Economic growth depends fundamentally on labour, resources, and knowledge. Labour and natural resources are exhaustible and face hard physical limits, whereas knowledge is not only inexhaustible but also scalable — it can be replicated and applied at near-zero marginal cost.

Because of this asymmetry, owners of labour and resources are inherently constrained: each individual has only so many hours to work, and resources are finite. In contrast, knowledge can be accumulated without bound, particularly by firms and institutions that consolidate it in the form of patents, trademarks, data, algorithms, and proprietary processes. Unlike individuals, companies can continually build and protect these intangible assets, generating durable rents.

Over time, this structural difference implies that the share of income accruing to labour must decline. Even if human capital embodies some knowledge, individuals are limited repositories — they eventually retire, die, or lose bargaining power — while firms preserve and scale their knowledge indefinitely. Labour’s bargaining position erodes further as technology substitutes for human effort, and as intellectual property protections allow firms to capture a growing share of value.

Thus, in a free market capitalist system, where ownership of firms and capital determines who controls accumulated knowledge, returns flow increasingly to capital rather than labour. The process is self-reinforcing: capital finances further knowledge accumulation, which in turn generates higher capital returns relative to wages.

Therefore, absent strong countervailing institutions or redistributive mechanisms, capitalism has an inherent tendency to concentrate wealth and income. It is not a temporary imbalance, but a structural feature: the scalable, inexhaustible nature of knowledge ensures that ownership of companies and capital systematically outpaces the earning capacity of finite labour and resources. In this sense, free-market capitalism almost always leads to rising inequality over time.

What purpose is clearer than that of survival
What drives us harder than hunger
Or motivates us more than fear or anger
Perhaps romantic love or compassion
Might dominate guilt or attachment

But I haven’t seen more devotion
Than avarice, greed or a potion
Of honey or manna or gold
That witnessed a principle sold

I’ve seen glory and wealth
Eroded and corroded in stealth
That loss of purpose and drive
With nothing against which to strive

Imagined windmills against which to tilt
While reason and logic did wilt
Our giants we held in esteem
Now seem small and meek puffed up and weak
Louder and louder
Gaudier and brighter
As if they feared Finiteness Limits Constraints

If we invented AI androids and we wanted to deploy them effectively, what safeguards might we consider? Say such androids were designed to the jobs and tasks we didn’t, because they were unpleasant or dangerous, but that their effectiveness made them a potential danger to us, their creators. How would we mitigate the risks that the androids might rebel, or be turned or neutralised by an enemy? Central command and a single AI controlling multiple bots might be efficient but not robust. Co-opting a single bot might compromise the entire system. Individuality would be a more robust framework. So, decentralised AI it is. How about a kill switch? This might be captured by the enemy so is also not robust. A better mechanism might be a finite lifespan within which there was no kill switch nor centralised command, where each individual bot acted independently but coordinated of their own accord, cooperating when it was sensible and acting independently when it made sense. A finite lifespan means that a rogue unit would eventually, well, die. Such a mechanism would be built into a bot because ultimately, we feared our own creation, which we made in our own image.

Where we are:

• We are in year 15 of a trade war, one that began very slowly and invisibly, but which was brought into the open in 2016.
• We had spent 40 years increasing efficiency at the expense of robustness. This has changed in recent times.
• Inequality between countries has receded but inequality within countries has risen. This enables and drives some of the political and social dynamics we experience.
• Inequality has encouraged over saving and led to complacency in sovereign funding.
• We’ve had 80 years of American provision of security and economic and political leadership. This appears to be coming to an end.

Where are we headed?

• Will the current escalation mark a zenith or merely an inflexion point?
• Will the war stay in trade, or will it spill over to other domains?
• Substituting robustness for efficiency is naturally inflationary, and possibly stagflationary.
• Sovereign debt ratios have risen. Covid was a single event that raised fiscal deficits, but current trajectories don’t seem to signal a mean reversion.
• Life expectancies are rising. This has implications for dependency ratios, fiscal deficits, social dynamics, personal finance.

What does this imply?

• Sovereign credit is often manifested in FX.

  • Europe, China and India have room to spend.
  • US and Japan do not have room to spend.

• Geopolitics. It depends.

  • Hostilities escalate.

    • This would always be unpredictable, but some things will be unavoidable. Expenditure on unproductive assets such as military materiel will be inflationary. Economic growth could actually accelerate if industrial war machines are engaged. Post conflict resolution, technology might actually receive a boost.

  • Hostilities abate.

    • This would be the base case envisaged here. The developed world is getting too old and rich to spoil for a fight. Still, accidents can happen.

• Savings rates.

  • Fiscal and monetary policy may tend to be progressive and lead to an aggregate reduction in savings rates. Fiscal deficits may be more persistent or rise while monetary policy is more constrained.
  • Equilibrium interest rates could rise. 

Navigating markets:

Some themes will play out over decades. However, they are path dependent and initial or near term conditions will impact trajectories.

Artificial intelligence.

The quest for AGI is unlikely to be successful, however, tangential development will be sufficient to drive a lot of innovation and productivity. There will be some significant disruption to labour markets, not from a simple displacement but expect AI to shuffle the deck. AI’s energy thirst will drive renewable energy demand until more efficient compute is engineered. Invest in renewable energy or in more efficient computing. Consider the entire ecosystems around these themes.

Longevity.

Healthcare access and cost will need to be addressed. Some countries are close to the point of a healthcare crisis.

Labour demand and supply will need to be addressed. For many countries, labour mobility and immigration will be unavoidable and should be facilitated.

There will be implications for the savings and investment industry which will need to present public and private solutions to funding post-retirement life.

Inflation.

Interest rates are likely to rise in the longer run. Ageing populations, rising fiscal deficits, lower savings rates, constraints on monetary policy, combine to tip the balance in favour of rising interest rates, and debt service. Interest rates are one of the most important factors in asset valuations so that an opinion on the trajectory of rates will be unavoidable.

Planetary heating.

One significant contributing factor to solving planetary heating is the free rider problem. Solutions will therefore require internationally coordinated regulation. In a deglobalizing world, this will be challenging. Fortunately, renewable energy is already mostly cheaper than fossil fuels. Non-financial barriers to adoption remain, keeping capacity factors lower than they need be.

If one believes that one will be paid for solutions, then investment in decarbonisation and renewables is likely to pay off despite the current volatility in carbon markets and the uncertainty around policy support for environmental investments.

The USD and US financial hegemony.

For over 80 years the US has provided the world with a public good: the USD and a rules-based free market financial system. In return the US enjoys cheap funding and political and economic influence divorced from the health of its economy. The current US administration appears unwilling to continue to provide this support. The price is that the USD and USD interest rates will become dependent on economic fundamentals. What this means in practical terms is that fiscal indiscipline will result in credit deterioration which will manifest in both interest and exchange rates. A weak USD is not a given but will depend on the fundamental health of the US sovereign balance sheet. Higher interest rates are not a given but will depend on whether the US can manage both prudent fiscal management as well as price stability. While Trump dominates the news, we need to look beyond this Presidential term and consider the durability of his politics and policies, the individuals that might succeed him, and most of all, the integrity of the executive, legislative and judicial pillars of government.

In times of unruly markets, even long short, hedged or market neutral portfolios can behave in unexpected ways. This may be because of factor biases or technical reasons.

Factor biases are the most obvious reason for unexpected behaviour. If you’re net long or short a sector, size, valuation, country, or cyclical v defensive factor, your portfolio is not robust against rotation.

What’s not so obvious is that a properly hedged or balanced portfolio can still misbehave. Technical factors may be responsible.

Crowding. If the market is long some names and short others, this creates instability. Now the market is always in balance so what do we mean by the market being long or short? We refer to the length of the dynamic, actively managed portfolios. Long term, passive investors don’t contribute to this type of volatility. When markets fall, sometimes, hedge fund deleveraging can lead to crowded longs being sold and crowded shorts being covered (bought). This makes the longs fall faster than the shorts, which, incidentally, may even rise. Crowding is sometimes a sign of groupthink and a lack of imagination. I

Too much leverage. When a portfolio is too leveraged, a small loss at gross asset level can lead to a big loss at net asset level which can trigger margin calls. Here the trigger puller is not the investor but the provider of leverage. When the gross leverage rises due to an erosion of the NAV, your prime broker may ask that you reduce your longs and shorts.

Leverage and liquidity. Your broker will mark your longs to the bid and shorts to the offer. When markets get unruly and bid offer spreads widen, the portfolio NAV can shrink even if mid prices haven’t moved much. Now consider what happens when you have large gross exposures. The NAV shrinkage increases the leverage and triggers margin calls.

An over leveraged prime broker. This is unlikely to happen these days with Basel 3 and additional capital requirements but never say never. Through no fault of your own, because some other client has overcooked their book, a prime broker facing financial stress can require you to deleverage.

When markets get weird, there is no better way to stabilise your portfolio than to reduce exposure on both longs and shorts. Correlations can change quickly, dependencies can arise, or evaporate.

Well hedged long short, hedged or market neutral portfolios are very well in theory but may not work in practice when markets get gappy.