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2022-09-19 Economy
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'This New Period Is Very Different, And Far Worse In Many Ways Than The 1970s'
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[ZERO] "The question I get most is whether this is like the 1970s," said Lindsay Politi, our inflation portfolio manager. We were discussing the phase of quantum change that has arrived and will unfold in the coming decade(s). "I’ve been batting around an answer to this. The short answer is only in the most superficial ways and the longer answer is a book," she said. I naturally prefer well written books to short answers. But when writing, I keep word count tight as a core discipline. So this short note captures key highlights from our discussions this week.
"Except for the fact that inflation is high and increasing, and other than the similarities that come from that, this new period is very different, far worse in many ways than the 1970s," said Lindsay. "The broadest point is that the world is moving from an industrial revolution economy to an information revolution economy." We’ll discuss that later. "But there are massive additional factors underlying this transition," she said. "Specifically, there are four lesser points that are part of this industrial/information transition. But ’lesser’ somehow seems wrong given their impact."
1. Lesser Points I: "Climate change is happening," said Lindsay, explaining the first of four lesser points impacting the great transition. "Rivers that defined national economies for centuries are drying up, our best farmlands are becoming infertile, and devastating weather events are now seen as normal." Investors try to ignore this because it’s hard to analyze. "There are no good analogs, this is a once-in-human-history event. The extent of the impact is hard to process but this much is now obvious: we face a reliably predictable series of unpriced inflationary shocks."
Lesser Points II: "No previous inflationary period was preceded by $30trln of quantitative easing," said Lindsay, identifying the second lesser point. "14yrs of QE, by design, manipulated market pricing of inflation risk, flattening yield curves, lowering yields, forcing them negative." These rates were embedded in all global financial asset prices. "Markets and central banks weren’t just surprised by inflation, they were surprised at a moment when they were, by design, more vulnerable to that surprise than at any point in recorded financial history."
Lesser Points III: "The 2nd most common question I get is whether an aging population means we’ll have deflation like Japan," said Lindsay, flagging the 3rd lesser point. "Like the 1970s, it’s risky to take one discrete example and use it as a template for anything at all similar. In a broader context, increasing populations are a consequence of industrialization." Global population was roughly unchanged from 10,000 BCE until around 1750 AD when it slowly then rapidly started to increase. "Now the global population appears to be stabilizing again. In an industrial capitalist world view this is negative because success is selling more and more widgets to more and more people, and flat or declining populations makes this harder. Maybe this isn’t a negative but another, arguably positive, symptom of a much bigger transition."
Lesser Points IV: "Investors make geopolitical assumptions based on fairly recent history," explained Lindsay. "A common one is that the US hegemony gives way to Chinese hegemony. Perhaps. But just like the industrial age led a broad transition from monarchy to democracy, could we be on the cusp of an entirely different type of government?" What does citizenship or nationality mean when people can live and work anywhere? "Is it more likely the renminbi replaces the dollar as the reserve currency or that we use a nationless means of exchange like cryptocurrency? Certainly, we see some nations and groups trying - often violently - to hold onto power but this seems more like last gasp attempts to turn the tide than real shows of strength."
(In)stability: 
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