On what principle is it that with nothing but improvement behind us, we are to expect nothing but deterioration before us?
– Thomas Babington
In last month’s article, we advised that while pie may be a wonderful selection for a tasty dessert, there is no place for it in your investment strategy. This month, we explore the beauty of investing in Information Age 2.0.
A Wall of Worry
One of our fundamental beliefs about investing here at Concentus is that investor psychology is the dominant factor that determines the really important trends in asset prices. Investor psychology can go through very long cycles on the way from the peaks of jubilant euphoria, to the depths of sheer terror and back again, and Great Investors seek to understand the current emotional status of the investing public. The financial crisis of 2008 left incredibly deep scars on the American investor psyche, and most investors are still feeling fearful, have lost their trust in the stock market and economy, and are still waiting for the other shoe to drop.
The latest example of this is the reaction to the 90-day equity market dip that happened between Labor Day and Christmas day of 2018. Investors reacted to that brief correction with unwarranted fear, choosing to remain in a cocoon of risk aversion with very high levels of cash.
In fact, the UBS Group, the world’s largest wealth manager, recently reported that a full 32 percent of its high net worth portfolios, owned by its wealthiest clients across 17 countries, are currently invested in cash. That’s cash, not bonds, but cash – otherwise known in investment industry lingo as “dry powder” because it can act as tinder for the next equity market explosion.
Great Investors know that there is always a crisis happening somewhere, and the world exists in a permanent state of uncertainty. There will never be a shortage of media coverage shouting about the latest global problem that threatens to take us down. The current version is the increasingly noisy coverage of the U.S. trade negotiations with China, and the threat of a full-blown trade war. For some perspective on this global crisis, we highly recommend reading Brian Wesbury’s insightful piece on the topic.
A Period of Economic Growth
Although most investors seem to insist on remaining fearful of a slowdown in economic growth, it is hard to understand why. Consider the recent news about the global economy:
- First quarter 2019, U.S. GDP was reported at 3.2 percent, which beat every single mainstream forecast and silenced the pessimistic thesis that GDP growth is decelerating.
- Next was the sharp spurt in productivity growth in the first quarter. Reported as a 3.6 percent growth, this all-important productivity measure also shattered the 2.2 percent consensus estimate. Not only that, but output and hours worked also rose, pushing output per hour higher as well.
- The 2.4 percent rate of productivity growth over the last four quarters is notable not only because it is the fastest gain since 2010, but more importantly because it is very unusual to see this kind of productivity gain occur this late in an economic expansion. Usually, the greatest jump in productivity occurs early in an economic recovery, which makes this productivity performance even more impressive.
- Then came the April jobs report, which was a grand slam home run. At 263,000, it blew away the consensus estimate of 190,000, and again beat every single mainstream forecast. At 3.6 percent, the current unemployment rate is better than it has ever been since Neil Armstrong made “one small step for a man” exactly 50 years ago.
- Finally, and perhaps most impressively, despite this low unemployment rate, it was also reported that U.S. job openings surged in March. Job openings exceeded the number of unemployed seeking work for the 13th straight month, at 1.3 million.
Call us foolish optimists, but the facts don’t lie. Why worry?
Information Age 2.0
Despite these impressive facts about the world’s current economic status, there are those among us and in the media who remain pessimistic. They argue that this kind of growth is not sustainable, and that despite these amazing gains, the world is on the precipice of a slowdown.
We believe that it is impossible to make a Great Investor out of a pessimist.
In his book The Rational Optimist, author Matt Ridley makes the point that advancements in innovation, economic growth, and human quality of life are the natural byproduct of human communication. Gutenberg’s invention of the printing press is a good example. When this technology was invented in the late 1400’s, it completely changed the game for human communication. The printing press immediately transformed European culture from the foundation of oral and handwritten communication to a new world of mass-produced communication media. The result was a massive burst in economic, cultural, and overall quality of life gains in Europe for more than 100 years.
Now consider the massive potential for improvement that lies within the communication network of today’s internet. While it is estimated that the printing press started “Information Age 1.0,” the commercial introduction of the microchip in 1971 launched “Information Age 2.0.” Today’s microchips are about 30,000 times faster than the 1971 version.
“Information Age 2.0” has dawned an explosion in communication and interconnectedness and a corresponding explosion in the opportunities for ideas and innovations. The only logical outcome that we should expect is for a continuation of this trend, positively impacting our quality of life in the next 100 or more years.
And best of all, we are only in the first inning of this ball game. Again we say, why worry?