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At the recent BCA Investments conference in Toronto one of concerns for global investors was the perceived increase in geopolitical instability across the globe. The deteriorating relationships between nations can be traced back to the policies of their leaders, who are voted into power by the man on the street. One thing that has concerned populations worldwide has been economic inequality – both within and between nations. A session covering this topic was presented by Walter Schiedel, author of the book “The Great Leveler – Violence and the History of Inequality”.

Inequality has always been in the spotlight amongst Emerging Markets, but lately Developed Markets are also feeling the grumblings of discontent. Two of the most significant political and financial events of the last three years; Great Britain’s decision to leave the EU and the election of Donald Trump as US president – has in some form been ascribed to discontent resulting from an increase in inequality.

Economic inequality is a very enduring phenomenon, observed since the dawn of civilisation. Historians note that, with both the Greek and Roman empires, inequality increased the longer the empire endured. In other words, even though these civilisations thrived overall, the rich got richer and richer relative to the poor.

How can inequality be so persistent throughout time? Mostly through property rights and wealth transferred from generation to generation.

Source : Walter Schiedel (30 September 2018)

The chart above shows the inequality cycles in Europe over the very long run. Clearly there have been some factors at play that prevented an inequality to increase in a straight line.

Historically, some of the principal mechanisms that leveled out wealth and income inequality were:

  1. ) Mass Mobilisation War

    During the two World Wars, markets were disrupted by government intervention and the commandeering of assets for the war effort. Tax rates were increased dramatically for the top echelon, while skill premiums fell in favour of unskilled factory labour. Finally, many infrastructure assets were physically destroyed in Europe and the UK.

  2. ) Transformative Revolution

    Communist revolutions in the Soviet Union, Maoist China, Vietnam, etc. have all led to a leveling of inequality, but at the great price of millions of deaths and destruction of infrastructure.

  3. ) Pandemics

    The world has seen some major pandemics between the 6th and 17th centuries. In each case, a labour shortage ensued, and real rural wages increased temporarily until the pandemic passed. Contrary to war, most of the country’s infrastructure remained, but was now used by fewer people after the pandemic.

These mechanisms, which have been very effective historically, are (thankfully) largely unavailable today – we hope that diplomacy has reduced the risk of global wars and that advancements in medical technology has reduced the risk of serious pandemics.

Source : Walter Schiedel (30 September 2018)

The chart above shows that these mechanisms have been effective in the past in reigning in inequality in the US, but that it is once again on the rise since the 1970’s. What are some of the peaceful alternatives to level things out and are these efficient?

  1. ) Peaceful Land Reform

    Does not work over the long term if owners are compensated fairly.

  2. ) Financial Crises

    No clear historic pattern of reducing inequality.

  3. ) Democracy

    No consistent effect, with the two-party systems not really suited to effecting significant policy changes.

  4. ) Economic Development

    Industrialisation causes a population shift to a nation’s cities, which leads to a temporary increase in living standards but not necessarily an increase in relative wealth.

Investment Implications

Schiedel contends that we are still only in the early stages of an upswing in inequality worldwide and predicts that:

  1. ) Industries and sectors favoured by the rich should continue to do well in the medium term. These sectors include cars, urban property, luxury goods, financial services and travel companies.
  2. ) The rise of the Asian economies will continue and their wealth will become even more concentrated in the hands of the super-rich.
  3. ) Emerging- and Frontier markets will become more unstable as economic inequality rises and the likelihood of civil wars will increase.

Whether these forecasts play out over the next ten years remains to be seen but Seed will continue to rely on the proven benefits of diversifying by managers, sectors and regions in an effort to limit downside risks.

Kind regards,

Cor Van Deventer

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