On Friday, last week I attended the always excellent Amundi World Investment Forum, a rather sumptuous affair in the shadow of the Louvre in Paris.
Great speakers always abound at this annual event but this year one of my own favourites headlined, Professor Sir Angus Deaton. Anyone who’s read his recent papers can probably guess at his big theme – the multiple causes of deaths of despair amongst white working-class Americans highlighted in his latest Brookings paper with partner Anne Case looked. The paper is available here at https://www.brookings.edu/wp-content/uploads/2017/03/6_casedeaton.pdf
The Scottish-born, American based economist highlighted three increasingly obvious drivers for the recent decline in longevity amongst the white working class, stateside.
- Accidental poisoning i.e opioid abuse
- Liver disease i.e alcoholism
What’s causing this shocking decline in longevity? Untangling the web of drivers isn’t easy and many of the more obvious trends discussed don’t seem to be terrifically relevant. Increasing inequality? If so why haven’t other countries with equally high Gini coefficients seen an increase in death rates? Low economic growth rates? Ditto. Plenty of other countries have seen lower trend growth rates but not experienced the same uptick in death rates although deaths from alcoholism in the UK are increasing.
But the good professor did keep returning to one obvious indicator that does point the finger at inequality – the long-term decline in median earnings, experienced over the last 40 years. Another factor might be the decline in labour force participation rates amongst many white working-class men. According to Professor Deaton three factors seem to explain some of the pain and despair that is pushing so many working class men over the edge:
- Anti-Labour policies
- Poor health care policies especially in the US
- Immigrants competing with low-skilled employees
I’m not sure I completely agree with all these drivers, not least the role played by immigrants. Evidence on this score is still very contested – the consensus still seems to be that immigrants by and large help to INCREASE overall economic activity as well as wages but there are of course massive localised problems. For more information on this increasingly angry debate amongst economists see the excellent article in the Wall Street Journal looking at the Mariel boatlift back in the 1980s and its effect on Miami labour markets. Available here at https://www.wsj.com/articles/the-great-mariel-boatlift-experiment-1497630468
Whatever view one takes of these immigration debates, we can’t possibly deny the impact of anti-labour policies by contrast. Asa good old fashioned liberal, I’ve always despaired of obstructionist trade unions using legitimate local grievances to fight ideological proxy wars but even I have to admit that the anti-union push has gone too far. Unions have an incredibly valuable role to play and if they can be talked out of using labour disputes as a way of fighting political arguments, we could rebuild a national consensus. Let’s get labour and big business talking to each other again and working cooperatively, particularly to help the lowest paid and least educated. Professor Deaton’s other obvious conclusion also bears consideration. Whatever the causes of the problems he identifies, the inevitable result is political populism, of both the left and the right.
And populism of any variant usually results in more government spending which in turn increases government borrowing with the inevitable knock on effect on interest rates.
Sovereign wealth funds warn on illiquid assets
Next up after Professor Deaton was an equally illuminating panel focussed on the views of leading sovereign wealth funds, with speakers from Singapore’s GIC (Dr Jeffrey Jaensubhakij, Group Chief Investment Officer) and Abu Dhabi ( Mark Nicholas Cutis, Chief Investment Officer, Special Situations at Abu Dhabi Investment Council ).
For me two big take-aways emerged from the surprisingly frank and honest discussion.
- Populism has a direct impact on strategic asset allocation. For the last few decades most sovereign wealth funds have made good money from a huge carry trade – buy bonds as interest rates are pushed ever lower. But echoing Professor Deatons point, if interest rates are likely to increase to fund extra government spending that trade looks increasingly risky. Inflation expectations might also rise, making bonds less attractive.
- The two sovereign wealth funds on the Amundi panel were very strident about their fears for illiquid assets (property and PE based mainly). Jaensubhakij from Singapore warned that investors are increasingly not being paid enough for taking on illiquidity risk. He suggested that the fund was “finding it increasingly difficult “to find good value investments with many of the best opportunities “ bid away”. This message echoed by Abu Dhabi where Mark Cutis warned that anyone contemplating investing in illiquid assets afresh would “find it very difficult to get involved. Be careful of doing it now…valuations looks stretched”.
This second message really resonates with my own view about peak fund issuance, especially in the alternatives space. I have been a long term fan of illiquid, alternatives for many years now, but even I think we might be close to ‘Peak Alternatives’. As more and more niches find their way into the public markets – arguably less well equipped to deal with the volatility of underlying illiquid assets than long term sovereign wealth funds – the chances of a nasty surprise increase by the day.
The website for the event is at https://forum.amundi.com/