Chapter 40
Never Close Your Eyes or You Will Miss Something
It is hard to think of a time in history when technology has become more rapidly accepted or economic change has been more widespread. This is impacting economic activity and how society functions. Together innovation and sociological impacts are making this era very different than in the past. It has been typical to use historical data to make decisions, but you must understand that this era has changed the value and relevance of much of the historical data that is typically used to develop opinions on the value of an investment. Data must be looked at differently now. Similarly, revisiting and reexamining theories about economic interactions are critical because so many relationships in the economy are being transformed.
Technology is allowing information and transaction flows to be much more flexible than in the past. More varied sources of capital are available, and it can be more rapidly deployed to more areas of the economy. This is helping to increase company formation and destruction. On a macroeconomic basis economic problems should be caught sooner and resolved quicker. This means that broad-based positive economic trend lines should last longer and when trouble hits, the shock should be shorter and shallower. This could create long, positive economic trend lines with relatively small readjustments. Figure 40.1 gives a visual representation of what this type of trend line might look like.
Crashes are hard to predict and are not very common. People often obsess about finding a data point that was the sign of the last crash, but a piece of data that in, hindsight, looked like a trigger for the last event is not always relevant for the next one. This is even more true in an economy that is shape shifting. Timing matters as well. If someone calls for a crash and it takes three years to come about, then the returns on your investment for those three years may have more than made up for any future losses. But those returns were obtained only if you did not panic and pull your money out of the investments and bury it in your yard.
The current economic trends appear to be heavily influenced by a series of revolutions in technology, and it does not appear to be abating. While history is not always a guide to the future, it is worth putting the current environment into some context. The first industrial revolution is generally considered to have started in 1760 and to have lasted sixty to eighty years. This was followed by a second industrial revolution that began in 1870 and lasted about forty-four years, up to the start of World War I. For context the first e-mail services were launched in 1995 and the iPhone was introduced in 2007. Based on this backdrop, the current era has time to run. Currently, innovative developments are still occurring at a rapid pace and in multiple areas such as artificial intelligence, virtual reality, the internet of things and quantum computing and impacting the economy and all parts of society. At some point, people will look back at this current period as an exceptional epoch of economic evolution.
Just like all good parties, the macroeconomic party is unlikely to go on too long without something getting broken. While the overall macro figures and economic conditions should continue to advance, there will be much more volatility and uncertainty at the medi and micro level. New competitors are changing the competitive landscape constantly and in some arenas barriers to entry seem to barely exist anymore. This will cause pocket style recessions in selected industries with more severe investment losses and gains. This means more successes and failures at the regional, industry, and corporate levels.
More thoughtful work needs to be done for investing success because manipulation of historical data will not be enough to tell you who the winners and losers will be. Start-ups are nimble and unencumbered by legacy assets and can attract capital like never before, but incumbent operators are increasingly innovative and are clearly fighting back more successfully than earlier in the century. Risks are heightened as changes in corporate structures will likely make failures more painful than in the past. For all these reasons, despite expectations of long range positive macroeconomic trends, careful investment selection will likely matter more than it has during previous macroeconomic runs.
The biggest risk to this scenario of macro growth coupled with more medi and micro uncertainty is the amount and type of government interference. Sociological changes driven by new media outlets and methods of communication and the millennial population bubble could lead to more radical and rapid swings in politics and policy. There is clearly a need for structure and rules from the government, but over-regulation, or poor regulation, may crush innovation and damage the economy in any country. The further the government apparatus is separated from understanding people’s well-being and how the private sector works, the more likely poor regulation will be enacted. The economy could also be disrupted by heavy handed miscalculations on interest rates by central banks and, especially, by governments having to face deficit challenges due to overspending and a lack of expense management.
Keep your eyes open. Constantly looking for new sources of information on the economy is healthy. Too much of the traditional economic data is too late and changes too slowly to be useful in an economy of innovation. In many cases the more frequent releases of “soft” data can be more valuable than “hard” data. Public releases from industry leading businesses at times can give greater insight into the economic trends than gross domestic product (GDP) reports often can. The amount of publicly available research from governments and agencies around the globe can be staggering. The work can sometimes be obscure and valuable at the same time. It is good to always look at events and data from outside your home market or your industry of choice. The modern economy is very intertwined and myopics never see the trends until it is too late. Just because something worked well for a long time does not mean that it works in the new economy any more. Throwing something out when you find something better is not bad to do. For good or bad, nothing stays the same.
Selected Ideas from Parts 8 and 9