Financial crystal ball 2022 – profound thoughts by yours truly and GPT-3.5
Mega-trends & personal investment decisions
This is an attempt to develop the context for making personal investment decisions. Opinions and comments are very welcome. This is triggered by a recent Bloomberg article “Forget Everything You've Learned About Investing.” It argues that the global economy is going trough a huge structural change, a departure from the world of the last few decades:
low inflation
plentiful and pliant labor
cheap energy
easy access to capital
globalization
gradual shift in the world’s wealth from tangible things (energy infrastructure, machines, factories, inventory and the like) to the intangible (patents, data, brand value, etc.)
All these trends are reversing:
"When the tide goes out, you can see who has been swimming naked, or so Warren Buffett likes to say. He meant it to refer to the corporate world. But it works just as well for countries: A nasty mix of general geopolitical tension, pandemic policy and war has meant that the tide of globalization — of cheap Chinese manufacturing and cheap Russian energy — has gone out for us. And we have been found to be less dressed than we should be."
"The next few decades won’t be about apps, brands and eyeballs. They will be (in fact, already are) about building energy assets, improving electricity grids and building new manufacturing capacity across the western world. Think capital expenditure boom and industrial super-cycle."
The implication for investors:
"You need to know how to invest in tangibles in a middling-inflation environment — and you need to know how to do that at reasonable valuations, given that the end of the low-interest-rate world is also the end of the world in which price doesn’t matter."
Wow!
Here is my thinking: The mega-trends that will affect the dynamics of the economy and markets, and thus the investment returns in the next decade or two, are:
Deglobalization and the need to duplicate supply chains and production capacity
Energy transition
Population aging - labor pool will shrink; social expenses will balloon; saving rates will plummet
Arms races between super and regional powers
Advances in fundamental science and core technologies
Note that these factors will pull the economy and investment returns in opposite directions. And they will interact in non-linear ways. So the economic and market performance will depend on the balance of these forces. For example
Deglobalization (1), energy transition (2) and arms races (4) should stimulate economic activity, though not necessarily the quality of life.
Population aging (3) will depress economic activity.
Advances in science and technology (5) may increase productivity but depress employment.
Note that the balance of these counteracting forces will differ by country and region. For example:
China, Europe, Japan, and Korea will be hit by population aging the hardest.
Europe and China have the most to lose from deglobalization.
Europe and Japan will be spending more on defense.
China and Europe seem to be doing more than others to speed up the energy transition.
The US appears to be well-positioned to deal with these changes:
Its domestic market is vast, its international trade is a relatively small part of the GDP, and it is food- and energy-independent.
Its natural birth rate is relatively high, and it can attract as many immigrants as it wants to.
The arms race will benefit the US defense industry, and local conflicts will stay overseas.
It is still the leader in science, R&D, and high-tech.
All that said, I think the effects of public policy may outweigh these "objective" factors. In the medium term, things like immigration and industrial policy, geopolitics, and, most of all, internal cohesion will hugely affect everything else. Over the long term, past the 10-year horizon, environmental changes and advances in science will define the future.
Go figure...
Or go ask ChatGPT, which is what I did:
Me: What global mega-trends will affect the investment returns in the next decade or two?
GPT: There are a number of global mega-trends that are likely to impact investment returns over the next decade or two. Some of the key trends to watch for include shifts in global economic power, the continued rise of emerging markets, the ongoing impact of technology and innovation, and the increasing focus on environmental, social, and governance (ESG) factors. Other factors to consider include demographic shifts, such as population aging and urbanization, as well as geopolitical developments and shifts in global trade patterns. All of these trends can impact the performance of different companies and industries, and should be taken into account when making investment decisions.
Hmm… 🤔