What could go right (and wrong)?

“Come, dry your eyes, for you are life, rarer than a quark and unpredictable beyond the dreams of Heisenberg; the clay in which the forces that shape all things leave their fingerprints most clearly.” (Dr Manhattan, The Watchmen)

The path ahead would still seem to be littered with danger. Media headlines prey on the instincts that were helpful in caves but maybe serve us less well as modern investors. A recession is still envisaged by many, particularly if you are in the UK where there is less cushion anyway. Even if interest rates and inflation are in the process of peaking, more of both is now more easily imaginable.

This is to say nothing of the messy and unnerving geopolitics, and the unwelcome return of overpopulation and other long-standing panics. For investors, however, it is useful to try and imagine the full range of potential paths ahead. This sometimes takes a bit of extra effort amidst the ever-gloomy consensus. We have another go this week.

Recession

There is a growing consensus that the peak in central bank policy rates is finally here(ish). Of course, we still wait impatiently for the effects of these sharp rises in policy rates around the world. Theory suggests that these higher interest rates slow the economy (and therefore inflation) by making people consume less, because saving becomes more attractive instead.

There are holes we can pick in the theory, but the reality on the ground still looks very different. On the latest evidence, the all-important US consumer continues to power ahead. The much-discussed excess savings arsenal – accrued during lockdowns - is part of this but should be running out at some point soon.

However, pessimists beware, because ‘real’ wages could pick up the slack – a key headwind to the developed consumer (negative inflation adjusted wage growth) could soon turn into a powerful positive. The employment backdrop remains solid, and wage growth with it. If that remains the case and inflation continues to moderate, then we should be prepared for much better growth than many currently fear.

A similar story could be true in much of Europe and the UK as it goes. The uneven ebbing of inflationary pressure may reveal a perkier consumer than generally suspected (Figure 1). Given the central role of those consumers in much of the developed world economy, this upside scenario is important to grapple with.?

Too many consumers/people

Humankind has nearly always worried about overpopulation. An unpleasant political economist and curate called Thomas Malthus solidified these concerns in his (in)famous 1798 book ‘An Essay on the Principle of Population’.[1] In it he argued that population growth would always outrun the resources to sustain it.

As a result, living standards could only ever operate within a narrow corridor of undulating misery for the masses. As populations repeatedly rebounded to the upper limits defined by the available resources, then famine, disease and other inevitables would return the population to temporarily more sustainable levels.

There remains hot debate today on the ‘Malthusian trap’. This is not just centred on whether it was true looking back from Malthus’s 18th century vantage point, but whether it still applies today. There is instinctive appeal, particularly as we battle our increasingly visible imprint on the planet. However, the facts on the ground argue in a different direction, as Julian Simon and others since have observed.[2]

The simple fact that the pessimists struggle to counter is that the larger the global population has grown over these last few centuries, the better off everyone has become (on almost every conceivable measure). In amongst our reflexive self-loathing, perhaps a function of the constant search for the next pariah, we must remember our collective genius and problem-solving capacity. Part of this is the apparent alchemy in repeatedly turning scarcity into abundance.[3]

Yes, many of those problems are of our own making, but to ignore the progress we have made in solving problems of the past risks lulling us into defeatism with regards to the huge problems ahead.

Geopolitics (again)

To many, the world has never looked this uncertain (or doomed). As various democracies continue to wrestle with seething electorates, hopped up on disinformation, other models of governance have shone in comparison.[4]

Some overconfident missteps from the developed world liberal elite over the? last few decades make for powerful marketing for the alternatives. Meanwhile, China’s capitalist economy under omnipresent supervision of a communist authority has never been tried before. Its proponents will argue that some of the traditional information flow problem[5] suffered by autocrats past has been solved by the current technological context too.

As investors, we do not need to bet hard on one model or another, even if we can hope for individual freedoms to ultimately triumph. History does speak authoritatively of the advantages of these individual freedoms and the incentives that subsequently flourish, taking full advantage of technological change.[6]

Unfettered creativity has been central to the tinkering and adaptation that have supercharged the effects of technological breakthroughs in the past. The suspicion is that the liberal democratic model is still the least bad framework to enable this human superpower.

In the meantime, and as I said at the start, always look for the full range of potential paths ahead. And if want help on keeping an open mind, especially when consensus is gloomy, then there’s a podcast for that: Word on the Street

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*This article is for information purposes only. It is not intended as a product offer or investment advice

[1] https://en.wikipedia.org/wiki/Thomas_Robert_Malthus

[2] https://www.wired.com/1997/02/the-doomslayer-2/

[3] https://www.cato.org/books/superabundance

[4] https://blogs.lse.ac.uk/lsereviewofbooks/2023/08/09/book-review-defeating-the-dictators-how-democracy-can-prevail-in-the-age-of-the-strongman-charles-dunst/

[5] https://www.brookings.edu/articles/the-autocrats-the-succession-dilemma/

[6] https://www.cato.org/cato-online-forum/embracing-culture-permissionless-innovation

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