Second Quarter 2018

One of the more encouraging aspects of working in the investment industry is witnessing the practical evolution of humankind. Change happens constantly, and most of the time, for the better. As invigorating as this is, it is our challenge in the investment business to recognize and embrace this change on a continual basis.

Dr. Klaus Schwab, founder of the World Economic Forum in Davos, Switzerland, hypothesized in 2016 that we are now in the Fourth Industrial Revolution. A few years’ earlier, German industrialists were making reference to Industry 4.0. No matter the timing, industrial revolutions have propelled humans forward over the past two hundred years, at an ever increasing pace. Given that we are now in the Fourth Industrial Revolution, what were the other three that led us here?

The First Industrial Revolution began in Europe and North America in the early 1800’s, whereby the use of iron, textiles and steam engines transitioned societies from agrarian and rural to industrial and urban. This was followed by the Second Industrial Revolution between 1870 and World War I, where steel production, oil products and the invention of electricity led to mass production and far greater mobility. It also led to the invention of products that are still used today, such as light bulbs, telephones and internal combustion engines. The Third Industrial Revolution was digital, beginning in the 1970’s. This gave rise to personal computers, the internet, and rapidly developing information and communication technologies, all of which radically changed the modern workplace and the way we live.

The Fourth Industrial Revolution is built on the platform of digitization. As the ability to collect and analyze data continues to expand, the potential for automation is reaching new heights, promising improved productivity, reliability, accuracy and safety. These systems might feature robotics, artificial intelligence, block chain software, nanotechnology, quantum computing, biotechnology, three dimensional printing, the internet of things (IoT) and autonomous vehicles. As these technologies combine to drive economic efficiency, they represent what some term a “second machine age”. Any business or government enterprise that ignores these advances will do so at their peril. The components of this current revolution are swirling together in a manner that will advance society at an increasingly fast pace, changing how people, companies and economies work and how wealth is created or destroyed.

One may think that such advances will only affect industrial companies. Nothing could be further from the truth. Bank CEOs have been quoted saying that, while their operations have thousands of brick and mortar branches, they are really evolving technology companies. The entire retailing landscape is confronted with the evolution of online sales. Auto and other transportation manufacturers will advance or perish as technology alters how vehicles are used and how they’re powered. Oil and gas producers are now increasing output from geologies that were not profitable 15 years ago. People are living longer healthier lives due to advances in healthcare. The list goes on and on.

As swiftly as change occurs, there is a natural human tendency to resist it. This has been characterized by the recent election of political leaders that embrace this resistance. Instead, they preach nationalism, erect trade barriers, attempt to slow down or reverse global trade, and move to protect old and fading industries. This is economic folly and will dampen the pace of wealth creation. It is the wealth creation spurred by freer trading markets over the past few decades that has lifted significant segments of the world’s population out of poverty. Political demagoguery usually has the opposite effect.

In the long run, technological advancement and economic growth will win out, and the world will be a richer and more efficient place. In the meantime, however, we cannot ignore the political risks that currently pervade our landscape. We will be navigating this environment cautiously over the coming months.


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