I was visiting with a client the other day about the inevitable rebound to come in our economy, and the opportunities that are developing now. The conversation turned to concern for those we know who might not survive a COVID-19 episode, and the grim scenes and stories from tragically overburdened hospitals.
It was a reminder, again, of the duality of our existence.
On the big scale, it is almost mundane. Demographers estimate that 108 billion humans have been born in all of history, and 100 billion of us have already died. Death comes to us all. It happens to everyone.
Yet when you get down to cases, what could be more unique or personal than our experience of the loss of a friend, lover, parent, brother, sister?
It may seem impersonal or cold to compare a projected death toll from our current troubles to some past pandemic, to talk about economic recovery and market rebounds. But we have to think about the big picture in order to make plans for living. We need to avoid emotional reactions to issues which would benefit from reasoned consideration.
I am only going to say this once. I feel the pain up close, intensely. Less than a year ago I learned first hand what happens when the ventilator loses the battle to keep a person alive.
I’ll not be apologizing for trying to figure out how to make the most of what we have to work with. Cathy wrote me a note in her last hours. It said “You have a lot of wonderful life left.” That’s the big picture. 330 million of us will survive the virus in this country. We have a lot of wonderful life left.
We need to feel our feelings about the pain up close. But we owe it to each other to think our thinking in the big picture.
If you would like to talk about the big picture or anything else, please email us or call.
The gap between consensus expectations and reality as it unfolds is where profit potential lives. This is why we put so much effort into studying trends and the ramifications for investors.
Here are four trends we’ve been watching for some time:
1. The cost of solar electricity and battery storage, being forms of technology, are declining year by year. In some places around the world, this combination may already be the most cost-effective way to provide new electrification. We believe we will see the end of fossil-fuel-powered generating plant construction within the next decade or so. This will not happen because of environmental activism, but because of compelling economics.
The investment ramifications are manifold. There will be winners and losers, and we have been investing in accordance with our developing understanding of how this is going to play out.
2. The world’s most populous democracy, India, may be poised for decades of economic growth much like China experienced over the past thirty years. Moreover, by 2050 India is projected to be the most populous country in the world. China will be surpassed as a result of its short-sighted ‘one child policy’ that created a huge demographic challenge with an aging population.
By getting in early, even a small investment allocation may make for significant potential gains over years ahead. No guarantees, of course.
3. The airline industry, after nearly a century of cutthroat competition that resulted in wave after wave of bankruptcies, has consolidated into a handful of companies that compete much more gently, to their mutual profit. The energy revolution may result in lower prices for fuel in the future—a large part of airline operating costs. And continuing development around the globe bodes well for air traffic volume trends.
The consensus expectation in the market seems to be for a return to the bad old days of costly competition. But we believe the industry has fundamentally changed due to the dramatically lower number of competitors after years of mergers and consolidation. Consequently, stocks in some of the major airlines appear to be bargains.
4. The Federal Reserve and other central banks around the world are set to begin unwinding the interventions used to effect the so-called “zero interest rate policy”, the policy by which the Fed kept the effective federal funds rate close to 0% following the recession of 20081. While restoring returns on bank savings and certificates may be a good thing for savers, rising rates on bonds will cause the value of existing bonds to go down. When you think about it, a 2% bond cannot sell for its full face amount in a 4% world.
Many parts of the fixed income universe appear to be distorted by the central bank policies. We believe that massive amounts of money flowed into mispriced assets in an attempt to find safety.
Clients, these are the things that have caught our attention. We cannot know the future, but it makes sense to try to get a better handle on it than the average market participant. We can offer no guarantees except that we will continue to put our best effort into the endeavor. If you have any questions or comments or insights to add, please email us or call.
1Federal Reserve Bank of St. Louis, Federal Reserve Economic Data
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
No strategy assures success or protects against loss.
Stock investing involves risk including loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
A few weeks ago the Nobel Prize Committee announced the latest round of Nobel laureates for 2016. Seven Americans were named to this high honor—and six of the seven were immigrants, born outside of this country.
Immigration is frequently a hot topic during an election year, this one perhaps more than most. On the one side, we are told that immigration is costing us jobs, lowering our wages, and causing more crime. On the other side we are given a moral argument, that we are a nation of immigrants who should welcome others into our melting-pot culture as we have welcomed those who came before.
We set aside the moral side of this debate; while we occasionally dip into moral philosophy, this blog concerns itself chiefly with practical matters of economics. And as a practical matter, there are very good reasons why we should appreciate the value that immigrants bring to our country, above and beyond whatever Nobel prizes they may win.
As a country we are facing a demographic crisis. Since the 1970s, we have been having noticeably fewer children per family than we did previously. As our generation reaches retirement age, record numbers of Americans are leaving the workforce. I still plan on working until I’m 92—but many of my contemporaries have other plans. As we leave, there are more openings left behind than we have children and grandchildren to fill.
This demographic wall creates a major drag on the economy: we want to grow our economy faster, but we simply don’t have enough workers to do it. For the past year we’ve seen the unemployment rate hovering at 5% and below. Even as the economy recovers and we start to add jobs, there’s going to be a very real question as to who will be filling them. The workers simply aren’t there. To some extent this is a regional issue—some of our employment woes could be fixed by having job-seekers move from economically depressed areas to thriving areas where jobs are being created too quickly to fill. But not everyone can uproot their lives for work, and where people cannot or will not relocate, the only alternative is to import workers from elsewhere.
Ours is not the only country facing this demographic crisis. We need only look at Japan, Europe, and other parts of the developed world to see what happens when an aging population is not replaced. Many first world countries have a lower birth rate and lower immigration rate—and, not coincidentally, lower GDP growth. We would do well to learn from their example what not to do.
This is not to say that we endorse open borders or encourage illegal immigration. We are a nation of law. We should have sensible laws that are enforced in a fair and even-handed manner. But to suggest that we should slam the door shut on immigrants is to ignore the economic reality we face. One of the best and surest ways to expand our economy is to add new people to it—and we will need to, if we wish to continue growing at a reasonable rate.
The opinions voiced in this material are for general information only.
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