It's more than a coincidence that globalization has been accompanied by almost 30 years of elevated stock prices.

Three decades ago, the Berlin Wall crumbled, China opened its economy to the outside world, and a new economic environment emerged. The internet bubble may be the signature financial event of the 1990s, but the advent of globalization created a spate of new markets for American multinational corporations as blue-chip companies like General Electric and Coca-Cola were able to sell goods and services in places they couldn’t have imagined a decade before.

When the U.S. entered a new millennium with 4% unemployment in 2000, many companies decided to locate production facilities in nations where labor was plentiful and cheap, most notably China and India. The upshot was a just-in-time, transnational supply chain optimized with numerous interconnected moving parts that lifted corporate profit margins to record levels.

In the wake of the financial crisis, the backlash to globalization started to catch fire. Even before the 2016 election, many American politicians were expressing displeasure with the World Trade Organization, and both parties voiced doubts about the Trans-Pacific Partnership. “Trump is just an accelerant throwing gasoline on the fire,” Erik Weisman, chief economist at MFS, says.

“People in Topeka” and non-globalized regions around the developed world “feel they’ve been lied to,” he continues. Even if Presidents Trump and Xi Jinping manage to work out a U.S.-China trade deal, financial markets might rally, but it’s unlikely to quell protests in Paris or Hong Kong.

Fallout from populist nationalism has sweeping implications for the investment world that are just beginning to dawn on the markets. It’s no coincidence that, starting in the 1990s, PE multiples for equities began to elevate. As value investing legend Jeremy Grantham, co-founder of GMO, noted in these pages two years ago, equity prices between 1997 and 2017 sported higher multiples “for the entire block of 20 years” than they did in 1929. Much of that multiple expansion can be traced to the low interest rates and deflationary pressures that accompanied globalization.

Today, many of globalization’s basic principles are fraying. The International Monetary Fund is calling capital controls, in certain circumstances, a positive development. In the U.S., much of Europe and the United Kingdom, free movement of labor is under fire.

Information flows, transmitted over the internet, were once universally viewed as a public good, a way to liberate and uplift national populations. Great universities like MIT placed class curricula online, offering access to teenagers in the emerging world. Now numerous countries from China to the European Union are trying to regulate search engines and social media. Some are even trying to transform the internet into their own intranets. Moreover, globalization took place over a 30-year period marked by falling taxes, tariffs and interest rates, Weisman observes.

Resurgent populism is going to require a reset. But deconstructing the supply chain isn’t going to be that easy, and altering it could make the system increasingly fragile.

Global giants inevitably will try to seize control of critical parts of the economy to their advantage. What does this mean for nations like Indonesia, Australia and the Philippines caught between the U.S. and China? Weisman wonders if they will be forced to favor one economic giant over the other. That type of process could quickly become expensive, and multinational profit margins could get squeezed.

It is the cost issue that concerns some of the most experienced global investors. Tariffs and other trade frictions ultimately raise unit costs, which in turn leads to higher prices, says Loomis Sayles vice chairman Dan Fuss. The net result is that markets shrink.

How it all plays out is anyone’s guess. Centralizing supply with a single nation may create efficiencies but it also engenders dependencies—Apple probably regrets locating so much production in China.

Near-shoring, as evidenced by U.S. manufacturers moving suppliers from Asia to Mexico, can lower costs and increase profits and production speed. But other issues come into play. America, for example, has been shortening its supply chain for energy with the advent of horizontal drilling, while China has negotiated deals for minerals in faraway Africa and soybeans in faraway Brazil.

On the surface, it would appear that President Trump is correct in assuming America has inherent advantages when challenging other powerhouses in international trade. After all, global exports represented only 9% of U.S. GDP in 2019, according to Commonwealth Financial Network chief investment officer Brad McMillan. Contrast that with the fact that exports represent 14% of Japan’s GDP, 16% of the eurozone’s and 19% of China’s.

America benefits from a large, insulated, almost guaranteed market, a labor force that is still growing—unlike the rest of the developed world—and easy access to capital, McMillan notes. But one doesn’t have to be an Iowa farmer or a Michigan automotive executive to see the U.S. is still dependent on trade.

For investors, the paramount issue is what this all means for asset prices. Studies of the Cold War era indicate that PE multiples from 1960 to 1989 were 4 or 5 points, or 20% to 25%, lower than they are today. Inflation and interest rates, of course, were much higher in the 1970s and 1980s.

American multinationals that dominate the S&P 500 have been among the biggest beneficiaries of globalization, and markets have rewarded them with rich PE multiples. Over the last decade, they have also attracted yield-hungry investors looking for juicy dividends. So far, many of these companies, with the exception of industrial and technology concerns, have displayed only minor vulnerability to trade disruptions.

That could change. Most signs of trade friction in America are surfacing only at the micro level—Maine lobster exports to China are down 70% over the last two years while Canada’s lobster exports have doubled.

However, China’s economy is slowing noticeably. Michael Cuggino, CEO and chief investment officer of Permanent Portfolio funds, suspects weakness among Chinese consumers will show up in weak revenues from casino companies with heavy exposure to Macau.

“The flip side is that the U.S. has a lot of large, mega-cap companies that need the whole world, platform companies like Google and Facebook,” Weisman observes. If authoritarian nations like Russia and Turkey want control over their own intranets, the more authoritarian the nation where the tech platform resides, the more likely that platform wins the business.

European countries understandably will want to play both sides to the extent they can, especially since they don’t have these mega-cap tech companies.

Other developed economies face even bigger challenges, in McMillan’s view. Europe and Japan are beset by declining labor forces, and access to capital is likely to be constrained as global investors seek regions with more promising returns. Additionally, they could be forced to choose between markets the same way smaller emerging nations are.

Shifts also are occurring in the emerging markets space. Classifying China as an emerging nation today is dubious—newer emerging markets like India and Africa have more growth potential than China and display faster population growth.

Some like Grantham have argued that U.S. equity multiples could remain elevated longer than many believers in mean reversion think. Globalization is only one factor that explains lofty multiples. Other reasons include high profit margins sustained by the rise of duopolies in many industries ranging from beer to internet advertising, and the combination of global debt and aging demographics keeping a lid on interest rates and inflation.

What could trigger an end to the three decades of 1929-plus levels of equity prices Grantham has described? Steve Cucchiaro, president of 3EDGE Asset Management, believes the growing populist drumbeat is likely to result in a big political shift that could let the air out of the balloon.

For example, Sen. Elizabeth Warren recently echoed President Trump when she said the Federal Reserve should pursue a cheap dollar policy that would help create more U.S. jobs. In the past, politicians have respected central bank independence.

“No one knows what is the last snowflake to drop on the snow pile that triggers the avalanche,” Cucchiaro says. But it is safe to say “what worked well for the last 10 years won’t work well for the next 10.”