By Tom Anderson/Consulting
My goal is to fundamentally change the way you look at the world.
Investors today are bombarded with opinions and perspectives. But what does it all mean, what can you make of it and how do you apply it to your investment strategy? I will address each of these questions in this three-part series, the first of which focuses on recent economic history in the United States and what we can learn from the recent economic history of other nations.
It is imperative to assess recent economic history in the United States in order to gain an understanding that can help provide clarity. I know for certain that the next 30 years cannot look like the past 30 years with regard to investments. Each of these periods is unique and most of the data from those time periods cannot repeat itself – and in many cases, could be the opposite over the next 30 years. We therefore have to look to alternate economic histories to prepare for our future.
From 1980-2013, we have seen interest rates move from high to low, inflation move from high to low and government debt move from low to high. While I am not saying, however, that interest rates cannot move lower, the economic phenomena of rates moving from the mid-teens to the 2 percent (and lower) range cannot repeat itself to the extent of this magnitude.
During the past 30 years, we have also experienced both consumer debt and government spending moving from low to high. Government debt went from virtually non-existent in 1980 to a massive figure today, approaching $17 trillion according to the Congressional Budget Office. During the early 1980s, the baby boomer generation was just hitting its workplace stride and was fully employed; today, the same generation is nearly fully retired. These data examples also cannot be repeated in the next 30 years.
I am certainly not alone in the view that economic history is important to study and understand. Other entities that have researched and commented on this topic include the Congressional Budget Office, the Office of Management and Budget, the U.S. Treasury, the Federal Reserve Bank of San Francisco, and most notably, the International Monetary Fund in its 2012 World Economic Outlook titled, “Coping with High Debt and Sluggish Growth.”
So, if we are looking at alternate economic histories, where might we look? Recent economic history in Japan, Argentina and Europe illustrate what the U.S. might face in the next time period.
• The deflation Japan has experienced from 1980-2000, which would be roughly equivalent to the Dow Jones trading at about 7,000 and interest rates staying under 2 percent. This resulted in the gradual collapse of the Japanese economy, often referred to as “The Lost Decade.”
• The inflation, hyperinflation and devaluation Argentina experienced in the 1990-2000 period.
• The European economic crisis, characterized by weak equities, higher interest rates and weak currencies (Spain, Greece and Italy).
There are key differences between the United States and each of the aforementioned economic histories. However, the current U.S.’ GDP to debt is sadly similar to all of these examples. There are important lessons in economic history and although it is unlikely that the fate of the U.S. will be exactly like any of these case studies, it is also unlikely that the next 30 years will look like the past 30 years.
So, what might the next time period look like? And how are we positioning assets to ensure that we are ready? In my second piece, I will address the lessons from the fiscal cliff and bring to light the sensitivity of our economy to shocks. My third piece will address how investors should position their portfolios for the different potential environments we could face.
Meanwhile, understand that the past 30 years of economic history in the U.S. cannot repeat itself. And as such, investors must not use this time period as the basis for their investment decisions.
Tom Anderson is an executive director – wealth management, a senior portfolio management director, a family wealth director and financial advisor with Morgan Stanley.