Like a volcano, this pandemic is a huge event and changing the landscape.
This recession is different, but different isn’t necessarily a disaster.
Financial expert and market analyst John Mauldin says the recession of 2020 is unique. In the first place, by any metric it’s worse than any recession we’ve seen in the last 90 years. In the second place, that’s because our economy has moved in the 20th and 21st centuries from cyclical industries like agriculture and manufacturing to services where the demand is smooth all year long, and it’s rare to get supply bubbles. The service sector accounts for 67% of GDP and includes financial services, media, transportation and technology.
The coronavirus hit the world economy “like a laser-guided missile.” A services heavy world economy built on large-scale, face-to-face human interaction was bound to fall apart when that very premise became impossible.
The Bad News
Mauldin doesn’t have faith in a “V-shaped” economic recovery. The initial demand shock created when people stopped going to restaurants and bars, flying on planes and staying in hotels won’t stop until people feel safe doing those things again, and as Mauldin says, that means a significant portion of the population is going to have to start wearing a mask in public. Unfortunately, even in comparatively more liberal Europe, people don’t like wearing masks.
A 90% economic recovery is still the worst recession many people have seen in their lifetimes. And Mauldin points out that “If COVID-19 was only the initial trigger, then we still have to deal with the preexisting conditions even if the virus threat goes away.” The pre-existing condition he’s talking about is related to what he calls the stumble-through economy.
In a nutshell, we’ve been suffering from a secular decrease in demand for quite a while. To pump up demand, central banks around the world have borrowed heavily. First it was the Japanese after their bubble burst in the 1990s. Then it was the West — U.S. and Europe — a decade later. It may not be a coincidence that fertility rates in developed countries have fallen below the reproduction rate.
Borrowing today brings consumption forward and puts the burden of paying for that consumption on the future. But what else can we do? “If we want to keep spending, we must pay for it ourselves. Which raises the question, not just in the U.S. but all over the developed world, with what?”
The Good News
Many people think that the pandemic is accelerating changes that were already occurring in our economy especially around technology and more businesses going digital and on demand.
The 20th-century economist Joseph Schumpeter coined the term “creative destruction.” That’s when the foundations of the economy shift and some economic activity is obliterated completely so that another, more productive form can take its place. The examples economists love to give is the horse and buggy industry being replaced by the gas powered automobile (which in turn is being disrupted by Tesla (TSLA +10.8%), now the world’s most valuable car maker).
Right now is a period of intense creative destruction. But you don’t get the creative without the destruction. The opportunity for savers is to re-allocate their capital to areas of the economy that are growing and away from areas that are facing destruction.
Invest in the 21st Century
The picture of the world can seem pretty bleak if you’ve been paying attention to the news. In addition to the immediate crisis of the COVID pandemic, cracks in the foundations of our institutions, including markets and industries have been exposed. How is it that hospitals can be going bankrupt when people need more medical care? Why does it take a pandemic to make us realize we haven’t seen blue skies over Delhi in decades?
Information technology is the biggest winner and now makes up the largest share of profits for the index. Anecdotally this has been evident in the stock price surge of distanced digital services like Zoom and Netflix (NFLX +8.1%.)
Tesla, another bellwether of 21st century industry trends, has seen its stock price soar. Now the auto company has a market cap bigger than Toyota Motors, even though it produces a fraction of the number of cars.
Two trends just got a catalyst from the coronavirus: 1) the adoption of tele-everything, and 2) the decarbonization of the economy. This is as true for the world of financial services as it is for video conferencing and automobiles. Businesses have already committed to spending less money on transportation by allowing telecommuting and reducing the number of in-person meetings they schedule, and the efficiency of using information technology and video screening to see patients is producing a revolution in healthcare.
Financial advisors have adopted tele-advising, and many savers have discovered the benefits of using a tech-driven platform with human enhancements for the majority of their financial planning. The runaway popularity over the last decade of ETFs that allow savers to invest in the market broadly or focus on sectors has given savers both more protection from risk, and more freedom to invest in sectors that will move the needle over the next eighty years. Though the Trump administration recently passed a rule intended to limit the ability of 401(k) plans to invest in green tech, the real growth of renewable energy is undeniable. The world looks closer to meeting the Paris Climate Accord goals now than it did six months ago.
Trade in the Buggy Whips of Tomorrow
Both in low-interest rate environments and during periods of inflation, putting your money behind American ingenuity has made retirement possible for millions. The genius of American capitalism is its ability to reinvent itself. This is definitely a transition period, but vision and a little courage will see us through.
That said, it’s always a good idea to keep your eye on your investments and your retirement plan. Now is the time to disinvest from the buggy whips of tomorrow. Airline travel has cratered in the last six months, and even after restrictions are lifted, travelers will be tentative about getting on a plane for a long time to come. Total capacity for airlines around the world will be cut by 40 percent in 2020, and it’s likely to stay lower for years.
Similarly, the pandemic has exposed the flaws in the profit models of hospitals while demonstrating the enormous profit potential of tele-medicine and bio-tech. In energy, Royal Dutch Shell’s $22 billion write down is another proof that 20th century energy assets are losing value much more quickly than expected. On the other hand, the iShares Global Clean Energy ETF is up 20% year-over-year.
Change is here. The 20th century is officially over. The 21st century poses some steep and difficult challenges for individuals and the planet, but there’s still reason to be optimistic. There are opportunities ahead for those who plan and position themselves to take advantage of them.