21 THE CHANGING WORLD ORDER MAJOR CHINESE DYNASTIES AND THEIR STAGES (WITH INDICATIVE UPWARD EVOLUTION) Tang Dynasty Ming Dynasty Qing Dynasty Song Dynasty Yuan Dynasty RCPRC 1000 1200 1400 1600 1800 2000 600 800 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 5 6 4 1 2 3 4 6 5 1 23 MAJOR CHINESE DYNASTIES AND THEIR STAGES Tang Dynasty Ming Dynasty Qing Dynasty Song Dynasty Yuan Dyn RCPRC 1000 1200 1400 1600 1800 2000 0 1 Level Relative to Other Empires (1 = All-Time Max) 600 800 1 2 3 5 6 1 2 3 4 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 22 THE CHANGING WORLD ORDER GLOBAL RGDP PER CAPITA (2017 USD, LOG) 1500 1600 1700 1800 1900 2000 7 8 9 10 11 Emergence of German Empire, 2nd Industrial Revolution Panic of 1873 Peak of Qing Dynasty Invention of printing press (1440) Dutch Revolt, war with Ottomans Beginning of capitalism (Amsterdam Stock Exchange) Thirty Years’ War Collapse of Ming Dynasty, English Civil War 2nd Anglo- Dutch War Taj Mahal, peak of Mughal Empire Glorious Revolution, Great Turkish War South Sea Bubble Seven Years’ War American Revolution French Revolution, collapse of Dutch Rep Revolutions of 1848 1st Industrial Revolution Taiping Rebellion, 2nd Opium War Roaring ’20s Peak of American Empire Digital Revolution 2008 crisis Deng Xiaoping reforms Meiji Restoration Great Depression World War II COVID- 19 Collapse of Qing, WWI, and post-war recession Napoleonic Wars Global RGDP is primarily a mix of European countries before 1870 due to limited reliable data coverage across other countries before that point. 23 THE CHANGING WORLD ORDER HISTORICAL LIKELIHOOD OF INTERNAL CONFLICT BASED ON SHARE OF ECONOMIC MEASURES WORSE THAN THRESHOLD (>1Z) 12% 11% 17% 30% <40% 40–60% 60–80% >80% Likelihood of Conflict in Next 5 Years Share of Economic Measures Worse Than Threshold (>1z) As you go from fewer problems with economic measures to problems across all measures, the risk of conflict nearly triples 0% 10% 20% 30% 40% 3 3 This chart is based on historical analysis of nine great powers (covering about 2,200 years of history in total). The likelihood of conflict is based on major cases of civil war, rebellion, and revolution but excludes peaceful revolutions that did not change the existing system. The analysis does not count the probability of conflict arising in a period when a country is already in the midst of internal conflict (and the five years following) to avoid counting periods in which economic conditions were bad because of the conflict itself. 24 THE CHANGING WORLD ORDER CONFLICT COUNTRY BEGAN IN… Dutch Revolt NLD 1566 English Civil War GBR 1642 Glorious Revolution GBR 1688 American Revolution USA 1775 French Revolution FRA 1789 Cas- es that created changes to the system or regime Trienio Liberal ESP 1820 French Revolution of 1848 FRA 1848 Meiji Restoration JPN 1868 Xinhai Revolution CHN 1911 Russian Revolution and Civil War RUS 1917 German Revolution/End of Monarchy DEU 1918 Rise of Hitler/Political Violence DEU 1929 Rise of Japanese Militarists JPN 1932 Spanish Civil War ESP 1936 Chinese Civil War CHN 1945 Jacobite Risings GBR 1745 Pugachev’s Rebellion RUS 1773 Dutch Patriot Revolt NLD 1781 White Lotus Rebellion CHN 1794 German Revolutions of 1848 DEU 1848 Cases that didn’t create changes to the system or regime Taiping Rebellion CHN 1851 Panthay Rebellion CHN 1856 US Civil War USA 1861 Muslim Rebellion CHN 1862 Paris Commune FRA 1871 Boxer Rebellion CHN 1899 1905 Russian Revolution RUS 1905 National Protection War CHN 1915 6 February 1934 Crisis FRA 1934 25 THE CHANGING WORLD ORDER EST EUROPEAN DEATHS FROM CONFLICT (%POP, 15YR MOVING AVG) Internal Conflict External Conflict Total 0.0% 0.1% 0.2% 0.3% 0.4% 1400 1500 1600 1700 1800 1900 2000 Renaissance, Age of Exploration Wars of Religion, Thirty Years' War Enlightenment, capitalism, Industrial Revolution Napoleonic Wars World Wars Pax Britannica, Second Industrial Revolution EU integr- ation C H A P T E R 6 THE BIG CYCLE OF EXTERNAL ORDER AND DISORDER 26 THE CHANGING WORLD ORDER DEU EQUITY RETURNS (LOCAL FX, CUMULATIVE EXCESS) DEU PER CAPITA INCOME (2017 USD) 1933 1935 1937 1939 1933 1935 1937 1939 5,500 6,500 7,500 8,500 -20% 0% 20% 40% 60% 80% Equities rise nearly 70% between January 1933 and 1938 Per capita income rises 22% between 1933 and 1938 WARTIME ECONOMIC CONTROLS Rationing Production Controls Price/Wage Controls Import or Export Restrictions Takeover of Central Bank Allies United States Yes Yes Yes Yes Yes United Kingdom Yes Yes Yes Yes Partial Axis Germany Yes Yes Yes Yes Yes Japan Yes Yes Yes Yes Yes REGULATIONS IMPACTING ASSETS Market Closures Asset Price Controls Asset Ownership Restrictions FX Controls Top Marginal Tax Rate Limits on New Issuance Limits on Corp Profits Allies United States No Yes Yes Yes 94% — Yes United Kingdom Yes Yes Yes Yes 98% Yes Yes Axis Germany Yes Yes Yes Yes 60% Yes Yes Japan Yes Yes Yes Yes 74% Yes Yes 27 THE CHANGING WORLD ORDER 0.0 1.0 2.0 3.0 1940 1942 1944 1946 1948 1950 Markets closed in Germany and Japan Equities in Germany perform well as the Axis powers dominate from 1939 to 1942 ...while the Japanese war boom fades more quickly, with strict government controls keeping equity prices flat In contrast, both US and UK equities rally almost continuously after the 1942 Battle of Midway until the end of the war... Massive declines when markets reopen EQUITY RETURN INDEX (USD) USA GBR DEU JPN 28 THE CHANGING WORLD ORDER Risk Premiums & Discount Rates EUR USA Individual Sectors CHN JPN Rising Growth Assets Rising Inflation Assets Falling Growth Assets Falling Inflation Assets USA EquitiesCredit Spreads THE BUILDING BLOCKS OF A WELL-DIVERSIFIED PORTFOLIO C H A P T E R 7 INVESTING IN LIGHT OF THE BIG CYCLE