Necessary Evolution: Creating Opportunities in Times of Extreme Economic, Social and Political Change

Mark Blyth

The Watson Institute for International and

Public Affairs at Brown University

Speaking of ‘Times of Extreme Economic, Social and Political Change…’

The effect generated when most people in a country believe that the economy no longer benefits them…

An Example from the UK…

Let’s redo that for the USA

• Batchelor Degree 1970 (inf adjust to 2020) is $58,650

• Average House Price 1970 (inf adjust to 2020) is $156,744

• Under 25 unemployment rate in 1970 was 11%

• Average Student Loan due in 1993 (inf adjust to 2020) was $16,764

• Batchelor Degree 2020 is $65,400 – ten percent real increase in 50 years

• Average House price in 2020 is $264,000 (Boston is $653,780)

• Under 25 unemployment rate in 2020 is 14% (highly variable)

• Student Loans due in 2020 is $37,172 – a 54% real increase in 27 years

No wonder people are

angry…

Public Anger as Information

• Anger as ‘moral outrage’ and ‘a desire to be heard’

• Anger as a Reaction to Perceived Futility of Action

• Anger as reaction to ‘off limits’ areas of concern

• A Failure of Representative Institutions and Political Parties

• The collapse of real wage growth and increasing inequality

• Rise of Anti-Immigration Politics

Private Anger as Micro

Stressors that Amplify Public

Anger

• Risk shifting from Firms and Governments to Individuals

• Rise mental Illness, epidemiological inequality

• Stresses from market deregulation –platforming, zero-hour contracts, franchising

• Existential threat of replacement (robots) or redundancy (aging)

A Handy Map of Angrynomics

Public Anger Private Anger

Moral Outrage (Claims to be listened to)

Macro-Economic Crashes (Inequality, Unemployment, Recession, Long term shifts in production and consumption)

Micro-Stressors (Technological Change, Market Reforms, Aging)

Tribal Energy (Weaponizing Anger for Instrumental Ends)

Macro-Economic Crashes (Dog Whistle Politics, Immigration, Heightened Nationalism, symbiosis of Media and Reactionary Politics)

Civil Unrest and FragmentationRise of Boogaloo MovementsQ anon, Mask Resistence

And then came COVID-19

A Global “Supply and Demand” ShockGlobal Supply and Demand Effects

• Fragmentation of Supply Chains

• Acceleration of Deglobalization

• National Security Onshoring

• Collapse of Labor Supply and Spending

• Open or Suppressed unemployment increases

• Massive Increase in Public Deficits and Debts as GDP falls

Source: Pedro Brinca, Joao B. Duarte, Miguel Faria e Castro (2020)

Losers and Winners –Short Term

• Hospitality - Hilton and Marriot down 38 and 48 percent respectively

• Soft-Touch Services - IHOP flattened

• Travel (esp. Airlines and Booking) - $157 Billion market cap loss in airlines

• Energy – whole sector down nearly 40 percent (negative oil!)

• Banks – JP Morgan down 30 percent

• Tech – FAANGs and Tesla up 30 to 50%

• Some Pharma (mainly vaccine rumors)

• Home Depot and DIY

• Garden Centers

• Firearms

• …eh? Mmm?

Longer Term Worries

• REITS and Commercial Real Estate in General

• Franchise structures vulnerable

• ‘In City’ Services – Pret a Manger

• Government Balance Sheets Balloon

• Structural Unemployment Rises

Angrynomics and the COVID Pandemic

• Anger sent home for three months is now back on the streets…

• Public Anger Rising (masks, elections, conspiracies)

• Private Anger Rising (mental health toll, Unemployment, loss of income, rising uncertainty)

• Public trust in government stretched further

Got Any Good News?

It’s a great time to be an investor…especially in stable value funds

Source: Paul Schmelzing, Bank of England Staff Working Paper No. 686, “Eight centuries of the risk-free rate: bond market reversals from the Venetians to the ‘VaR shock’” October 2017

Borrowing is going to Stay Very Cheap for a Very Long Time

Policy is Pushing in the Same Direction

• Fed’s new Policy regime (overshoot)

• EZ Inflation at 0.4 percent

• CB Digital Currencies on the way (Helicopter money normalized)

• No Return to Austerity

• If G > R debt falls (unless you are Italy)

Yes, there are Real Problems

• Equities less plentiful and more expensive

• Bonds yield square root of zero

• Pension promises made may not be kept

• Aging populations

• Intra-Generational Puts (housing/avocados trade off)

But there are also real opportunities for longer term investors

• Buy the dip and cognitive biases (Keynes on depressions)

• Pandemics do end (19 vaccines on the way)

• The problem is capital redeployment, not capital rebuild

• Commercial Real Estate and Housing

• The Resumption of Global Travel

• Unemployment means infrastructure rebuild

• Reconfiguring Cities

• Decarbonization is on the way

• New forms of Capital and Governance (expanded ownership)

The Take Home…

• This too shall pass…buy the dip and discount the noise

• Think through how to redeploy capital rather than preserve it

• You have a covered option on Green Investment – take it

• Do that and you might just lessen the anger