Issue 27: 2014

Macro Analysis

Globalization and Tangible Assets

In a global economy, there are benefits and challenges for skilled workers
and the wealthy in America.

Photograph by Andy Ryan

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One consequence of globalization is a shift in relative valuations. There’s a shift away from worth being determined primarily in national markets, which are protected from global economic forces, to a world where worth is valued against other nations. Nowhere is this more apparent than in the sharp rise of inequality of wealth and income in developed countries. This rising inequality is an apparent side effect of globalization across the developed world, even in Nordic countries that pride themselves on progressive policies to fight it.

Skilled workers from the United States face a global market

In the United States the widening gap also reflects the greater diversity of its population. Before the world was so open to global trade, lower skilled, less-educated U.S. workers had a stronger relative position in the labor market. In today’s world they face more open competition from the low-skilled, less-educated portion of the population that makes up a vast majority of the world’s 7 billion people. The relative labor market position of the lower-skilled U.S. population has been weakened by globalization, a result that is generally true all across the developed world.


Gary Waters/Getty Images

 

In contrast, there is a growing lifetime earnings premium for college graduates that, relative to nongraduates, is a key driver of rising inequality in the United States and other countries. This growing premium is based on a need for better-educated workers, which is based on accelerating technological changes. Over the past three decades, the share of U.S. employees with college degrees has jumped from one-in-five to more than one-in-three. The share of the U.S. working-age population with college degrees is more than five times the global average.

Globalization makes a college-degreed U.S. worker much more valuable as compared to when the national workforce was competing just among itself. College degrees are relatively rarer in the world market than they are in the United States — one-in-three in the U.S. workforce and one-in-fifteen in the global workforce — and the opportunities are consequently far greater than before.

It’s not just college degrees that have become more valuable in a globalizing world driven by rapid advancements. When the market potential is 7 billion people instead of just 325 million, athletes, musicians, actors, movie makers, technology entrepreneurs and global brands of all sorts are much more valuable. Relatively rare forms of human capital have seen disproportionate gains from globalization. More common forms of human capital have become less valuable in a globalized economy.

Billionaires are bidding up the prices of the best real estate, priciest art and other collectibles.

Supply and demand amongst the wealthy

For those at the top of the income distribution, wealth accumulation has been more rapid as globalization progresses. The number of new billionaires and millionaires is growing faster than ever. This is having a dramatic impact on the tangible asset market. The more rare the asset, the more intense the competition among billionaires bidding for it, the higher its price goes. Whether it’s a trophy penthouse property in London or Hong Kong or a sports franchise in Spain, the pool of wealth available to inflate its value is growing much faster than the underlying economy or markets for more mundane properties. Supply is relatively fixed for museum-quality art and prime-location real estate. Demand is growing rapidly as globalization creates a concentration of wealth never seen before in human history — in both scale and scope. From this vantage point a globalizing world economy is very bullish for tangible assets, as too much wealth chases too few Picassos.

These trends are behind a massive bull market in tangible assets around the world. Billionaires are bidding up the prices of the best real estate, priciest art and other collectibles as rapidly rising and unprecedented wealth fights over the world’s rarest collectibles. The demand is rising faster than ever before and the supply is basically fixed. Globalization is expected to continue to intensify, and the pressures on high-quality, tangible assets are likely to build until either wealth stops expanding or prices overheat to the point where they have to adjust.

Tangible asset changes and higher living standards

This general phenomenon is most obvious and visible in the upper echelons of the wealth spectrum. Yet it exists further down as well. More and more millionaires are created each year in the globalization process. Their demand for tangibles like vacation homes and precious metals is likely to support a robust tangibles market, as large numbers of people across the world are accumulating wealth as never before.

More and more millionaires are created each year in the globalization process.

In emerging markets, such as India and China, where gold has a special cachet as a store of wealth against multiple contingencies, the growing middle classes, running into the hundreds of millions, are likely to allocate their rapidly accumulating savings at least partly to this traditional store of value. All through the wealth and income distribution, the rapid accumulation of wealth following in the wake of globalization is likely to pressure tangible asset prices as never before. The flip side of rising inequality in the rich world is rising living standards in the poor world, where people are moving out of subsistence poverty at the fastest rate in history. This is creating a rapidly growing mass market for affordable tangibles as well as the most sought-after rarities.

IMPORTANT INFORMATION

Investing involves risk. There is always the potential of losing money when you invest in securities.

Projections made may not come to pass due to market conditions and fluctuations.

Past performance is no guarantee of future results. Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

International Investing
International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

Commodities
Trading in commodities, such as gold, is speculative and can be extremely volatile. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest-rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Tangible assets can fluctuate with supply and demand, such as commodities, which are liquid investments, unlike most other tangible investments.

Other
Nonfinancial assets, such as closely held businesses, real estate, oil, gas and mineral properties, and timber, farm and ranch land, are complex in nature and involve risks, including total loss of value. Special risk considerations include natural events (for example, earthquakes or fires), complex tax considerations and lack of liquidity. Nonfinancial assets are not suitable for all investors.

One consequence of globalization is a shift in relative valuations. There’s a shift away from worth being determined primarily in national markets, which are protected from global economic forces, to a world where worth is valued against other nations. Nowhere is this more apparent than in the sharp rise of inequality of wealth and income in developed countries. This rising inequality is an apparent side effect of globalization across the developed world, even in Nordic countries that pride themselves on progressive policies to fight it.

Skilled workers from the United States face a global market

In the United States the widening gap also reflects the greater diversity of its population. Before the world was so open to global trade, lower skilled, less-educated U.S. workers had a stronger relative position in the labor market. In today’s world they face more open competition from the low-skilled, less-educated portion of the population that makes up a vast majority of the world’s 7 billion people. The relative labor market position of the lower-skilled U.S. population has been weakened by globalization, a result that is generally true all across the developed world.


Gary Waters/Getty Images

 

In contrast, there is a growing lifetime earnings premium for college graduates that, relative to nongraduates, is a key driver of rising inequality in the United States and other countries. This growing premium is based on a need for better-educated workers, which is based on accelerating technological changes. Over the past three decades, the share of U.S. employees with college degrees has jumped from one-in-five to more than one-in-three. The share of the U.S. working-age population with college degrees is more than five times the global average.

Globalization makes a college-degreed U.S. worker much more valuable as compared to when the national workforce was competing just among itself. College degrees are relatively rarer in the world market than they are in the United States — one-in-three in the U.S. workforce and one-in-fifteen in the global workforce — and the opportunities are consequently far greater than before.

It’s not just college degrees that have become more valuable in a globalizing world driven by rapid advancements. When the market potential is 7 billion people instead of just 325 million, athletes, musicians, actors, movie makers, technology entrepreneurs and global brands of all sorts are much more valuable. Relatively rare forms of human capital have seen disproportionate gains from globalization. More common forms of human capital have become less valuable in a globalized economy.

Billionaires are bidding up the prices of the best real estate, priciest art and other collectibles.

Supply and demand amongst the wealthy

For those at the top of the income distribution, wealth accumulation has been more rapid as globalization progresses. The number of new billionaires and millionaires is growing faster than ever. This is having a dramatic impact on the tangible asset market. The more rare the asset, the more intense the competition among billionaires bidding for it, the higher its price goes. Whether it’s a trophy penthouse property in London or Hong Kong or a sports franchise in Spain, the pool of wealth available to inflate its value is growing much faster than the underlying economy or markets for more mundane properties. Supply is relatively fixed for museum-quality art and prime-location real estate. Demand is growing rapidly as globalization creates a concentration of wealth never seen before in human history — in both scale and scope. From this vantage point a globalizing world economy is very bullish for tangible assets, as too much wealth chases too few Picassos.

These trends are behind a massive bull market in tangible assets around the world. Billionaires are bidding up the prices of the best real estate, priciest art and other collectibles as rapidly rising and unprecedented wealth fights over the world’s rarest collectibles. The demand is rising faster than ever before and the supply is basically fixed. Globalization is expected to continue to intensify, and the pressures on high-quality, tangible assets are likely to build until either wealth stops expanding or prices overheat to the point where they have to adjust.

Tangible asset changes and higher living standards

This general phenomenon is most obvious and visible in the upper echelons of the wealth spectrum. Yet it exists further down as well. More and more millionaires are created each year in the globalization process. Their demand for tangibles like vacation homes and precious metals is likely to support a robust tangibles market, as large numbers of people across the world are accumulating wealth as never before.

More and more millionaires are created each year in the globalization process.

In emerging markets, such as India and China, where gold has a special cachet as a store of wealth against multiple contingencies, the growing middle classes, running into the hundreds of millions, are likely to allocate their rapidly accumulating savings at least partly to this traditional store of value. All through the wealth and income distribution, the rapid accumulation of wealth following in the wake of globalization is likely to pressure tangible asset prices as never before. The flip side of rising inequality in the rich world is rising living standards in the poor world, where people are moving out of subsistence poverty at the fastest rate in history. This is creating a rapidly growing mass market for affordable tangibles as well as the most sought-after rarities.

IMPORTANT INFORMATION

Investing involves risk. There is always the potential of losing money when you invest in securities.

Projections made may not come to pass due to market conditions and fluctuations.

Past performance is no guarantee of future results. Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

International Investing
International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

Commodities
Trading in commodities, such as gold, is speculative and can be extremely volatile. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest-rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Tangible assets can fluctuate with supply and demand, such as commodities, which are liquid investments, unlike most other tangible investments.

Other
Nonfinancial assets, such as closely held businesses, real estate, oil, gas and mineral properties, and timber, farm and ranch land, are complex in nature and involve risks, including total loss of value. Special risk considerations include natural events (for example, earthquakes or fires), complex tax considerations and lack of liquidity. Nonfinancial assets are not suitable for all investors.