Investing in a World Where Capital is Politicizing

Morgan Housel from the Collaborative Fund wrote an incredibly thoughtprovoking piece connecting our current global geopolitical and economic environment to the long arc of history back to World War II. By showing how a remote (but impactful) event from generations ago continues to affect the world today in ways that are not obvious (at least to me), Morgan Housel highlights the importance of looking for those “big things” that will influence our world far into the future. He goes on to highlight three important forces that are likely to shape the decades to come: Demographics, wealth inequality, and narrowing information gaps. I found all of the arguments to be insightful.

I highly encourage you to read it.

The piece helped connect a number of dots that I had been thinking about recently. In particular, capital providers have been relatively unconstrained over the last 40 years and have benefited significantly from a favorable environment. And as Morgan Housel points out, the wealth that accrued to capital providers allowed them to influence (maybe even choose) the political/regulatory regime they operate in. We are now likely swinging back the other way with power flowing back to labor. Developed world labor, globally, has been disenfranchised and is now uniting against the power of capital providers.

Where things get interesting is that as power flows back to labor, labor will find that they are constrained geographically whereas Capital (with an uppercase C) is not constrained geographically. US labor (or UK or France or Italy, etc) may be able to push against Capital, but Capital can flee. Capital does not have to bear any consequences unless it chooses to bear it by not fleeing. Unfortunately, laborers around the world are de facto in competition with each other when it comes to trying to reap the benefits of Capital (either through encouraging investments or through redistributive policies like taxation) whereas Capital, globally, is singularly aligned with the goal of flowing into the most welcome borders.

To break this cycle, Labor will necessarily need to dictate where Capital can go. The most onerous way would be through capital controls, but increasingly capital is likely to be “dyed” by politics, simultaneously creating and limiting opportunities abroad.

I think should the global environment not improve for labor, the most logical outcome is that capital (with a lowercase C) will increasingly become politicized. In the past, all capital was roughly the same. It didn’t matter how or where the capital came from unless it was overtly corrupt/dirty. But in the future, not all capital will be the same. Capital will become increasingly intertwined with politics. One day, Capital might no longer choose the political environment it operates in, but rather the political environment may increasingly dictate what Capital can do. For example, I think we have started seeing this with Saudi Arabian money over the past year despite Saudi money being one of the largest funding sources for Silicon Valley. Historically, money is considered cleaned the moment it changes hands. Why should the receiver of money be tainted by the deeds of the money’s priors? Why should my money be tainted by the deeds of the person that gave it to me if my money was never involved?

But this is changing.

As I play around with these thoughts, it’s become clear to me that the world has already changed. China has already politicized their money. China invests in countries that support their strategic goals (Iran, North Korea, etc). China grants access to their economy as long as the money is aligned with their domestic goals. For example, a number of foreign companies that listed Hong Kong, Taiwan, and Macau as separate countries from China have suffered economically in China. While we can attribute this behavior simply to an authoritarian regime, I think its also interesting to consider that modern China has its roots in a labor movement called Communism.

With these thoughts in mind, I think I have come to a more nuanced view of the conclusion I drew in my post, Betting on Big:

Though I have only referred to capital as one concept above, there are really two types of capital – physical capital (machines) and financial capital. What’s interesting is that many labor-lite companies are also quite capital (machinery)-lite. I think western economies have been transitioning towards capital (machinery)-lite environment for a while, but the last 10 years appear to be the start of something new – a transition towards true capital-lite economy. The likes of Apple, Google, Facebook, etc not only do not require much labor or physical assets, they also don’t require much financial capital at all. Oases in the dessert. Something from nothing. And very large to boot.

What I think I mean is to bet on companies that need neither labor nor capital of any form. These are likely large, platform companies operating over the internet. Years ago, Capital was able to move around and arbitrage labor. Betting on capital-driven companies provided far more scalability than labor-intensive businesses. But capital is likely to come under pressure in the coming years as well. The last frontier then should be singularly aligning with human capital and platforms that are neither tied down by labor nor capital in any country.