Investment implications of The Great Stagnation

1. Slow revenue growth means that fiscal crises will be more severe than expected.

2. The deeper point is that the revenue growth/utility growth gradient has fundamentally changed, due to the "real shock" (as they call it) of the internet.  Facebook is fun but it doesn't produce a proportional amount of revenue, and ultimately that has implications for asset pricing.

3. The change in this gradient means that a downturn hurts less, and that in turn means we will have more recessions and more asset price bubbles.  Investors will take more chances, in part because safe returns are lower and in part because financial loss hurts less, in utility terms, than it used to. 

4. Since the MU of money is now lower in downturns, the equity premium will fall.  Risk premia will fall.  Risk-taking will be less rewarded, because the destruction of one's finances is not as bad as it used to be.

5. If threshold savings is not an issue for you (e.g., needing to save a certain amount to put a kid through college), you should consider higher levels of consumption as a response to The Great Stagnation.  Real rates of return on savings will not be fantastic, and risk-taking will be rewarded less.  Spending is one sure way to get your money's worth.

6. I have other thoughts on this topic.


Comments for this post are closed