Last week on Thursday I attended the CFA Society Seattle’s annual Forecast Dinner. It was my first time attending the event, so I wasn’t sure what to expect. The first thing I noticed was that there was some intense networking going on. I don’t mind, but everyone was being way more social than I expected. I suppose everyone had to unload two years of not getting to socialize enough. The main thing I was looking forward to for the dinner was the presentation by the speaker, Mark Blyth.
To give some background, Mark’s area of expertise is in political economics. He is the director of the William R. Rhodes Center for International Economics and Finance at Brown University. He has published a couple books, his most recent one, which he co-authored with Eric Lonergan and published in 2020, is Angrynomics. I read Angrynomics prior to the dinner. I found it very compelling, so I was definitely interested in hearing what Mark had to say in his presentation. To give some background on it, the first two-thirds of Angrynomics is a discussion about the many forces in our world that are creating an environment where economics and politics are driven by anger and the underlying problems that have led to this environment. The last third of the book proposes their solutions to the problems they present in the first part. Angrynomics definitely gets a recommendation from me. Anyone interested in these types of economic topics will find it especially interesting. I am even in the process of re-reading the last part of the book to make sure I fully understand their solutions. You may also see a write-up of my summary of the book in the future.
Mark’s presentation at the dinner was just as compelling as the book, so I figured I would summarize some of my key takeaways:
Deglobalization didn’t happen. This was one of the big predictions at the beginning of COVID. When everything shut down, we learned that outsourcing much of our goods production results in shortages when we have snags. When it comes to essentials, such as life-saving medications, this creates a bit of a national security risk. Many people predicted that a shift to more regionalized production would occur, but so far, no material actions have been taken to suggest those predictions will be proven correct. If anything, global trade has increased during this period.
We ended up having a K-shaped recovery. At the beginning of COVID, everyone was predicting a letter or a shape to describe the type of recovery we would have. Those ranged from being a V-shaped recovery to a U-shaped recovery, or even a check-shaped recovery, but what we ultimately had was a K-shaped recovery. It was a recovery that had two divergent outcomes. Working professionals and owners of capital assets ended up being just fine, but everyone else suffered the brunt of the economic downturn.
What everyone is calling The Great Resignation is only 3% of the labor force. This one was especially surprising because it seems like there is a labor shortage that is having a big impact on our economy. I guess that just shows how big of an impact a 3% decrease in workers has on the economy.
Some sectors may never come back the same way. We will probably see a shift in several industries as they alter their business models.
The long-term trend for interest rates is low. What we saw in the 70s during that period of high interest rates is just an outlier over the course of history. He expects the interest rates to continue their long-term path of staying low. He showed the following chart, which I found interesting. He expects the high inflation we’re seeing to be transitory. He sees the current inflation environment as being analogous to World War II, where once the post-war disruptions dissipated, inflation was back to a more normal level.
What China does has a big impact on the global economy. There is a feeling in the world after the poor handling of Afghanistan that the US won’t back Taiwan if China invades. Mark believes the US will defend Taiwan if that were to happen.
There is a big shift toward hydrogen energy around the world that is flying under the radar. Much of the focus has been on Tesla and other Lithium-battery cars, but over the long-term, lithium doesn’t work out logistically. Acquiring lithium is costly, and overall, it is a scarce resource. Toyota has shifted their focus to hydrogen fuel cells. A hydrogen train has been used in France and Austria. Denmark and Norway are pursuing hydrogen ships, and many other hydrogen projects are taking place around the world.
He would go long on oil over the next 10 years. With the big shift to green energy happening around the world, capital is going to flow out of oil, making it more costly to increase production. Meanwhile, demand isn’t expected to decrease for oil. So don’t expect prices at the pump to go down any time soon.
He expects a lot of the issues we’re dealing with now to work themselves out. The real risks in our future are geopolitical.
That summarizes my main takeaways from his presentation. I think we can all appreciate Mark's global perspective on the economy and politics as the (hopefully) final stretch of COVID unfolds.
