If You Had a Billion Dollars and a Crystal Ball ...
What answers does an investor (or CEO) need most to make good decisions over for the next decade?
It’s a hypothetical question based on a fairytale, but it’s also a serious strategy to help focus on what matters at an especially confusing historical moment. A billion dollars is too much money for day-trading, so asking for next week’s Nvidia price won’t be much help. Assume this is a portfolio (or a company) you want to protect and grow over, say, the next decade. When you are flooded with contradictory data and uncertain headlines in times of great volatility, what do you really need to know?
How much debt can the world afford?
Whoever said you can’t just throw money at a problem hasn’t been paying attention. No, money alone doesn’t stabilize a financial crisis, end a pandemic or turn back an invasion, but these all become much worse without money. By the IMF’s reckoning, U.S. government debt as a percent of gross domestic product has more than doubled to 123% since 2000 in the face of various crises. Total global debt reached a record of $313 trillion last year although it fell as a share of world GDP. It’s not that this debt ever has to be repaid, but it can dampen growth by crowding out investment in the real economy. Meanwhile, debt servicing costs look likely to rise as a dwindling savings glut reduces the natural supply of bond buyers.
Will artificial intelligence create more jobs than it destroys?
AI is coming after the world’s white-collar jobs the way robots and automation decimated blue-collar employment over the last four decades. Anyone running a business must determine how to harness its power, especially where repetitive analytical tasks can be handled cheaper and faster by more sophisticated software. More important, companies must keep a tight focus on threats to their fundamental business models, pivoting in ways that Kodak and your local newspaper did not. New technology always creates more new jobs over time, but we’ve rarely seen a wave so revolutionary arrive so fast. Rather than waiting for automated equipment to replace factory workers, powerful new algorithms are just a software upgrade away. For now, massive AI investment is creating lots of tech jobs, but the next phase could look grim indeed.
What are the economics of climate change?
Different elements of climate transition deliver different growth and inflation dynamics. Tighter environmental regulation and rising insurance costs probably drive prices higher and slow growth, but spending on resilience and transition infrastructure should boost economic activity. Meanwhile, declining hydrocarbon investment sometimes drives oil and gas prices higher and will deliver losses to their owners when they become “stranded assets.” But investments in clean technologies have the opposite effect, creating jobs in new industries and dampening inflation by delivering cheaper energy.
The actionable question is whether U.S. 10-year yields are more likely to hover below 2% or above 3%.
How high will tensions rise with China?
Beijing clearly wants to make China great again, even if it’s not necessarily trying to remake the whole world in its image. Rising suspicions have famously reversed the deflationary impact of China trade through rising restrictions, redundant supply chains and rising defense budgets. While Washington speaks of limiting the impact to a “small yard with a high fence,” the rising costs and uncertainty have spread across industries (from software to steel) and countries (India to Mexico). An isolated and angry Russia further complicates the picture with sanctions now targeting Chinese firms that engage with sanctioned Russian counterparts. It’s getting harder for the West to impose costs on China without hurting its own interests, and the other way around--but there’s plenty of history of intertwined economies going to war. Outright hostilities still look unlikely, but investors and chief executives will nevertheless need to learn how to avoid getting caught in the collateral damage of rising tariffs, sanctions and export controls.
How much will the U.S. turn inward?
Regardless of who wins the November presidential election, American isolationist sentiment is rising. Even if Washington delivers the latest package of Ukrainian assistance, the appetite to resist Russian aggression is fading. For some, the logic is to muster resources for rising risks in Asia, but for others it’s a classic argument to stop squandering resources on distant shores. If America does pull back from global leadership roles, look for more violence, less predictability, higher costs and lower returns.
And what about Africa?
By 2050, the United Nations estimates Africa’s population will nearly double to 2.5 billion, and the median age will be 19 (compared to 38 in the United States and China). With enough investment and the right economic policies, many of its 54 countries could thrive and offer handsome returns. The worry is that political mismanagement will extend the history of violence, instability and emigration.
Will the Fed spend more time fighting inflation or deflation?
Embedded in this question is where interest rates will settle and what discount rate to apply to any financial or corporate investment. But the deeper question goes to the likely balance of supply and demand that will be determined by answers to the previous questions. Recall that before COVID, the Fed (and other major central banks) were fighting deflationary pressures from globalization, new technology and aging demographics that undercut pricing power and cooled demand. Now a fresh array of trade barriers, global insecurity and massive spending on everything from elder care to climate transition look likely to keep the global economy running hotter than before. The actionable question is whether U.S. 10-year yields are more likely to hover below 2% or above 3%.
All else equal, “above 3%” seems more likely today due to geopolitical tensions, government spending and climate costs. But keep this list close at hand as fresh data and headlines come in. There are many more questions that could change the forecast, but these are a good start as you try to make sense of this confusing world – and await that billion dollars.