The Tumultuous Birth of Our New Golden Age
Beginning around 1771, per capita income and quality of life began to rise in five unprecedented waves which we refer to as Techno-Economic Revolutions. Each wave was enabled by a general-purpose breakthrough technology such as the steam engine, the railroad, the assembly line, and now, the digital computer. And the hallmark of each revolution was an extraordinary surge in productivity giving everyone access to more, with less effort.
Few so-called “experts” truly appreciate the implications of harnessing Techno-Economic Revolutions. When we published Ride the Wave in 2013, our objective was to prepare managers, consumers, and investors to harness the forces of change when the Fifth Techno-Economic Revolution inevitably evolved from its Transition Stage (or Turning Point) into its Golden Age. A new cyclical bull market began in March 2020 amid the secular bull market that started in 2013, anticipating the Golden Age. As of now, both are going strong.
What’s the bottom line? For smart investors, the good times are here, and the best is yet to come. If you need an illustration of why understanding the implications Techno-Economic Revolutions is so valuable, just consider the 165% rise of the Trends PARE-5 portfolio since March 23, 2020, when we called the bottom of the market. Those who failed to understand what was going on missed this windfall, which also took the NASDAQ up 94% and the S&P 500 up 63%. We’ll talk more about the investment implications in trend #3, this month. In this segment, our focus is on the broader economy and what lies ahead.
In early 2021, it’s fashionable to say “we’ve come to the end of the line” and “it’s time to hunker down.” It is commonly believed that the subpar economic performance we saw in the early 21st century is all we can hope for going forward. That’s the same sort of mindset which dominated in the early stages of the last Golden age (beginning in 1943) and created huge openings for those who could see the bigger picture.
Today’s pundits typically think that, just like Barack Obama, Joe Biden is inheriting a damaged economy that will struggle to recover, perhaps for years. The reality is quite the opposite. Biden is, in fact, stepping into a “dream scenario for economic growth” and this will become abundantly clear on the other side of the Covid-19 pandemic’s second wave. Just consider the facts.
When Obama took office in January 2009, the global economy was struggling with the aftermath of the housing bust and subsequent financial crisis. Some still believe that greater fiscal stimulus from Congress could have boosted the recovery. However, the truth is that the “Great Financial Crisis” was simply a by-product of trying to swim against the current of Techno-Economic Revolutions. Just like the 14-year period from 1929 to 1942, the first 16 years of the 21st century were destined to be a difficult time of transition and stagnation. Fortunately, the monetary and fiscal policy made the pain associated with this transition far more manageable than that of the Great Depression.
To make up for the kind of innovation-driven growth that disappeared with the bursting of the dot-com bubble, our institutions created perverse incentives which drove unjustifiable investments into the housing sector. For a period, this kept people busy in construction, finance, and consumer goods, but it did nothing to enhance productivity. So, once the housing supply exploded causing the housing bubble to burst, these enormous investments had to be written-off. And then, a slow recovery ensued, exactly as the theory of Techno-Economic Revolutions predicted.
In recent weeks, conventional thinkers echoed 2009 by arguing that the failure of Congress to agree on another stimulus package prior to the November election raised the specter that the economy will endure a reversal in the coming years.
But the current economic reality of 2021 is in no way like the reality of 2009. Obviously, our economy faces getting past the self-inflicted wounds driven by our response to the pandemic. But after that, a new period of rising affluence is virtually assured.
With Covid-19 cases peaking in January, it is understandably hard for most people to look beyond the lockdowns and fearmongering. And it’s showing up in the economic numbers, but this should be no surprise. The pre-election political posturing on a final wave of stimulus has led to some economic softness in November, December, and January. But we can afford this “soft patch” after the private sector created jobs at the monthly pace of 906,000 as recently as October. The message here is not to let the near-term challenges distract us as the economic stage is being set for a period of extraordinary economic growth.
Of course, the crucial macro-assumption here is that effective and widely distributed vaccines will lead to a robust rebound from the depths of the 2020 crisis and provide the best stretch of economic growth since at least the 1990s. Notably, Trends is not alone in seeing “the light at the end of the tunnel.” Goldman Sachs is looking for real GDP growth averaging nearly 4 percent over the next three years: 5.3 percent in 2021, 3.8 percent in 2022, and 2.4 percent in 2023. And even if we returned to just 2 percent real GDP growth in 2024, we will have had the best economy since the late 1990s boom. Notably, this four-year period will see U.S. unemployment steadily falling into the 4-percent range, if not lower.
But that’s just the most likely case. There is no reason to ignore the fact that good fiscal, regulatory, and monetary policies could make this encouraging scenario even better. This is where Biden’s team could certainly underperform, relative to Trump’s. For example, the best thing the new administration could do, other than getting the short-term stimulus passed, is NOTHING! That means not raising business taxes and not slapping heavy new regulations on America’s most innovative companies. For the Biden team, the big challenge will be resisting anti-business policy initiatives coming from the progressive left.
On the other hand, diminished influence from the populist right may lead to more high-skilled immigration coupled with greater science investment. That would be a big plus for the commercialization of game-changing solutions.
In any event, the monetary and fiscal “pump already seems primed” to turn the 2020s into the 21st Century’s “Roaring Twenties,” including a productivity and wealth boom that extends well beyond a mere “post-pandemic rebound.”
In a recent essay in the coming productivity revolution, Eli Dourado lays out a sector-by-sector roadmap covering how AI and other digital technologies, will catalyze growth in biotech, transportation, energy, space, and IT. His focus is on how these sectors and technologies will determine whether we have “a Roaring 20s” or “a Boring 20s.” As Dourado concludes, “Collectively, these technologies add up to a lot of possibilities. If we cure a bunch of diseases, slow down aspects of aging, realize cheap and emissions-free baseload energy, deploy new modes of transportation and implement better construction technologies, we will almost certainly exceed 2 percent a year [total factor productivity] growth.”
But as he goes on to warn us, “… we might not do these things. It all depends on execution. The underlying science is there. The engineers are willing. Even the funding is available in most cases. But, as a society, how much urgency do we feel? Our culture does not prioritize progress—it fights, destructively, for the status quo. And our politics reflects our culture.”
br /> The Trends editors are already on record endorsing Accenture’s forecast from 2016 predicting dramatically higher U.S. productivity growth enabled largely by the unprecedented transformational capabilities of Artificial Intelligence. We’ll dig further into this crucial aspect of the coming boom in trend #2 this month.
But fortunately, we won’t have to wait for a big new wave of technology adoption before we begin seeing a productivity surge. A de facto productivity boom is already here. As economist Mark Zandi of Moody’s Analytics recently noted: productivity has increased by over 4 percent in the past year, dramatically exceeding the under-one-percent productivity growth rate we saw prior to the pandemic. Driving that surge has been the destruction of smaller, less productive businesses in industries such as retailing, leisure, hospitality, and recreational activities. According to Zandi: “Tens of thousands of mom-and-pop retailers have failed, and mid-sized publicly traded retailers have filed for bankruptcy, while the retailing behemoths gobbled up market share.” Zandi also notes that businesses across a variety of other sectors have “taken advantage of the pandemic to more fully deploy technologies and process changes which they were investing in but were reluctant to take full advantage of during the good times.”
That begs the question, “Have we seen all the productivity benefits from the pandemic shock or will the productivity-enhancing response to the pandemic continue into the future?” According to Goldman Sachs, the effects are likely to last well into the new decade. As they put it, “The pandemic may also catalyze permanent changes in business input usage; for example, reduced travel and entertainment spending. This would boost aggregate productivity if the associated output is repurposed as final demand, perhaps by selling hotel rooms to tourists instead of businesspeople or converting office floors to condominiums. Similarly, the work-from-home phenomenon has arguably mobilized part of the household capital stock (including home offices and computers) for business purposes, which is much like what Uber and Airbnb did for cars and second homes, respectively.” So, when you consider
According to Chad Syverson, an economist at the University of Chicago, “the transformational impact of the COVID19 shock should not be underestimated. Syverson says, “it basically forced a reckoning on companies with respect to the way things are done. And that reckoning made them realize, “Oh, we were doing this thing for a this-and-that reason, which was decided 25 years ago because of something that doesn’t matter anymore.” Companies will increasingly ask themselves, “Why are we really doing it this way? And can’t we do it this other way instead?” And it’s that discussion which will help them get productivity gains.”
Of course, there are downside risks going forward. Syverson outlined these in a research paper titled, “The COVID crisis and productivity growth,” on which he collaborated with economist Filippo di Mauro of the National University of Singapore. Obviously, the impact of the pandemic on productivity is not going to be entirely positive. Syverson acknowledges several long-term negatives could result; these include “disruption to schooling, loss of operational know-how at failed firms, and the creation of “zombie” companies that survive long after the pandemic, only due to government support. We need to redeploy productive assets in such a way as to minimize these negatives.
Combining fiscal and monetary stimulus with new technologies and business models is getting the new era of prosperity back on track. Those who are looking for an opportunity can win big. Those who seek to avoid change and the risk that comes with it are doomed to failure.
Given this trend, we offer the following forecasts for your consideration.
First, when we look back on this time period, we will see that there was nothing fundamentally “broken” in the economy that needed to heal.
Unlike the last two business cycles, there was no obvious financial bubble driving excessive activity in any one economic sector when the pandemic hit. There is no excessive investment that needs to be unwound. And the financial sector has escaped largely unharmed.
Second, when we look back on this situation, we will see that the nature of the shutdowns in the spring of 2020 lefts the economy with a solid base from which to grow.
The economy collapsed in Q2 2020 because, in the effort to get ahead of the virus, we shut down about one-third of the economy on an annualized basis. That created a lot of opportunities to rebound when the unnecessary causalities of the shutdown came back online and began to grow around the virus. That process will continue.
Third, when we look back, we will see that household balance sheets were not crushed like they were in the prior recession. Instead, the opposite occurred. Reduced spending, fiscal stimulus, rising home prices, and a buoyant equity market all helped push household net wealth past its pre-pandemic peak.
Fourth, when we look back on this time, we will see those demographics are incredibly supportive of growth.
During the last recovery, the economy was still adapting to the Baby Boomers aging with a much smaller cohort of Generation X’ers behind them. The larger Millennial generation was just entering college at the time. Now, the Millennials are entering their prime homebuyer years in the force and will soon be moving into their peak earning years. The resulting strength in housing is fueling higher home prices as well as durable goods spending, and we are just at the beginning of the trend. Housing activity should remain strong for at least the next four years.
Fifth, when we look back on this time, we will see that household savings have grown by more than $1 trillion, providing the fuel for a hot economy on the other side of the pandemic.
Sooner or later, that money is going to come out of savings and into the economy; we expect it to flow into sectors like leisure and hospitality where there is considerable pent-up demand. And,
Sixth, vaccines quickly developed using the latest genomic technology, will enable the U.S. and global economies to come roaring back quicker than generally expected.
Vaccines from Pfizer, Moderna, and Astra-Zeneca are over 90% effective, based on a two-dose regimen. Johnson & Johnson is coming out with one that should prove to be highly effective with one dose. And both Russia and China are also releasing vaccines they claim to be effective. The U.S. government, working with its corporate partners, is rushing to vaccinate at-risk Americans, ASAP. To be sure, it will take some time for vaccines to be widely available, but once they are, the sectors of the economy most encumbered by the pandemic and for which consumers have the most pent-up demand will be lit on fire. Moreover, schools and daycares will reopen allowing parents to return to full productivity in the workforce.