Macro observers generally fall into two categories in 2023: Those who believe the world changed this decade and those who don’t or at least doubt it.
I’m not sure my view can be neatly categorized. I try to avoid being pigeonholed lest I should find myself in a position where I have no plausible claim on being right. Maybe that’s cheating. I don’t know. And I don’t generally care.
If you do think the world changed as a result of the pandemic (and, later, the war), your argument goes something like this. The pandemic exposed, once and for all, the fragility of economies built on modern-day, services-based serfdom, where a shrinking few collect rents from the teeming masses. When those rent streams were disrupted, the entire system was jeopardized overnight. The rentier class lost a passive income stream and a paycheck-to-paycheck populace faced instantaneous poverty. Only the wealthiest were safe, and “safe” was a relative term: The streets were burning, after all.
At the same time, the peril of globalized supply chains was thrown into stark relief, and globalization itself, already under fire from the populist left and right for hollowing out the middle-class in the developed world, was indicted anew, this time on even more serious charges.
Monetary policy-enabled fiscal transfers prevented a depression and shortly thereafter, vaccines prevented a mass extinction (the former isn’t an exaggeration, and the latter only slightly). Demand rebounded and quickly outpaced supply, both in terms of goods and workers willing to provide services. Inflation accelerated, exacerbating the wage demands of newly-empowered labor.
Russia’s decision to invade Ukraine was gas on the fire as soaring commodity prices forestalled disinflation on the goods side, just as goods-to-services switching put more pressure on service providers unable to hire enough workers to meet demand.
Fast forward to H2 2023 (i.e., to now) and although inflation has moderated in most advanced economies, it’s by no means clear we’re going back to the way things were pre-pandemic.
Voters, having witnessed the power of fiscal stimulus, will surely demand more from it going forward, and it anyway hardly matters: Existential imperatives including rearmament and the energy transition will force governments to choose between spending and oblivion. Not much of a choice, really.
Labor, having tasted real victory over capital for the first time in decades, won’t be keen to relinquish momentum. Climate change (which is getting more real by the month+) will invariably elicit sporadic bouts of harrowing commodities volatility. Paradoxically, the green transition will too: Building a clean energy world will be enormously extractive and fossil fuel-intensive.
In his latest, BofA’s Michael Hartnett recapped most of that narrative and put some numbers to key points. Whether you’re in the changed world camp or not, it’s worth considering the figures, some of which are familiar to the point of being wholly pedestrian, others less so.
“Unemployment is low, strikes are on the rise and wages are hot,” Hartnett wrote, noting that there are 650,000 US workers either on strike or threatening strikes. Who can blame them? Even if (indeed, especially if) you’re capital, you can certainly understand why workers who’ve seen their counterparts secure huge wage gains and dramatic concessions from employers would want a piece of the action. Greed is good, Mr. Capital, no?
“Low unemployment equals labor has power equals high wages equals US retail sales up 33% from pre-COVID levels,” Hartnett remarked, spelling out the transmission mechanism from labor market dynamics to consumption to inflation.
Moving on to geopolitics, Hartnett said commodities are likely to “clash” with the soft landing narrative.
He described OPEC+ as “stingy” and emphasized that “it’s not just oil.” “All major commodities are vulnerable to national and regional supply risks,” he cautioned, adding that there are “at least 18 commodities” where more than half of supply is controlled by just five countries or alliances. Oligopolies, Hartnett wrote, are inflationary.
As for government spending, he traversed familiar territory. “Despite the end of COVID” we’ve seen some $2.4 trillion in fiscal stimulus over the past 18 months across developed markets.” He cited the US budget deficit (again), noting that it’s the largest ever outside of wars and recessions, while America’s debt burden is up $18 trillion over a very compressed time frame.
Importantly, Hartnett noted that in 2024, more than three billion people will vote in countries which together comprise 80% of global equity market cap and 60% of global GDP. “Markets and maybe central banks are thus discounting more fiscal excess,” he said.
Our middle class may indeed be “hollowed out” but we ain’t seen nothing yet. We still use 20-25% of all the world’s resources for 4% of the population. Not a fair allocation by any stretch of the imagination. And if you think our suppliers are stingy now, just wait. The commodity markets will provide us with the canary in the mine. We want to imagine that any change to our collective “fortunes” just won’t happen but what we should be figuring out is just what a portfolio for living in a hollowed out country should look like.
Harnett’s descriptions splash some chilling water on the possibilities in the future of markets, institutions and countries. Whether present or past tense, changing or changed, doesn’t matter. He has a point, and he shines useful light on vague questions I have pondered, but without a clear view of what’s coming down the pike. Thanks, Mike Harnett. I take the theme that investing and evaluating investments will only become more complex next year.
I’m at the table, dice in my hand. Honestly, my 2024 bets on innovative battery manufacturing, 5G, and internet advertising are made already. I hope at this point that the US market and the financial well-being of good old American consumers will stabilize by Q2 of 2024. Fingers crossed.
I have no idea if the world has changed or not.
However, I have yet to talk to one single Millenial or Gen Z person who thinks investing in USTs is a better idea than investing in equities. **
H said in another post that the last time mortgage interest rates were over 7%, those trying to purchase homes today were 9 years old, therefore, a 7 handle seems ridiculous to them!
In a similar way, since Millennials were 9 (about 20 years ago- or 2003), SPY has returned over 10% annually and produced 7.5% real returns (in excess of inflation). Equities beat the pants off of US treasuries/ bonds over this same time period. Therefore, over the next 15-20 years as the Boomers pass down $75T of wealth (which Boomers might have invested in the 60/40 framework), their kids are more likely to invest much more heavily in equities and not follow the 60/40 guidance that their Boomer parents believed in.
** the sample is not statistically valid!
I bought a house once when the rate was 11%. That was after the rates came down from a greater height. I refinanced 18 months later when the rate dropped to 6.375%. My wife and I were ecstatic at the time.
One other thought to share… I’m not a bond guy either. I invest in equities. But I feel the air needs to clear before questions about the quality and strength of the US economy are settled. I have a sense of foreboding that changes in dynamics are coming this decade. US markets have enjoyed free-wheeling money flow for a long time. I’ve been amazed at how long it has lasted and that so much money could continue being invested to sustain such a strong US market for so long. But change happens. It just does.
For instance, the climate is changing. For this matter, the question is not just what do we want. It’s actually a question of what actually can help? For instance, commodities like Cobalt, Aluminum, Iron-Ore, Lithium, Nickel, Uranium, and Copper all can play a role in realizing the benefits and values of renewable energy, which is going to be very expensive, and it will help the environment. It may even be a decent investment, though it’s not my bailiwick. But the truth is, the money invested in extracting these commodities will only make a small dent in the impact of climate change. So climate change will not be arrested and controlled. Addressing climate change will be very expensive. Climate change will persist. The climate will not be “normal.” Commodities will deplete. And you’ll have a mess of radioactive material to house.
Today, thorium nuclear power, which provides much more positive impact for dealing with climate change is the best thing for solving the problem of the climate. It’s quite different from traditional nuclear power, which remains dangerous to humans for 10,000 years. Thorium can be stored more safely and continues to be radioactive for 300 years, which is only 3% of the time needed before traditional nuclear power generation materials become safe. The Chinese are investing in thorium. The US ought to as well.