“This New Period Is Very Different, And Far Worse In Many Ways Than The 1970s”

By Eric Peters, CIO of One River asset management

“The question I get most is whether this is like the 1970s,” said Lindsay Politi, our inflation portfolio manager. We were discussing the phase of quantum change that has arrived and will unfold in the coming decade(s). “I’ve been batting around an answer to this. The short answer is only in the most superficial ways and the longer answer is a book,” she said. I naturally prefer well written books to short answers. But when writing, I keep word count tight as a core discipline. So this short note captures key highlights from our discussions this week.

“Except for the fact that inflation is high and increasing, and other than the similarities that come from that, this new period is very different, far worse in many ways than the 1970s,” said Lindsay. “The broadest point is that the world is moving from an industrial revolution economy to an information revolution economy.” We’ll discuss that later. “But there are massive additional factors underlying this transition,” she said. “Specifically, there are four lesser points that are part of this industrial/information transition. But ‘lesser’ somehow seems wrong given their impact.”

1. Lesser Points I: “Climate change is happening,” said Lindsay, explaining the first of four lesser points impacting the great transition. “Rivers that defined national economies for centuries are drying up, our best farmlands are becoming infertile, and devastating weather events are now seen as normal.” Investors try to ignore this because it’s hard to analyze. “There are no good analogs, this is a once-in-human-history event. The extent of the impact is hard to process but this much is now obvious: we face a reliably predictable series of unpriced inflationary shocks.”

2. Lesser Points II: “No previous inflationary period was preceded by $30trln of quantitative easing,” said Lindsay, identifying the second lesser point. “14yrs of QE, by design, manipulated market pricing of inflation risk, flattening yield curves, lowering yields, forcing them negative.” These rates were embedded in all global financial asset prices. “Markets and central banks weren’t just surprised by inflation, they were surprised at a moment when they were, by design, more vulnerable to that surprise than at any point in recorded financial history.”

3. Lesser Points III: “The 2nd most common question I get is whether an aging population means we’ll have deflation like Japan,” said Lindsay, flagging the 3rd lesser point. “Like the 1970s, it’s risky to take one discrete example and use it as a template for anything at all similar. In a broader context, increasing populations are a consequence of industrialization.” Global population was roughly unchanged from 10,000 BCE until around 1750 AD when it slowly then rapidly started to increase. “Now the global population appears to be stabilizing again. In an industrial capitalist world view this is negative because success is selling more and more widgets to more and more people, and flat or declining populations makes this harder. Maybe this isn’t a negative but another, arguably positive, symptom of a much bigger transition.”

4. Lesser Points IV: “Investors make geopolitical assumptions based on fairly recent history,” explained Lindsay. “A common one is that the US hegemony gives way to Chinese hegemony. Perhaps. But just like the industrial age led a broad transition from monarchy to democracy, could we be on the cusp of an entirely different type of government?” What does citizenship or nationality mean when people can live and work anywhere? “Is it more likely the renminbi replaces the dollar as the reserve currency or that we use a nationless means of exchange like cryptocurrency? Certainly, we see some nations and groups trying – often violently – to hold onto power but this seems more like last gasp attempts to turn the tide than real shows of strength.”

(In)stability:

“There’s an assumption that this transition will be disinflationary, but I really don’t think that’s right,” said Lindsay. “Most big transitions are inflationary with a lot of volatility and relative instability. In general, predictability, stability, peace, cooperation, etc. are disinflationary for goods prices and inflationary for asset prices. Instability, less confidence about the future, more combative markets/governments all add extra costs that translate into higher goods prices and lower asset prices,” she said. “Not all transitions are inflationary but transitions that will require a significant rerating of existing capital because of its obsolescence, transitions that create scarcity, transitions that shift power dynamics; those tend to be inflationary.”

Anecdote:

“The problems we’re facing, to the extent they’re actually problems, are because the industrial age is ending,” said Lindsay Politi, our inflation portfolio manager, brilliant. “Check out this chart,” she said, early morning, awaiting CPI, standing desks, our screens aglow, pointing to an S-curve that tracked World GDP per capita from 1mm years ago to present. “Brad DeLong, one of my favorite economic historians, published this chart and what you see is that growth basically flatlined through human history until the industrial revolution. Then went parabolic. Now it’s leveling out again,” she said, tracing that S-curve with her finger on the monitor.

“Economic philosophers who lived in that inflection period didn’t really know what to make of it.” Malthus observed that throughout the course of human history bouts of economic growth ended in collapse, not understanding the profound change industrial productivity created. Marx understood some failings of capitalism – the drive towards excess and resulting gluts that we now call recessions, and the tendency for labor to be undervalued relative to capital. He also couldn’t have understood how dramatically standards of livings would rise for all people. “

Just like Malthus and Marx were struggling to understand the dramatic economic changes they were confronting, we’re also struggling to come to terms with the transition from the industrialized age to the information age,” said Lindsay. “In the context of this S-curve, the folly of quantitative easing becomes clearer.” Central bankers were trying in vain to escape the reality of the flattening inflection in this growth curve. “Capitalism broadly is poorly suited for an information economy. Capitalism is about maximizing the production of widgets and it is very good at that.”

Over the course of a few generations, we have gone from people living in extreme scarcity to the point where industries now create storage spaces for the many things we own and buy.” This need for constant manufacturing of new things is literally killing us via climate change. “In the information age, ideas are not widgets. It’s not quantity that matters but quality. And almost everything we know about what creates quality ideas is the opposite of what drives people to create more widgets,” said Lindsay, and I considered my long walks in nature, hours of contemplation, triangulating information, free association, hunting for questions, ideas, answers, away from screens, the factory floor, soul destroying production lines.

“The system will necessarily change. I have lots of ideas about where we might be going but I think the main idea is that looking to the past for an understanding of the future will be as fruitless today as it was for Marx and Malthus,” she said. “And along with that, expecting there to be limits on things like inflation or price movements because they existed in the past will also prove to be very wrong.”