportunities and share with you our readers.

When I looked at the history of Asia, I discovered that debt stimulus was necessary for the region's growth. 

But when considering the breadth and scope of the type of stimulus needed on an international level, one must look at how these companies are raising their capital. 

Specifically — are they raising capital from local commercial banks, or are they raising from equity markets?

Where is the source of the capital? Is it international? Or on a domestic level?

And how do these questions factor into globalization?

Well, as we develop our approach and models, we must account for both local and global factors, including the capital that is getting funneled towards these companies and political machinations.

Our CDI and ACD models focus on this very idea of globalization. Essentially, the idea of export discipline, where the government provides stimulus to companies to foster the export industry.

With CDI, we seek to capture two major factors —debt and investment both locally and internationally. Because debt and credit can be tracked irrespective to globalist perspectives, our ability to capture these trends are unaffected. 

In other words: when creating a theory of model, it must be durable, despite all other inputs and variables.

 
Peter Pham