In today’s issue:
- Don’t host a buffet dinner in China
- The economic pie is going to shrink
- Without economic growth, your portfolio should look different
[Yesterday, we gave you an optimistic take on the country’s future. But it just wouldn’t be fair to the new government if we didn’t provide a gloomier alternative. This extract from a 2022 edition of The Fleet Street Letter lays out the biggest problem Labour will face…]
In 2016, I worked as a circus performer for a resort in Phuket. It had a restaurant with a prodigious buffet. Holidaying guests from around the world all understood that the buffet would be refilled and restocked regularly, allowing guests to eat at whatever time of the evening they liked.
Koreans, Chinese and Japanese guests all queued politely behind each other. Germans, English and French kindly passed each other the tongs and soup ladles. Americans and Australians shared tables with guests from the Middle East. It was peace and prosperity for all.
But, one week, the resort was hired by a Chinese company for its employees. These guests did not understand that the buffet would be refilled and restocked.
What happened next was so traumatic for all concerned that it is still seared into my memory. It also perfectly demonstrated the change I see coming over the global economy, undermining the investment trends many of us rely on…
Of course, in a sense it was understandable. The Chinese guests, who all arrived the moment the restaurant opened, noticed there simply wasn’t enough food on the counters to go round… and so they panicked.
They began to fight over a pie that did not grow…
The result was utter chaos.
People would run to the nearest counter to fill their various plates with whatever they could get their hands on, intending to redistribute it amongst their family later. Securing enough food was the priority.
Because a new batch of guests arrived every three nights, the same disaster unfolded over and over again. Every night, amidst the scramble, there were epic collisions between runners which sent plates of oysters and roast pork flying into the ceiling and back down again. Those following close behind then slipped on the remnants, sending the plates in each hand flying too.
The Thai staff that tried to clean up the mess were barged aside as guests would proceed to pick the food up off the floor and take it to their table. (It made sense given they had a better chance of securing that food than fighting for space at the throngs to be found at all the buffet counters.)
After the first few disastrous evenings, some of my colleagues were required to perform crowd control and I remember their grey faces afterwards…
Anyway, the point is that, once the pie isn’t growing, the dynamic of society changes radically. The way to get ahead in such an economy is to take from others.
The economic panacea of human history is running out
One of the very few things almost all economists agree on is that economic growth fixes most problems. It’s the closest thing we have to an economic panacea.
The reason is simple. A growing pie means that broadly based prosperity is achievable. This encourages political stability and social cohesion. Also, it pays for the many challenges that we face, such as healthcare and welfare.
Sure, inequality is an issue. And not everyone benefits. But when an economy is growing, getting ahead can be achieved by growing the pie together, rather than by fighting over chunks of it.
We have forgotten this simple distinction. And it will come back to haunt us in various ways, creating threats and opportunities for investors… and everyone else.
Growth has been the state of the world for many generations. Indeed, it’s the story of human history. There have been very few periods of sustained decline in living standards. But we may be on the cusp of one for two reasons.
The first is simple – demographics.
There are two ways to grow an economy. One is productivity – the same number of people creating more. The other is population growth – more people making more.
For the first time ever, populations across many developed nations are expected to go into long-term decline. This trend may be slow at first, but the effect is nevertheless material when compared to pre-trend growth. It may even be enough to offset productivity gains.
Personally, I think that this demographic change is a good thing, but that’s irrelevant. The point is that it is not good for economic growth, by definition.
The second reason why economies will struggle to grow is debt.
Just as saving is deferred consumption, meaning that you forgo spending now so that you can spend saved money in the future, debt is consumption taken from the future and brought forward. This implies that the future consumption will not be there. Or, more specifically, that future consumption must be foregone in order to repay the debt.
For the past few decades, our economy has grown based on ever more debt. This means that ever more economic activity was taken from the future and brought forward. But this means it won’t be there in the future. Not only that, it’ll have to be repaid (or written off).
While you can continue to borrow, this simple fact can be masked by ever more borrowing. That is why debt maturity has grown ever longer, with some governments now issuing 100-year bonds and mortgages expanding beyond 30 years. People are reaching ever further into the future to steal GDP and bring it forward.
We are also increasingly financing a growing proportion of our purchases. “Buy now, pay later” type companies are offering to cover even the most basic costs. My friend’s fintech company helps people borrow money to send their children to private school.
But we may be reaching the point at which such borrowing has simply exhausted itself. Not only this, but the cost of debt is rising. But this is not the point I’m trying to make this month.
Instead, focus on the change to growth.
Demographics and debt will combine to make growth in our economic future far lower than we are used to, if not negative. The buffet will not be restocked.
A low-growth world is an ugly world
Before we get to the worrying economic and investment implications of this, a quick warning. I’m worried about the social and political impacts too. They may even take precedence over your investment choices.
You see, while a pie is growing, getting prosperous means educating yourself wisely, investing well and working hard – you become part of what grows the pie. And that pie is grown by cooperation, coordination and integration. At the expense of another metaphor, the rising tide lifts all boats and encourages international harmony.
But what happens when the pie starts shrinking? When there are less and less people to create GDP (and pay taxes and interest bills)?
Then the chaos that I saw in Phuket will ensue. Because we will all be fighting over shares of a shrinking pie instead of growing the global one together through cooperation. Getting enough pie will become the priority, rather than growing it.
This is already evident in global geopolitics, with nations scrambling to secure energy and other strategically important resources at the expense of others.
We are seeing onshoring and friend shoring, which will make economies more robust, but less efficient, which implies less prosperity.
Instead of investing in more energy production, nations are fighting over who gets what from where, often leaving those who cannot pay high prices without enough resources to meet their needs.
The change is also evident in national politics, with nationalist parties in the ascendancy and globalism becoming unpopular. Make America Great Again, Donald Trump and the EU’s trade barriers, and immigration are hot topics.
Immigration is perhaps the best example – people focus on the cost and burden to the NHS rather than the nurses and doctors which immigration supplies. This is not a judgement, but a shift in sentiment which comes about from a shrinking pie.
How to secure your growing share of a shrinking pie
The good news is that economic growth and stock market returns are not correlated, as market historian Russell Napier likes to repeat. This was the big flaw in the idea that investors can capture higher investment returns by investing in China and other newly industrialised countries in East and Southeast Asia before that.
The point is that the nature of profitable opportunities has changed. This is easiest to understand in the commodities space.
We have gone from an age of abundance, with commodity booms manifesting themselves through vast commodity volumes, to an age of scarcity, with wild price spikes that volume cannot keep up with.
This has many investment implications…
[The issue went on to specify how your portfolio should shift to profit from this new world. And The Fleet Street Letter’s investment director has put together a plan.]
Until next time,
Nick Hubble
Editor, Fortune & Freedom
