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A long view on markets
- 1. The Long View 150+ Years of Financial Markets & What it Means for Business Alex Friedman Jackson Hole Economics 1
- 2. What is the one essential of life? • For a human being, for a corporation, and for a nation… 2
- 3. Growth 3
- 4. For a long time, global growth was status quo 4
- 5. Post Civil War, everything changed • Energy, electrification, telecommunications, healthcare and transportation fundamentally reshaped societies • Human lives became more productive, life expectancies rose 5
- 6. Financial markets tell the story 6
- 7. But trees can’t grow to the sky 7
- 8. And by the 1970’s, the US looked like this 8
- 9. Two guys (one on a horse) came to the rescue 9
- 10. Financial leverage changes America 10
- 11. But, growth in America’s real economy slowed The US stopped gaining ‘market share’ in the 1950’s 11
- 12. …Replaced by growth in the financial sector 12
- 13. Which led to the 2008 Great Financial Crisis 13
- 14. And once again, the Fed came to the rescue The US central bank brought rates down just about as far as they could go 14
- 15. And it seemed to work 15
- 16. Except, most of the gains went to the wealthy 16
- 17. While, working class wages stagnated 17
- 18. The real economy’s growth rate halved 18
- 19. Or maybe it returned to its normal level? 19
- 20. And don’t forget, we have a ton of debt! 20
- 21. US Debt compared to other nations 21
- 22. What does it mean for a business executive? • Lessons from Wayne Gretzky – head in the right direction 22
- 23. Where is the puck going? Bytes for atoms… 23
- 24. Where is the puck going? Faster adoption… 24
- 25. Where is the puck going? East… 25
- 26. Where is the puck going? Green Places 26
- 27. Watch for the unexpected, but don’t panic 27
- 28. Final take away: count on change coming • The stock market may well keep going up for a while, but policy tools are limited by low interest rates, which means the Fed has limited tools for the next crisis • Political and tax regime change likely to address inequality • It will be hard to take care of the world’s elderly given low bond yields 28
- 29. And remember, consensus thinking is boring 29
Editor's Notes
- All of nature is organized around growth. Animals are born and they grow and eventually maybe have babies that grow. We form companies, and we try to grow them. The public markets are all about growth; if a company is growing, it has a high trading multiple as the future should be better than the present. Think Amazon. If it is shrinking, like in nature, one has to be wary. People grow, companies grow, and when you put it together, countries can grow. The question, though, is what kind of growth is normal, how do we know what normal is, and what happens when stuff grows slower than we expected?
- This is one of my favorite charts. Here is 2000 years of insight, on one page. Let’s take a look. For a long, long time, it appears India and China have about 1/3rd of the world’s economic activity. Not surprising when we consider that economic activity for most of history was directly linked to population size and the political regimes in those parts of the world made up a lot of the world’s population. But wait, what happens on the early 1800’s? Western Europe and the US (and Japan) start to grow and grow at the expense of China and India. And then what happens in the early 1900’s? The US starts to grow and grow at the expense of western Europe. Why? Because the US financed the allies in WW1 and as the great creditor, they essentially realized a giant wealth transfer from western Europe to their shores in the early 1900’s, which supercharged America’s industrial revolution gains.
- The global population grew over 50% between 1800 and 1900, and then more than doubled over the following 50 years, with economies growing much faster than in previous centuries. 4% annual economic growth in the US was the norm.
- Look what starts to happens around 1865, as the US Civil War comes to a close and the combination of breakthroughs in technology, the industrial revolution, and much longer lifespans add steroids to the stock market…
- When economic growth began to slow in the 1970s, voters grew frustrated, while oil shocks, Watergate, and the ignominious end of the Vietnam War compounded the public’s sense of what President Jimmy Carter called America’s “malaise.”
- US President Ronald Reagan and Federal Reserve Chair Alan Greenspan came and changed everything…
- Politicians and central bankers don’t like it when growth slows down, so they supercharged things by bringing interest rates down from almost 20% to less than half. And the US shifted from a nation of net savers to a nation of net borrowers. The US consumer borrowed and bought stuff from places like China, which in turn then invested their newfound wealth in places like US Treasuries, keeping interest rates low and perpetuating the cycle…
- Back to my favorite chart – look at the US around the 1970’s. Notice we are not gaining global mkt share anymore…
- And yet the financial markets were going up. The financial markets grew to three times the size of the real economy by 2007…and since we know trees can’t grow to the sky, guess what followed?
- Take a look at this chart of the S&P 500 from its peak in 2007 to 2009. You all remember that? It felt like the sky was falling.
- Why did it work? Banks can’t hold lots of deposits when there is no interest rate, so they have to lend. That is what the Fed was trying to do - spur lending. But the thing is, companies took this cheap cash and instead of investing, most bought back shares, which drove their EPS and share price up. And since there was no yield in bonds, investors put more into stocks and other real assets, which meant their prices went way up. More demand than supply.
- This is because it is the wealthy who largely hold stocks and real estate and stuff like that, which went way up. Partly as a result of central banking policy, today, the top 1% in America own as much wealth as the entire middle class. And perhaps even more striking, the richest 400 Americans control more wealth than the bottom 60% of America.
- Adjusted for inflation, you can see here that wages are around the same as in 1970. Median household income tells a similar story -- one of decades of no growth. Why should this be? Anyone? Well, maybe because if you were working in a regular job, say making stuff in a factory, you would expect that you might get a wage increase if your factory produced more stuff – if it grew. And if we added up all the activity of making stuff and doing stuff, but not the financial stuff we spoke about -- i.e. leverage – we should be able to tell by the overall growth rate of GDP, at the level of the country, what was going on. Was America’s economy growing as it should have?
- Well, America’s economy was growing, but at only half the rate it used to grow. And here is one of the problems we human beings face. We don’t live long lives. Our frame of reference is not great. Most people alive today and even their parents are used to the economy growing about 4% a year. But suddenly it is only growing at half of that rate. What has gone wrong? Who can we blame? What can we do to fix this surely temporary problem?
- Well, maybe this is not the new normal, as some Wall Street economists like to claim, but actually the normal normal. The old normal. And this brings us back to where we started. The crazy telescope on the first page and my comment about what growth we should expect in life vs what we might have gotten used to because of an aberrational period in American history. 2% is probably what we should expect, not 4-5%.
- Eventually the US will need to address its debt load – our reserve currency saves us for now…but not forever
- As Wayne Gretzky, the hockey great put it: ‘I don’t skate to the puck. I skate to where the puck is going.”
- Each year brings more technological advancements than the last, and once the exponential “hockey stick” kicks into overdrive, innovations happen at a blinding pace. Not only is the speed of change getting faster, but for various reasons, markets are able to adopt new technologies faster
- Look at the big picture of energy over time. Here is a chart of U.S. energy consumption from 1776 until today, showing that the energy we use to power development is not permanent or static throughout history. Given the speed at which technology now moves, expect our energy infrastructure and delivery systems to evolve at an even more blistering pace than we’ve experienced before.
- Mkt driven by: Trump Tax cuts, Fed rate cuts, TINA, etc. But longest bull market will eventually end. Recession may not be imminent but when it comes, the Fed may not have the needed tools. Wealth divisions at these levels will produce change: perhaps in White House, perhaps one day in a new tax regime. And given what central banks have done with bond yields, many of the elderly wont have enough savings for retirement; this may lead to political instability as some governments wont be able to issue debt to get bailed out by the bond markets, e.g. Greece and Italy during periods of the Eurozone crisis.