I want to launch a fancy bit of speculation today, with what I think are direct investment implications. It’s a hypothetical scenario in which we might be about to kick off a decade long investment and economic boom reminiscent of the roaring twenties of the last century. If I used a probabilistic analysis I wouldn’t put more than a 50% chance of what I suggest playing out as I suggest but I do want to highlight some bullish drivers that are, I think, present and growing in strength.
Crucially I want to advance this scenario as a way of combatting the prevalent wariness, caution and scepticism which is I think the prevailing norm amongst investment decision-makers. On this latter, I note that most investment decision-makers, investment analysts and investment commentators are male, and over the age of 45 (if not 50) who collectively boast a behavioural vulnerability to the grumpy old man syndrome. The best way to balance this natural, biological lunge towards caution is to enhance institutional cognitive diversity at decision-maker level so that we can balance out these biases. Which is I guess why so many hedge fund and trader shops feature alpha seeking alpha young men and women (less of the latter) who will kick back against the consensus and collective risk aversion.
Anyway, back to the Roaring Twenties hypothesis. I sense that I am on stronger ground when I speculate that it will be good for investors and on weaker ground for wider economic growth, which presumably must at some point be powered by increasing productivity.
The first bundle of tailwinds behind improved share returns and possibly higher economic growth is powered by demographic considerations. The ever-present ageing paradigm isn’t, of course, going away – cue wealth deaccumulation on a vast global scale and a declining savings pool – but we will experience a huge boom in inter-generational wealth transfer from baby boomers starting to keel over and shifting their property wealth to younger family members. This is of course a profoundly unequal wealth transfer, but my hypothesis is not meant to address equality issues. This will coincide with a profound shift amongst millennials. They boast a much lower capex lifestyle – partly by default because of the high cost of so many things – with consumption patterns focused on experiential spending. This lifestyle economy will translate to a boom in spending on service goods as well as travel (yep it could make a return). But many millennials, despite their supposedly socialist leanings, have also started to dabble in old investment paradigms vis a vis Robinhood and crowdfunding. This is a speculative generation, many of which will be empowered by generational wealth transfers to start spending seriously on things that make sense to them. This speculative impulse is powered by a very real, almost gravitational imperative – a need to see higher rates of return in order to fund longer lives, courtesy of advancing life sciences. I would expect the current 20 somethings to have an average life expectancy of at least 90. That’s great but it means you need an even bigger capital sum to last you through retirement. There’s a limit to how much you can sensibly save, so the corollary is that we collectively seek higher returns which are in turn a tacit acceptance of higher risk appetites. If you think my last point is speculative consider why most US pension plans still assume 7% real returns on equities despite copious evidence that this number is hugely unrealistic from a balanced risk perspective.
The next bundle of factors centres on state-directed capital expenditure. In previous blogs, I have argued strongly that we are at the first stages of a competitive technology race between the Chinese and the West. Vast sums of money will be squandered/invested in a whole bundle of tech-based battle grounds. The West has no choice other than to keep up, and we’ll all be intoxicated by the idea that state direction can produce massive technological change. I have my real doubts about this strategy but even I accept that some of that money will hit the target – as indeed the Race to the moon and the Cold War tech battle showed – and we’ll see some trickle down to new products with potential revolutionary productivity-enhancing benefits. There’s no way of knowing what these areas will be but if I had to bet I would look at life sciences, quantum computing and the space race. Regardless, gushers of taxpayers money will be spent.
Which brings me to the next driver – green investment. Again, there is no real debate here. We’ll have to spend vast amounts of money to enact climate change targets and some of that may result in genuine productivity-enhancing benefits. Much of it will not but there is one small sliver of hope here – as private sector directed investment takes charge under a more positive Biden administration, we might get better capital allocation. I hope!
The last driver in this trifecta of state-directed fiscal expansion is the levelling up and onshoring debate. I think we won’t see an end to free trade but we will see subtle adaptations, as indeed economists such as Dani Rodik have argued for. Whether conservatives like it or not, we are seeing right-wing parties starting to embrace old social democratic ideas about onshoring, levelling up and better welfare safety nets. These right of centre politicians are embracing this agenda for non-ideological reasons but that doesn’t make the changes any less real. One very obvious aspect of this is that we’ll see more money spent on those with less money i.e the regionally located poor. That is good news in macroeconomic consumption terms as this groups propensity to spend is much higher. The obvious negative is that fiscal deficits will keep on rising but if growth rates can be boosted then maybe we can inflate our way slowly out of the trap.
The next bundle of drivers centres on central banks. If anyone thinks that central bankers have given up on the monetary experimentation game, they are deluding themselves. The rise of central bank e-money brings into view the next weapon – direct money transfers in the event of a slowdown. Friedman’s helicopter money finally emerges. Again, there is an obvious redistribution-based aspect to this which will boost consumption. In addition, central banks will carry on suppressing interest rates in part to help fund the fiscal deficits but also to force ever more investors up the risk curve.
My last bundle of factors is the most speculative and where I am most hesitant – productivity-enhancing improvements. All of the above is fundamentally concerned with what Marxist commentators such as Chris Dillow have, I think correctly, identified as a crisis in capitalism. The market system is an amazing creation and for the vast majority of time delivers remarkable progress but it is also prone to periods of extended crisis where growth rates fall back and generate social inequality and grievance, which is then expressed through the political system. Many such as Larry Summers have argued that the last decade has seen secular stagnation which I think is a respectable diagnosis though I’m not actually convinced that growth has been that slow – it’s just been very unequally distributed.
What is less much less debated is that measures of productivity growth have shown slower growth rates, although again there may be some measurement issues masking real growth (especially out of technological changes). In order to generate faster growth – to fund this fiscal expansion and keep a social and political consensus – will need additional productivity growth. What might produce this? I think there is a reasonable chance that the technological changes we are experiencing have already made huge changes and that we’ll now see real movement in the productivity numbers. One example – WFH. I think the work from home bonanza will wind down in the next few, post-Covid, world, but I also think many more will work from home one or two days a week. These home workers will spend less time commuting and vastly more time working from 9 to 7pm for their employers. This shift has been allowed by profound technological changes which are accelerating as we speak.
Another aspect of the technological challenge is what tech blogger Ben Thompson has called the rise of the aggregators and platforms, enabled by technology and globalisation. These global-scale platforms and aggregators are growing ever more profitable but might soon be replaced by shiny new versions of Google or Facebook. The point though is that globally scaled platforms and aggregators (whoever they are) are immensely profitable, which is good news for shareholders. Its also great news for productivity as these organisations are usually cruelly efficient and can use abnormal profits to fund expansion into new verticals where their productivity-enhancing dynamic can wreak more disruption. This narrative – which has some obvious policy challenges and is immensely unequal in its distributional outcomes – feeds into another driver. Large corporates are inherently more productive whereas smaller businesses are inherently less productive. It’s not popular to say this and I know we all root for the small businesses (which have a huge localised redistributional benefit) but hard economics tells us that scale improves efficiency. More scale equals better productivity benefits.
I’d also suggest that some other more hidden factors might boost productivity growth. The Blair government, amongst others, made much of the idea that a more educated populace who’d mostly been to university and would end up a more productive workforce. As thinkers such as David Goodhart have rightly pointed out this mass tertiary education expansion has had some dire consequences but my hunch is that we’ll begin to see the benefits in the twenties and thirties as these newly educated workers struggle with their precarious position. They will be forced to innovate, be more entrepreneurial and be more willing to consider post-university retraining and reskilling. Put bluntly if you’ve got a mickey mouse degree you are probably smart enough to realise that you might need to retrain in your thirties and forties – and you probably won’t be resistant to these ideas, unlike many 20th century industrial workforces who were trained in a Fordist way of corporate thinking which talked about jobs and skills for life. A new paradigm of constant training and retraining might help boost labour productivity.
Aggregate all these bundles of factors and I think we begin to see a narrative that offers hope for a Roaring Twenties of above-average growth as we escape the dreadful impact of Covid. Of course, any number of risks could derail any or all of these drivers but I think we shouldn’t – as investors – bet against this pro-growth agenda I have set out. Sure, it will produce fiscal incontinence on a vast scale but that will be for the thirties to sort out!