Dear Clients and Friends,
We are currently either in, or coming out of a bear market. We just experienced two quarters of negative growth, which in the past has been a strong indicator of an economic recession. We have a war in Europe, shutdowns in China, and broad inflationary pressures over the developed world. The housing market seems to be cooling fast, and the consumer is in a funk. However, unemployment is surprisingly low, corporate profits are fairly robust, and the EU is weathering the war-caused energy disruptions quite well. The US has yet to experience strong productivity growth, but there are signs that this may change. Something has to give, and it always does.
Over the last few years, I have opined on these changes: Technology leads to productivity growth, demographics lead to economic and societal changes, and markets create opportunities. It takes time for these forces to mold our economy, and this should be welcomed by investors. Sudden and abrupt changes may satisfy the passions, but they rarely satisfy the markets. Slow and gradual changes allow market participants to respond and change at a pace that allows for accommodation, rather than upheaval. We can all agree that Covid was a moment of disorder; we changed because we were forced to change. Two years later, all investors have to take notice of what those changes mean and how they will shape the next chapter for our economy and markets.
In the first half of this year the US economy created lots of jobs, and it also shrank. This essentially means that “we”, as an economy became less productive (doing less with more) and this trend is not sustainable. Yet, there is a silver lining to this apparent hiccup in productivity. Over the next few years, we will experience the fruits of both demographic shifts, consumer demand shifts, and Covid disruptions. Think about it this way- The US economy is gearing up for a new chapter where software and the internet of things becomes a tangible reality for all consumers. For example, a couple of programmers in California create a software program that turns basements and attics into temporary lodging for travelers. This may seem far-fetched but it is old news – ever heard of Airbnb? The physical world is being reshaped by software, and this force is growing in scale and adoption, but once it hits critical mass, I believe productivity growth will accompany the shift.
Before this growth can occur, we have to deal with the world as it is, rather than the world we envision, and that takes labor, fossil fuels and some changes that are uncomfortable. Once we have the right match of people and software, the leverage produced by skilled labor and new technology will help drive productivity. As investors we must be cognizant of the changes and look for the opportunities that will be created in this shift. And, as we have seen, there will be winners and losers.