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Sune Sorensen
September 4, 2020

Under the "Macroscope": The Decade Ahead

Niels Bohr, my fellow countryman and Nobel laureate in Physics and father of the atomic model, is quoted as saying, “Prediction is very difficult, especially if it's about the future!” However, change is the only constant and change is not an event; it is a process and as such, we can explore what such processes may look like. From there, we can map out different paths to major change and from that vantage point, we can monitor for signals that may help us determine the probable direction of travel in the key economic, financial, and social spheres. As investors and business owners, we can thus position ourselves to manage the risks and harness the opportunities.

In this exploration of the decade ahead, I will be putting the US under the ‘macroscope’ as it remains the key cog in the global economic and financial machine. It has been dominant on most fronts for the last 70 years, and in terms of financial flows and asset markets performance, it has been ‘exceptional’ for the last decade. However, many of the considerations I’ll raise will also be applicable to various degrees to the other key components of the global economy and all are interconnected at historically high levels.

As we exited the Great Recession in the early 2010s after unprecedented monetary and fiscal measures, there was much talk of the onset of the ‘Japanification’ of all developed economies. Many observers are expecting this to finally set in during the 2020s. The human mind likes to put neat labels on complex things and then file them away in an orderly spreadsheet-like mental space never to be questioned and thought much about again. This approach comes with great risk of a rude awakening in the real world. The US is not Japan – culturally, politically, economically, or financially. There are certainly overlaps: financial repression at the monetary level, debt dependency, centralization and zombification have gradually gained the upper hand in the financial and economic spheres during the last decade. The Covid-19 crisis has been an accelerant for all of these trends, and its effects will be with us long after the virus. While the monetary playbook has been the same, it’s the reactions to its outcomes that should be considered. Politically, culturally, and socially, the US is a very different place and, in my view, it’s those differences rather than the similarities that will be most important in terms of shaping the outcomes for the next decade.

,A look back to the 1960s…

These political and social forces will turn ‘ice into fire’ as the 2020s get underway. The current “Molotov Cocktail” zeitgeist smells more like the late 1960s to early 1970s to me: coming out of increasingly unpopular foreign entanglements (Vietnam then – ‘War on Terror’ now), with the nation’s social fabric stretched to its breaking point, and matters of race and inequality dividing society across rural/urban and generational lines, only a short time after what felt like major social and economic progress. A world still shaped in the image of the ‘Washington consensus’, looking increasingly out of consensus and confused by the messages coming out of the ‘shining city on a hill’. As the 1970s got underway, it was clear that there were deep political and social problems. The late-60s were marked by riots in major US cities, the military was deployed on US streets, and protesting students were shot and killed by the Ohio National Guard at Kent State University. These were truly partisan times, while several high-profile civil rights leaders were assassinated, as was a presidential candidate.

Once it became clear that crackdowns and displays of hard power were only making matters worse, the chosen solution was to throw money at the problems. The ‘guns vs. butter’ debate turned into the ‘guns and butter’ framework that has been with us ever since. The political economy set in and fiscal measures became the answer to all ills. Debt became the remedy and central banks were co-opted to monetize it. In 1971, President Nixon abolished the post WWII Bretton Woods system and severed the USD’s final links to gold, thereby removing cumbersome restraints. The price was paid via the currency and eventually through exceedingly high levels of inflation. In 1972, an embattled Nixon left office in disgrace, after the fallout from the Watergate scandal.

Back to the future…

So where are we heading? Well, ‘history rarely repeats, but it does rhyme’ on occasion. The upcoming US presidential election is obviously on the forefront of most people’s minds. It may come to be a seen as a point of departure, but the dynamics of the 2024 election may prove more consequential in terms of actual policy changes beyond the rhetoric.

Let’s get fiscal…and soak the rich…

In 2020, the Millennial and Gen Z generations will numerically match the Boomer and Silent Generation in the electorate (if they come out to vote) and this trend will obviously only continue to tilt more and more in their favor, even with the quirks of the Electoral College for presidential elections factored in. Without getting into the party politics of it, one can clearly see the interests of this rising electorate majority. Millennials, who are now in their early 30s, own just 3% of the total US household wealth, according to the Federal Reserve. The Boomer Generation entered their late 30s in the 1990s with 21% of the household wealth and they currently hold 57% of it.

People tend to vote in line with their interests, especially in times of economic crisis, so fiscal spending focused on areas important to the younger generations and broader wealth redistribution measures would appear to be baked into the cake. The top marginal tax rate for individuals in the years between 1965 and 1981 was 70% and finally in 1978, faced with double digit inflation rates, income tax brackets were adjusted for inflation leading to fewer people being directly taxed at the highest rates. Currently, personal and corporate tax rates are at relatively low levels. Considering the current debt and fiscal dynamics alone, it is hard to see how they are not heading for significantly higher levels in the years ahead. Add in political sentiments and the required spending to get the economy back on track and you are looking at a fraught landscape.

The witches’ brew…

In the last decade, global monetary policy has been loose, but fiscal policy was relatively tight. The last couple of years in the US were the exception, with tax cuts and fiscal spending combined with relatively tighter monetary policy. Now both have been unleashed in the face of the Covid-19 crisis. Fiscal spending is politically hard to scale back, let alone stop, once you get started, and as we have seen, once monetary policy gets going and becomes a key driver of asset prices, that also becomes impossible to rein in.

The risk going forward is that there is a sense of ‘the boy who cried wolf’ attached to inflation risk, after many observers made strongly-worded predictions about high to hyper-inflation being just around the corner when those first rounds of QE were unleashed back in ‘08. Populations seeking simple, painless solutions to complex, difficult issues tend to find politicians who will make promises of exactly that. The ‘answer’ would appear to be ‘MMT’ by another name with never-ending ‘temporary’ fiscal programs paid for by more and more debt, which in turn is bought by the central bank spiced up with some ‘tax the rich’ efforts for good measure.

In the mid-1960s, US inflation was below 2% before exploding into double digits in the mid-1970s. Will this ‘rhyme’ with the 2020s? The ingredients are all there. What is for sure is that most central banks have lost their independence and are increasingly a tool for government policy. With global levels of debt reaching a record $258trln in Q1 2020, it will be very painful to raise interest rates and any policy errors will be felt far and wide.

This is a volatile brew that has been simmering for a while and may come to a boil in the decade ahead. Investors need to think about these dynamics – social, political, economic, financial – and make sure they are prepared to face the risks and harness the opportunities.

With financial repression set to spread beyond the monetary policy domain, ‘how you own’ will be as important as ‘what you own’, so make sure your vessel can weather the storm. On the investment front, it starts with comprehensive risk management and global cross asset class strategies. Finding companies supported by decade-long mega trends powered by innovation and with a proven ability to navigate change, and then building positions upon market disruptions when most are fearful, will be key.

It’s also worth noting that currently ‘Real Assets’ relative to ‘Financial Assets’ are at their lowest point since records began in 1926. Precious metals, productive land (farm & forestry) and real estate in stable jurisdictions might be a good place to start as you look to protect what is rightfully yours on the path ahead. On a final note, always stay humble and nimble and operate with a margin for error for optimal outcomes.

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