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Necessary Evolution: Creating Opportunities in Times of Extreme Economic, Social and Political Change
Mark Blyth
The Watson Institute for International and
Public Affairs at Brown University
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Speaking of ‘Times of Extreme Economic, Social and Political Change…’
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The effect generated when most people in a country believe that the economy no longer benefits them…
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An Example from the UK…
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Let’s redo that for the USA
• Batchelor Degree 1970 (inf adjust to 2020) is $58,650
• Average House Price 1970 (inf adjust to 2020) is $156,744
• Under 25 unemployment rate in 1970 was 11%
• Average Student Loan due in 1993 (inf adjust to 2020) was $16,764
• Batchelor Degree 2020 is $65,400 – ten percent real increase in 50 years
• Average House price in 2020 is $264,000 (Boston is $653,780)
• Under 25 unemployment rate in 2020 is 14% (highly variable)
• Student Loans due in 2020 is $37,172 – a 54% real increase in 27 years
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No wonder people are
angry…
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Public Anger as Information
• Anger as ‘moral outrage’ and ‘a desire to be heard’
• Anger as a Reaction to Perceived Futility of Action
• Anger as reaction to ‘off limits’ areas of concern
• A Failure of Representative Institutions and Political Parties
• The collapse of real wage growth and increasing inequality
• Rise of Anti-Immigration Politics
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Private Anger as Micro
Stressors that Amplify Public
Anger
• Risk shifting from Firms and Governments to Individuals
• Rise mental Illness, epidemiological inequality
• Stresses from market deregulation –platforming, zero-hour contracts, franchising
• Existential threat of replacement (robots) or redundancy (aging)
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A Handy Map of Angrynomics
Public Anger Private Anger
Moral Outrage (Claims to be listened to)
Macro-Economic Crashes (Inequality, Unemployment, Recession, Long term shifts in production and consumption)
Micro-Stressors (Technological Change, Market Reforms, Aging)
Tribal Energy (Weaponizing Anger for Instrumental Ends)
Macro-Economic Crashes (Dog Whistle Politics, Immigration, Heightened Nationalism, symbiosis of Media and Reactionary Politics)
Civil Unrest and FragmentationRise of Boogaloo MovementsQ anon, Mask Resistence
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And then came COVID-19
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A Global “Supply and Demand” ShockGlobal Supply and Demand Effects
• Fragmentation of Supply Chains
• Acceleration of Deglobalization
• National Security Onshoring
• Collapse of Labor Supply and Spending
• Open or Suppressed unemployment increases
• Massive Increase in Public Deficits and Debts as GDP falls
Source: Pedro Brinca, Joao B. Duarte, Miguel Faria e Castro (2020)
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Losers and Winners –Short Term
• Hospitality - Hilton and Marriot down 38 and 48 percent respectively
• Soft-Touch Services - IHOP flattened
• Travel (esp. Airlines and Booking) - $157 Billion market cap loss in airlines
• Energy – whole sector down nearly 40 percent (negative oil!)
• Banks – JP Morgan down 30 percent
• Tech – FAANGs and Tesla up 30 to 50%
• Some Pharma (mainly vaccine rumors)
• Home Depot and DIY
• Garden Centers
• Firearms
• …eh? Mmm?
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Longer Term Worries
• REITS and Commercial Real Estate in General
• Franchise structures vulnerable
• ‘In City’ Services – Pret a Manger
• Government Balance Sheets Balloon
• Structural Unemployment Rises
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Angrynomics and the COVID Pandemic
• Anger sent home for three months is now back on the streets…
• Public Anger Rising (masks, elections, conspiracies)
• Private Anger Rising (mental health toll, Unemployment, loss of income, rising uncertainty)
• Public trust in government stretched further
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Got Any Good News?
It’s a great time to be an investor…especially in stable value funds
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Source: Paul Schmelzing, Bank of England Staff Working Paper No. 686, “Eight centuries of the risk-free rate: bond market reversals from the Venetians to the ‘VaR shock’” October 2017
Borrowing is going to Stay Very Cheap for a Very Long Time
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Policy is Pushing in the Same Direction
• Fed’s new Policy regime (overshoot)
• EZ Inflation at 0.4 percent
• CB Digital Currencies on the way (Helicopter money normalized)
• No Return to Austerity
• If G > R debt falls (unless you are Italy)
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Yes, there are Real Problems
• Equities less plentiful and more expensive
• Bonds yield square root of zero
• Pension promises made may not be kept
• Aging populations
• Intra-Generational Puts (housing/avocados trade off)
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But there are also real opportunities for longer term investors
• Buy the dip and cognitive biases (Keynes on depressions)
• Pandemics do end (19 vaccines on the way)
• The problem is capital redeployment, not capital rebuild
• Commercial Real Estate and Housing
• The Resumption of Global Travel
• Unemployment means infrastructure rebuild
• Reconfiguring Cities
• Decarbonization is on the way
• New forms of Capital and Governance (expanded ownership)
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The Take Home…
• This too shall pass…buy the dip and discount the noise
• Think through how to redeploy capital rather than preserve it
• You have a covered option on Green Investment – take it
• Do that and you might just lessen the anger