reading

Prologue

Into the Wild

For each of the past twenty-five years, I have gone on a safari, either to India or Africa. On one trip to Africa, I heard the story of a king who sends his son out to learn the rhythms of the jungle. On his first outing, against the din of buzzing insects and singing birds, the young prince can make out only the roar of the lions and the trumpet of the elephants. The boy returns again and again and begins to pick up less obvious sounds, until he can hear the rustle of a snake and the beat of a butterfly’s wings. The king tells him to keep going back until he can sense the danger in the stillness and the hope in the sunrise. To be fit to rule, the prince must be able to hear that which does not make a sound.

The rhythms of the jungle are far removed from those of New York, where I live, but this old African tale is quite relevant to a world reshaped by the global crisis of 2008. The crisis turned the world on its head, disrupting trade and money flows, unleashing political revolts, slowing the global economy, and making it more difficult to discern which nations would thrive and which would fail in such a transformed landscape. This book is about how to filter out the hype and noise and pick out the clearest signals that foretell the coming rise or fall of nations. It’s an attempt to recreate the education of the prince, for anyone interested in the global economy.

People in the world of global finance often think of themselves as big cats, predators alert to the rustlings of the economic jungle. But in Africa the difference between the cats and the rest quickly dissolves. Each year on the Mara-Serengeti plains of Kenya and Tanzania, more than a million wildebeest walk a nearly two-thousand-mile loop that they have traced and retraced for generations. Moving behind the rains and accompanied by zebra and gazelle, the ungainly wildebeest are shadowed by the lion, the leopard, and the cheetah.

The contest looks stacked, but lions are relatively slow and short-winded and catch their prey on less than one attempt in five. Cheetahs are faster, but because they are smaller and often hunt alone, they are forced to concede many kills to scavengers working in packs. Less than one cheetah in ten lives longer than a year. Lions do a bit better, but many males die young in territorial battles with other males. The circle of life and death turns as brutally for the predator as for the prey, a fact that might give pause to the would-be lions of the global economy.

I’ve lived in fear for my own survival since I entered this jungle. I started out in investing as a twenty-something kid in the mid-1990s, when the United States was booming and emerging nations were still seen as wild and exotic. Financial crises swept from Mexico to Thailand and Russia, triggering painful recessions and reshuffling the ranks of rising economies and world leaders. The collateral damage in global markets wiped out many big investors, including a good number of my mentors, colleagues, and friends.

Looking back, the demise of national leaders (and global investors) followed a pattern. They initially followed a path that led to economic or financial success, but then the path shifted and led to quicksand. It happened in the emerging-world crises of the 1990s, in the dot-com bust of 2000–2001, and again in 2008. Each time people got too comfortable doing what they were doing in good times, then got swallowed when the earth shifted under their feet.

The cycles of market euphoria and despair often produce clichés about “herd behavior,” but even in the jungle life is more complicated than that stereotype. A certain “swarm intelligence” guides the wildebeest, ensuring the survival of the group even when it means an early death for many individuals. The wildebeest’s circular migration has been mocked with the old proverb “the grass is always greener on the other side,” but the herd is right about where the grass will be greener. It follows the rains, north into Kenya in the spring, back south into Tanzania during the fall.

The critical dangers appear twice a year at “the crossing” of the Mara River, which the herd must ford while traveling both north and south. Normally, to avoid predators, the herd heeds an ancient warning system—the shrieks of baboons, the harsh calls of jungle babblers. But this system fails on the banks of the Mara, where the wildebeest mass by the tens of thousands, with danger in plain sight: floating crocodiles, rain-swollen waters, lions in ambush on the far side.

Heads down, the wildebeest appear to be talking all at once, their distinctive bellows like so many Wall Street analysts on a conference call, plotting their next move. The herd waits for one member to go. If this animal takes a step and retreats, fear paralyzes the multitude, but memories are short. Within minutes another will try, and if it plunges in, the mass follows—many into waiting jaws and deadly currents. An estimated 10 percent of the wildebeest population perishes each year, a large number of them during the crossing.

People working in global markets from New York to Hong Kong can get sucked into a culture that is programmed, like the wildebeest, to remain in constant motion. Every day research reports bombard these financial capitals, urging the crowd to chase the next Big Thing or to run from the next Big Correction. The compulsion to move gives rise to a new consensus every season or every quarter, an impulse that has only grown since the global financial crisis. Just take the year 2015. During the first quarter the chatter was all about how you had to either get in or get out of the way of the surging Chinese stock market, which then seemed like a one-way bet. The second quarter was all about how Greece was going to take down the global economy, and during the third quarter the financial panic in China dominated the conversation. Sometimes the reports are right, and sometimes they’re wrong, but always they move forward, forgetting what they were saying the day before, and why. At times the shifting conversation appears to have no rhyme or reason.

Wall Street is fond of old sayings about how only the paranoid and the fittest survive. I would phrase the issue a bit differently. The challenge is how to channel a wise paranoia in the service of survival. Every crisis is greeted as a renewed call to action, and the bigger the crisis, the more frantic the action. Years after 2008 the fear of more big losses still runs so high that Wall Street’s biggest players are likely to watch returns monthly rather than yearly, which pressures money managers to trade constantly in the hope of avoiding even a single bad month. This is happening despite evidence that gains are now more likely to accrue to investors who trade less, proving, as one wag put it, that “sloth is a virtue.”

In the summer of 2014, after many safaris, I saw a big cat actually catch its prey for the first time, in Tanzania. Late one afternoon my friends and I came upon a cheetah, panting hard after, our guide told us, two failed chases earlier in the day. Over the next two hours, the cheetah waited in a little dugout as it recovered its breath; the light faded with evenfall, and the wind shifted to carry its scent away from a solitary male gazelle. When conditions were right, the cheetah made its move, creeping slowly, slowly, low and unseen through the short savannah grass to within fifty yards of its target. Then it accelerated to sixty miles per hour and—in a zigzag final dash that took fractions of a second—brought down the gazelle.

More telling than the burst of speed was the stillness that preceded it. Big cats are programmed to survive by conserving energy, not to waste it in constant motion. The most common sighting of a lion involves watching them take a nap; they are known to sleep eighteen to twenty hours a day. When cats do succeed on the hunt, they try not to expend much effort on battles over the meal. And they don’t panic over cyclical turns in the weather. During the violent afternoon rains that sweep the Masai Mara plains in Kenya, I’ve watched the wild animals stop where they are and stand stock still—predators within striking distance of their prey—until the deluge ends. They seem to understand instinctively that cloudbursts are one beat in the normal rhythm of their days and that panic will only lead to greater chaos.

Many accomplished survivalists inhabit the jungle, and not all are big cats. The best defenses belong to the hulking vegetarians, the elephants and the rhinos. Even a lion pride will rarely take on a seven-ton elephant with six-foot tusks. The best spies may be the wildebeest, with their network of baboons and birds. The best hunters may be the hyenas, who despite their popular depiction as thieving scavengers are among the most successful large predators. Unlike the cats, a hyena has endurance, can run down virtually any animal, and does not target mainly the old and infirm. Moving in packs of up to sixty, hyenas fear no prey. On the plains of the Serengeti, I once saw a pride of lions cede its kill to a pack of twenty persistent hyenas.

Early on in my career, painful experience taught me that anyone who wants to survive longer than the five-year political and economic cycles that buffet the global economy needs to absorb a few laws of the jungle. Do not expend energy on daily or quarterly blips in the numbers. Adapt to a changing landscape rather than let ego obstruct a strategic retreat. Focus on big trends, and watch for the crossings. Build a system to spot important signs of change, even when everyone around you is comfortably going with the current flow. Over the past twenty-five years I have spent long hours on the road, trying to build a system of rules for spotting telltale shifts in economic conditions.

What goes for survival in the wild and on Wall Street also goes for the survival of nations in the world economy. There is no one role model. Every nation is equally vulnerable to the cycles of boom and bust that kill off most runs of strong economic growth and that ultimately transform sprinting cheetahs into exhausted cats. The waves of crisis following the 2008 global meltdown crippled many economies, weak and strong, developed and developing. Following the well-established patterns of economic development, the new stars of a new era are likely to emerge from nations that are overlooked as scavengers and slow-footed vegetarians and whose rise is starting without a lot of hype. Anyone trying to understand the rise and fall of nations needs to internalize the fact that the global economy is a noisy jungle; booms, busts, and protests are part of its normal rhythms. What follows is my guide to identifying the ten telltale signs of major turns for the better or worse, even those that don’t make a sound.

Ruchir Sharma

THE RISE AND FALL OF NATIONS

Ten Rules of Change in the Post-Crisis World

Contents

BY THE SAME AUTHOR

Prologue

Into the Wild