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

i thought most obvious was buy EMG FX/sell US $...does it need to be more complicated?

"Spending is one sure way to get your money's worth"

OK, that convinced me. I'll buy your book.

Tyler needs to see a shrink. I smell depression. One of the non-lifespan enhancing fruits of modern medicine was Prozac.

The above observations/recommendations assume rational economic behavior by most people.

A suspect assumption.

7. Book a trip to NYC. Find a tall building. Jump.

Just like the Depression, buy companies that sell to the government, the consumer of last resort.

A commenter on Econolog, TracyW, made the same basic point in #1.

Taxing more in the present paradigm won't solve that problem, but I don't expect government and it's most ardent supporters to understand that. Governments will have to significantly cut it's spending and consumption, and/or redirect large portions of it into the same low revenue lines that the people are starting to do. Or governments will have to start extracting it's "revenue" in other forms, such as time and directed/mandated service. One can almost see this coming in the health care sector already in all of the developed world.

Great, stagflation facts.

Wonder why the reasons most likely causing it are ignored while some phantom idea that the entire industrial revolution was stolen from the past and thus we have no hope to recover from it.

High taxes, High regulation, High mitigation, High and guaranteed inflation are costs that sap the bulk of potential from endeavors to create value, as much of the value of the investment is waste and a large proportion of any profit also becomes waste. This could not possibly cause any problems in a market. Nope, it is because ancient technology is where all the value to society was.

How about, invest in areas undergoing catch-up growth?

> 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.

If growth stuff is going to be over-priced, that implies dividend-paying value stock will be under-priced and also that bonds and similar products will be under-priced*. But bonds are really really low-yielding now, are they not? Does that imply that the stagnation thesis is false or that we haven't accepted just how stagnant the economy truly will be?

Also, the stagnation thesis applies to developed countries. Does this imply that developing countries are great buys?

* or at least, less over-priced

"But bonds are really really low-yielding now, are they not?"

Low-yielding is the opposite of low-priced.

Anon: "I don't understand the emphasis on the Internet. Yes, Facebook is fun and cheap, but ..."

Here's a few examples of how the internet has changed the business world:

1. Rsther than depend on travel agencies - whose interests were not always aligned with those of their customers - business travelers today can find the cheapest fares for themselves via internet websites. Changing travel dates and itineraries is very simple. As a result, travel costs have plunged.

2. Most technical training formerly required either travel to a training site or else payment for a highly skilled trainer to visit a company. Today, internet based training has eliminated a large part of companies' training expenses.

3. Internet reverse auctions allow Purchasing departments to obtain sharply lower prices for thousands of items.

As I noted above, the big impact of the internet is in cost reduction. It's not through some major breakthrough but rather via thousands of internet-based applications which are quietly working behind the scenes.

The internet is a big deal - a huge deal - though probably not in the way most of America interacts with it.

Comments for this post are closed