Outlook for the 21st Century
“Every civilization sows the seeds of its own demise” Georg Wilhelm Friedrich Hegel, philosopher (1831) “Monetary actions affect economic conditions only after a lag that is both long and variable” Milton Friedman, economist (1961) “If something cannot go on forever, it will stop” Herbert Stein, economist (1986) “Our unwavering conclusion: Never bet against America” Warren Buffet, investor (2021) _____________________
The Framing of Human Survival Perhaps the most powerful and enduring force of life is the survival instinct. Yet, survival is always accompanied at some point with struggle. Economics is a history of human attempts to maximize survivability of individuals, countries, companies, and groups while struggling to overcome the short- and long-term costs and consequences of these efforts and cope with the inevitability of demise. Our psychology and economic decisions are motivated by hope and fear, expressed by Benjamin Disraeli:
“I am prepared for the worst, but I hope for the best.” Expansion and contraction are the bookends of life. This inherently uncertain push-pull is most profoundly and disturbingly felt when unsustainability appears to be inescapable, and substantial change, often unwanted, looms. It defines the concept of crisis. Our nation and our world are facing such crises, some immediate and others slow motion, summarized from recent headlines (see footnotes at bottom):
Trade wars and on-shoring are causing stimulative globalization trends to slow or reverse.
Geopolitical norms are being aggressively challenged causing global rearmament.
Public health is threatened by evolving pathogens.
Ecosystems risk collapse, evidenced by species endangerment and extinctions. Climate change effects are causing food and water insecurity, population migrations and political instability.
Human demography is changing, evidenced by falling global fertility and life expectancies.
A 40-year trend of lower interest rates is reversing monetary policy from stimulative to restrictive as global inflationary pressures rise, even as governments increase fiscal spending.
These are productivity and growth hurdles, and liabilities to individuals, governments, and institutions. Rational Response to Crises The above crises imply that the driving forces of economic growth over the past 50 years are declining but are not extinguished. Growth is slowing, but not trending negative, forcing social change. To wit, eight billion people on planet earth are fighting and struggling to survive, adjust, adapt, and prosper. Some of these people will react by escapism or denial. Some will isolate themselves or migrate, attempting to control their environment. Still others- we think the significant majority- will adapt rationally after a long and variable lag. This slow adaptation is due to the uncertainty in the perceived duration of the stimulus. Additionally, uncertainty is heightened by stochastic aberrational events or surprises that confound expectation. For instance, a population must assess questions like “How quickly will global public health cope with evolving pathogens?”, or “How significant will the structural changes stimulated by climate change be?”, or “How effective will the Federal Reserve be in driving down inflation, perhaps creating a recession?”. Locally the questions might be, “Will safe clean water be maintained?”, or “Will storms or floods cause destruction in local cities?”, or “Will taxes reflect increasing government spending?” These disturbing questions lead to a distribution of human answers that lead to long term social change. Of course, change is always present and never complete. Just when people believe they have weathered the storm, a new threat arises. Conversely, when people begin to despair, frequently new tools or technology emerges which make significant differences. Managing ourselves is taking on renewed importance. In that vein, a few caveats are worth noting:
Panic, an uncontrolled reaction, is never an answer in either personal or social activities.
Taking reasoned action is a wonderful way to deal with anxieties. The admonition to “Think Globally and Act Locally” is often a way to make a difference in your locale and society.
In reality, complete or absolute solutions never occur. The perfect is often the enemy of the good. We must accept partial solutions and compromises, implying every choice is relative and probabilistic. People adamantly demanding complete or pure solutions are frequently motivated by ego, profit, or organizational advantage rather than improving the problem at hand.
Since everyone is continually adapting, the most useful psychology is maintaining an open mind. It pleases to assume one knows all answers, but this is counterproductive. Frequently, though not always, it is wise to postpone acting or deciding on a given issue, as more data can improve one’s basis for conclusions. Wisdom is the appropriate and considered use of all available facts.
Since money is in fact a major source of social power, these caveats apply to our spending, our investments, our sense of stewardship, and our values.
21st Century Themes In every era, some investments fail to grow in the emerging paradigms. Others will solve real problems offering growth paths. We look to identify long-term themes where investments can solve problems:
This is not your grandparents’ economy. The inflation fight is real and because of the megatrends previously discussed, it is likely to be chronic, with higher average levels, and volatile spikes. We are planning for a 5% average inflation spiking to 10% or more.
The so-called “Fed Put” appears dead. This subtle tactic, employed by the Federal Reserve, gradually lowered 1981 interest rates near 16% on the 10-year Treasury note to a 2020 level of 0.5%. In this manner, economic downturns could be countered by lower interest rates while inflation remained low. This paradigm is now broken as evidenced by the need to raise interest rates to provide a real return (nominal rate less inflation rate) and battle inflation. Markets are conditioned to expect this after forty years, but in our view wise investors should take heed.
Climate change is also real. However, change is not simple, and events intervene to thwart adaptation. Wars, lithium extraction, geopolitical wrangling and technology limitations all conspire to make this transition difficult, costly, interrupted, and incomplete.
Public health is undergoing whiplash. After decades of taking acceptable health quality for granted, the world is grappling with the impact of evolving viruses; unsafe food, drugs, and water; politicized policy; escalating mental health issues; and substance abuse pandemics.
Infrastructure is woefully underinvested. A global investment surge is only just beginning, mostly funded and applied in developed economies. Along with infrastructure is global rearmament and artificial intelligence applications as geopolitical cold and hot wars erupt.
Two general portfolio guidelines are gaining priority. One is that with higher average interest rates on the horizon, we expect to work harder to maintain a complementary equity-bond balance in diversified portfolios. Some in the industry describe this as the 60%-40% (equity/bond) portfolio though we argue that there is far more nuance regarding client risk profile, retirement status, and bond duration (time to maturity). Secondly, we are studiously avoiding industries, companies, and regions with unregulated, impulsive, or irrational leadership. We deem cryptocurrency, China, Russia, and Twitter as examples of counter-productive decision-making and leadership, patterns appearing to become more frequent. We at KWM select investments which address these major themes. We anticipate a significant rebalancing sometime in the middle to latter quarters of 2023. During annual client reviews, we discuss these individual positions and how they support emerging national and global economic trends. FOOTNOTES REGARDING GLOBAL SOCIO-ECONOMIC-POLITICAL-ENVIRONMENTAL ISSUES https:/ www.eurasiagroup.net/issues/top-risks-2023;