My Morning Keynote

The Sunday Essay ☕️

This morning, I am hosting the Vancouver Resource Investment Conference. Today’s letter is my morning keynote that I will deliver at the show. I hope you enjoy it.

Each year, I have an overhanging theme that guides much of the content I assemble at this event.

This year, that theme is also the name of this talk: The Changing World Order: How to Come Out On Top.

In reality, I should have put a question market after the first part, because far more than I want to inform anyone about the changing world order, I want to discuss and debate whether or not we are in one, and if so, to what degree.

There is an abundance of evidence that would suggest something of this kind is occurring. 

For context, we currently live in the American World Order. Prior to this was the British World Order. Before that, the Dutch, and before them, the Spanish.

There have actually been five world orders in the last six hundred years, all led by a global superpower, who largely organized trade under their economic and military thumb.

The first of the five, were the Portuguese, 600 years ago. The Portuguse ceded power to the Spanish around 500 years ago. The Spanish passed the torch to the Dutch at the completion of the 30 Years' War, roughly 400 years ago, the Dutch passed to the British at the conclusion of the 4th Anglo-Dutch War roughly 200 years ago, until the Americans arrived, who really affirmed their strength after the conclusion of World War Two.

What can we learn from this?

Two things - one, that five empires inside of only 600 years should give us a hint at the expeditious nature with which power rotates around the globe.

Second, in every case, the transition of power occurred at the conclusion of a large-scale, multiregional war, effectively bankrupting the global power as they attempted to fight everywhere all at once. This is the cost of being the world's policeman.

But suppose we dig deeper into the fall of these empires.

In that case, we would see that the very same economic, cultural and political behaviours emerge, like clockwork, near the end of their power - and they occur consistently in the same order.

When we dive into the cycle of an empire, it is like watching the same movie on repeat, again and again and again.

This is valuable. Because if we want to begin to understand the changing world order, the most intelligent thing we can do is understand what occurred the previous few times this happened. 

So let's do that.

During the final years of an empire, three trends emerge, and as I mentioned earlier, these trends were present in every empire of note. 

The first, is that the empire becomes overextended financially. Simply put, they begin spending more than they are generating.

Their military obligations overseas and living standard demands at home lead to an unsustainable budget deficit. Since they are conveniently the issuer of the world’s reserve currency, they quietly begin creating more, to paper over the losses - expanding the money supply.

In ancient empires, this involved diluting the coinage with less valuable metals to stretch the currency, but even the Dutch Guilder, 300 years ago, was a paper note that could be (and was) printed at will.

No nation in history that controlled the world's reserve currency has resisted the temptation to create more when times get tight.

This is the first red flag activity that marks an empire in decline - money creation.

But as you increase the supply of money, the value of the money obviously comes down relative to things that cannot be easily created - real assets like land, precious metals, and businesses.

These assets increase in value relative to the devalued currency.

So the people who own real assets - typically the more affluent, become richer, while those who do not, and are stuck with the devalued currency, become poorer. 

This is fundamentally how wealth disparity is created.

The further the money supply is expanded, the harder it becomes for the poor to catch the rich - the house that they could not afford last year, is somehow further out of reach this year - as the distance between the currency and the assets grows, those without assets begin to despair.

With a minority controlling most of the wealth and the majority having access to less and less of it, the population becomes divided. This plants the seed of populism - two groups, sharing one country, but living completely different lives. 

And this, leads directly to the second red flag activity - internal conflict. 

The rich want to keep the system as it is - it is working in their favour. But the poor demand change and redistribution of wealth. Both sides are logically fighting for their best interest.

But because monetary policy is complex by design, most people don’t understand why the wealth disparity exists. 

And an upset population with no obvious enemy, begins to look for one.

The nation finds itself in a scenario where the people are angry - about everything. Blame is passed back and forth. The poor are called unproductive, the rich are called greedy, and civil discourse becomes impossible.

With emotions running hot, every issue becomes a boiling point of tension, and the population can seemingly no longer agree on anything.

Civil unrest sparks protests; protests lead to riots and eventually activity that begins to border on civil war.

However, a nation can continue in this state of dysfunction for a long time - until, the third red flag emerges - an external competitor. 

For an empire to enter its sunset years, there must be another country that has risen in power enough to challenge the existing world order - a country whose economy is strong enough to offer alternate trade and military assurances.

Now, rarely in history does this external competitor emerge as one solo country. More frequently, a syndicate of smaller nations emerges - who are able to park their ideological differences to align against the global superpower. 

Think about the end of World War Two, with Soviet and American soldiers fighting side by side - ideologically opposite but aligned in their fight. 

And as soon as the fight was over, these ideological differences boiled to the surface immediately and emerged as the Cold War.

Today, one would argue that the BRICS+ nations are presenting that challenge.  They don’t share political ideology, language or religion, but they are united in their cause to counterbalance the United States. 

You could make a very clear case that all three of these red-flag activities are present in today's global order.

The empire is printing money at a record pace, and the populist uprising is maturing, from benign protests like Occupy Wall Street to violent occurrences like the BLM riots and the January 6th attack on the Capital.

People are angry, and they are looking for enemies.

So the more important question is, what can we do about this?

First - let me make light of the situation because the above description may paint a bleak picture for some.

Thus far, the argument thus has been that empires come and go with remarkable consistency and speed.

Yet, I will argue, that during this time, the quality of our lives on a global level has none but improved by every metric - poverty is down, violent crime is down, life expectancy is up, infant mortality is down, access to clean water and medical systems are up, and on and on.

Now, I am not claiming that the world is absent of problems, far from it.  But the human journey, generation over generation, has been one of remarkable improvement in quality of life.

I don’t believe that will change. So let’s take a breath. 

But secondly, just as we have learned that all empires share the same hallmark signs of decline, we will see that they also share the same hallmark signs of growth.

Every single time.

So what happens during these early years - how does a nation transition from obscure poverty to global dominance?

It is wild to imagine that only 250 years ago, America was more or less a third-world country clinging to the edge of the Atlantic Ocean. 250 years is not that long, considering their global influence and domestic affluence. 

During these early days, what we see in a rising nation is that if the population can find alignment in their values, then they become productive - so the first characteristic is value alignment.

The alignment can be religious, cultural or political ideology; it matters less what they are aligned on, but finding this alignment removes the constant infighting and unrest that stalls the growth of so many emergent nations.

The rulers of the nation must also share this alignment. If the governance is one that rewards hard work, then the nation grows. If the governance is oppressive and corrupt, then productivity stalls.

For an emerging nation to succeed, it must be aligned in its values from the bottom to the top.

If this is the case, their productivity begins building wealth.

After a period of time, we see emerging nations begin to invest this wealth in education. 

Education becomes the pillar that increases future generations' skills and knowledge, allowing one generation to improve upon the previous. Over time, this builds a more competitive economy that produces more innovations, gaining them access to the global marketplace. 

This is a fun part of the empire to study. The innovations of the Dutch that propelled them to Empire status are worth exploring.

So very quickly…

The Dutch Empire existed during the golden age of conquest, when nations would sail across the ocean, explore new lands, meet new people, take their stuff, and bring it home.

Crude description, but not inaccurate. I might argue that nothing has really changed…

So, the technology of note during this time was, of course, ships. 

The country with the fastest and most capable ships could rule the day.

And the Dutch built the most competitive ships in the world. 

But it wasn’t the ships themselves that were so amazing; it was the mechanism for getting them built. 

Conquests and trade missions were high-risk ventures. The seas were dangerous, and maritime expeditions often never returned. When they did return, it was not guaranteed that they would return with any goods. And those that did, may have been gone for years at a time before returning.

It was a very uncertain business.

These conquests were also very costly. Lots of cash was required to build or buy a ship, hire a crew, and stock a boat for an extended period. It was a daring venture when the odds of a positive return on that investment were far from guaranteed. 

Most of these conquests were, therefore, financed by a few wealthy merchants or subsidized by the government. This put huge capital demands on a small group of people and required them to take tremendous risks. It limited the amount of expeditions that were possible.

So the brilliance of Dutch innovation was not the ships necessarily - but the creation of the world's first publicly traded company traded on the world's first stock exchange. 

The Dutch East India Company was the world's first publicly traded company and, for the first time ever, anyone could participate in the financing of exploration and trade.

This opened the industry up to much more capital, allowing them to build better ships and build more of them. It reduced the risk that any one investor had to bear - and, in the case of a successful expedition, distributed the wealth to a larger population, who would then be more likely to reinvest. 

This system worked so well that at its peak, the Dutch East India Company accounted for one-third of the entire world's trade, and one in every 50 Dutch citizens owned shares.

A lot of people got rich.

The Dutch were also huge advocates for education - affirming our earlier point.

At the height of the Empire, 8% of all of the world's universities were located in the Netherlands.

12% of books published were published there as well. 

Remarkable for such a tiny nation relative to the world.

Part of the success of the Dutch East India Company was due to another controversial innovation.

The company struck a deal with the Dutch government to provide them with their own private military. This ensured that whatever deals they were trying to strike with competitive nations overseas would likely be favourable.

This marriage of military and industry was the first modern example of the military-industrial complex, which was subsequently replicated by the British East India Company and is still very present today in both America and China.

The Dutch were crafty. 

But now, let's get back to our story of the Empire cycle. 

To recap:

Productivity builds wealth, wealth funds education, education creates innovation, innovation produces economic competitiveness, and economic competitiveness gains access to global trade and, subsequently, more wealth.

And with this new wealth, a new need arises - security.

Newly acquired wealth must be protected, and trade routes must be defended, so at this stage in the empires' rise, they begin to invest aggressively in their military.

With a dominant share of global trade and a military to protect it, our emerging nation is now profitable and safe. 

A profitable, safe entity is an attractive investment opportunity, and as a consequence, the country begins attracting foreign capital.

Now, all of this sounds rosy - but here is where the devil emerges in the details.

Our emerging nation suddenly has access to something that has never been offered to them before - debt.

When you are profitable and safe, investors will line up to give you money, and countries are no different. 

Debt is the pillar that allows a country to grow faster than its organic productivity would normally allow.

Very few can resist the seductive creep of debt.

At this point in the growth of an empire, the culture begins to transform. The generation that remembers the humble beginnings has passed, and the new generation has known nothing but wealth, and logically, they expect their life to continue to improve. 

A few generations ago, they were poor and knew they were poor. 

But now they are rich, and they know that they are rich.

As the living standards in the country continue to improve, the population's expectations of a better life rise alongside. 

People don’t want a “nice car”; they want a “nicer car” than the one they have now. And for that, they need more money. So as the country becomes more affluent, the people want to get paid more. 

But if the workers want more money - so do the owners and shareholders of the companies - more profits.

As higher wages begin squeezing profit margins, the executives begin analyzing their costs. In every case, as the labour of our emerging country goes up in price, industry begins looking for cheaper labour elsewhere.

Our crafty Dutch friends looked across the North Sea, to the funny little island on the horizon and thought, “Here is an idea; why don’t we design the ships here but have them built over there, using cheap British labour…”

And just like that, the Empire began to outsource the productive engine that built their wealth in the old days.

The owners get wealthier, but the middle and lower classes lose jobs - reducing their leverage for wage increases.

The government wants to keep the peace - so they begin offering subsidies and social programs to the population.

But the country is not as productive as it used to be. As costs rise, and production declines, the nation is heading for trouble.

To service debt payments, global military activity and living subsidies at home, they are forced to begin expanding the money supply.

At first, slowly, and then quickly.

And here, our famously successful empire has entered its sunset years.

But that funny little island?

Productivity built wealth - and subsequently, education; they learned how to build great ships for the Dutch - the seeds of what would eventually become the greatest navy the world had ever seen.

And the cycle starts all over again.

So, what can we learn from this?

Two things: 

One, that all empires follow the same cycle, and at the bookends of it, productivity fuels wealth, and debt fuels decline.

Second: The “empire blueprint” can be copied for our personal and household wealth. 

The same laws that govern the rise and fall of empires also govern the rise and fall of our personal and household affluence. 

The same ones.

Recall the three main red flag activities that lead to decline? Financial instability, internal conflict and external competitor?

Picture this. I am happily married with three young kids. We do reasonably well financially. 

But if I stopped working hard yet maintained my living standard, I would quickly find myself in financial distress. 

Red flag activity number one. 

As long as my wife and I are still getting along, despite our financial troubles, then no worries!

But if we start fighting - blaming each other for our troubles, arguing over who's at fault until eventually we become unable to have any civil conversations, then yikes - red flag number two. 

Even this may be sustainable for some time… until that savvy, handsome gentleman at my wife's work begins laying on the charm and makes her an offer of stability and civility that sounds hard to refuse…

Now my empire is now in trouble.

Look, it is a silly example.

But also a very real one. And I hope this puts in perspective that these laws apply to us on a personal level.

And what great news.

Because now, we can keep our eye on the red flag activities and ensure we stay ahead of the trouble.

In addition, by staying aware of the roots of wealth creation, we can emulate those behaviours.

Our goal should be to live our entire lives inside the behaviours of an emerging empire.

And what fuels that rise?

Strong values: values give us a vision of where we are going and prevents us from being pulled into irrelevant skirmishes, wasting energy and getting distracted by every issue.

Hard work: Productivity builds wealth.

Education:  Increase our competitiveness regardless of how the world may change.

This may sound too simple - but the simple stuff is what works. 

I study history because it helps me understand the present. I don’t even try to predict the future.

I look at the processes that have worked in the past and stick to them.

If you demand that the world be more complex than this, and we must sweat every little detail, that's fine.

The late Charlie Munger was without question one of the most successful investors that the world had ever seen. 

His most common response when listening to a pitch or investment idea?

“It’s too hard.”

One of the most brilliant minds in finance, ever - yet nearly every pitch he heard, he claimed was “too hard.”

If it wasn’t simple, he wasn’t interested.

Be patient. Trust your process. 

You’ll do just fine.

Jay

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