8 Economists' Investment Tips
Fu Peng: “Major Asset Class Framework Handbook” -- Global Macro Three-Level Division of Labor Framework
Master Course Lecture: Building an Investment and Research Framework 2.5: A Global Three-Level Division of Labor Framework
Summary of this issue
The division of labor and distribution model for post-World War II globalization
What's in this issue
The model generated from this is a framework for the global three-level division of labor that I've talked about a lot before. In other words, all of our macro-models of large global economic integration are based on this architecture, which applies to almost every asset.
There are three important components to this framework — consumers, producers, and countries that export raw materials, which I have explained to you before in “Meet”. Global economic growth comes from an international division of labor, but just like commodities, commodity prices do not depend on supply; they must rely on the demand curve. Our economic growth must depend on people using what we produce and people consuming them.
Why would technological improvements increase economic efficiency very slowly without debt and leverage? Very simply, in the process of improving efficiency, without debt or leverage, the expansion of the aggregate demand curve is linear, but when finance is involved, our demand can be released all at once.
If you look at today's young people, you'll see that they earn 2,000 yuan, it doesn't matter what they buy. Where is their money coming from? This kind of IOU, that kind of IOU, this kind of credit card, that kind of private loan. Essentially speaking, finance provides the five major financial services of “deposit, loan investment and integration”. In principle, it provides debt and leverage.
If you are a producer, a large amount of your debt is concentrated in the production sector, that is, the enterprise sector; if you are a consumer, your debt is concentrated in the consumer sector, that is, the residential sector. In other words, China's debt relationship has become a relationship between the production sector and income, while the debt relationship in European and American countries is a relationship between the residential sector and income. Financial institutions have added leverage in the middle, so it has to assume this responsibility. As can be seen from this, different roles in the international division of labor have led to differences in the focus of debt research.
Countries that export raw materials are also very interesting, such as Australia. You will find that both the production department and the residential sector are burdened with debt, and the two departments are intertwined. It has both American attributes and Chinese attributes, so everyone can understand why Australia is a three-tier system. After something goes wrong with the production sector, it must immediately involve its residential sector and real estate, because it has no savings to get to the bottom.
That's our division of labor in this entire three-tier architecture. So whether it's positive feedback or negative feedback, in fact, all variables come from outside. In the process of external debt expansion and leverage expansion, we generate our production, processing, and manufacturing, generate our internal investment, generate our savings, generate growth in our foreign exchange reserves, generate our currency investment, then generate our profits, and then drive demand for raw materials. This process is the whole path of positive feedback.
However, problems will follow. First, external debt expansion is cyclical. It increases leverage and removes leverage, and has a huge impact on the world. Why am I saying that from 2008 to now, in principle, the problem is not over yet? Because European and American countries that have been consumers since 2008 are restructuring, what we are immediately facing is overcapacity, insufficient profits, and insufficient aggregate demand. At that time, the first method we thought of was to guarantee total demand under countercyclical regulation, launch a 4 trillion dollar plan, and let government departments expand leverage to use internal demand to withstand the decline in external demand.
Therefore, it is precisely because of countercyclical adjustments that the Chinese economy has developed rapidly in those years.
Of course, countries that export raw materials, such as Australia or New Zealand, are passively following us. Over the past few years, everyone will find that for countries in the upper reaches of our industrial chain, such as Australia or New Zealand, the marginal effect of China's countercyclical policy adjustments on it is getting weaker and weaker.
So it's easy to understand that many people will ask, we have supply-side reforms, steel industry profits have recovered, and iron ore prices have also risen. Why is Australia's economy still getting worse? Very simple. The adjustments we have made, first, are not adjustments to aggregate demand. If it is similar to 2009 or 2010, Australia will prosper with us.
But not now. We are no longer using the method of aggregate demand, we are starting to use the method of supply, we are starting to use structural methods, and we are starting to pay attention to structural weight. At this point, you will find that external countries will not be able to receive our dividends. This is a phenomenon of fragmentation that we have seen in recent years; in fact, it is all derived from the integration of the global economy.
China was not the first beneficiary of the production sector. The early beneficiaries after “World War II” were Germany, Japan, then the Four Asian Tigers, and then China. There is actually a small split now. For example, if Vietnam is now a producer in an international division of labor, of course Vietnam also has its own characteristics, then you should know why you should have been to Vietnam in the past five or six years. Of course it's a physical entity, not a house speculation. The other party's income hasn't increased yet, and your savings haven't increased yet. Go speculate on the house, raise housing prices, and transfer the debt to whom? The transfer of debt must be based on income growth. When have you seen a country speculate on houses before total income has increased and total savings have not increased?
I remember seeing a Wenzhou boss go to Africa to develop real estate. At the time, I said why did you think so unintelligible? Local income hasn't increased, savings haven't increased, so who is selling the house? Therefore, the first step must be to increase its revenue and then take away its future time value. Therefore, the first step must be production, processing, and manufacturing. This is true for any country. First do production, processing and manufacturing, then invest in the industrial chain, and then do real estate after increasing savings, then go into finance, and finally withdraw. Back then, the Four Asian Tigers basically followed this path.
Under this framework, our feedback mechanism was formed, and a medium- to long-term asset allocation and investment path was created on this basis. As early as I wrote “The Untold Stories Behind Ten Years of Business”, I mentioned a very important factor — the relaxation of financial regulations in Europe and the US, including in the UK, I would talk about its financial policies and financial regulation, because without this option, there would be no basis for debt expansion.
So everyone knows that at the end of the day, the world is still a small group of policy makers who decide whether the engine of our machine can run.
That is the content of this course, thank you all.
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