Why the ‘Age of Abundance’ Is Over
- In recent decades, those of us in first-world countries have become accustomed to plentiful and fairly cheap goods. But Goldman Sachs’ Christian Mueller-Glissmann says that now, we should prepare for scarcity.
- Are shortages due to supply-side problems? Or will strong demand create scarcity and unpredictable inflation?
- And what about macroeconomic trends, including labor demographics, economic cycles and what Christian calls the ‘inverse Goldilocks’ phenomenon.
Prior to the pandemic, shortages of everyday goods were rare in most first-world countries. Supermarkets brimmed with produce. Big-box stores sold gratuitous merchandise. E-commerce sites tempted consumers at every turn.
But COVID jolted us into a new reality. Suddenly, everyday items became scarce commodities. Who can forget the Great Toilet Paper Shortage of Spring 2020?
A few years later, our store shelves are once again overflowing. However, supply-chain issues continue to disrupt industries of all kinds.
Goldman Sachs’ Head of Asset Allocation Research Christian Mueller-Glissmann calls the last 20 years the “age of abundance.” We’ve become accustomed to goods being “available at our fingertips, often at a discount,” he says. “Now, we’re entering an age where there will be scarcity.”
Christian thinks some of that scarcity will be due to supply-side issues, but he predicts that many businesses will create scarcity in response to strong demand.
When it comes to the dynamic game of global macroeconomics, Christian is one of the world’s sharpest thinkers. Cem Karsan and I were thrilled to welcome him to a Global Macro episode of Top Traders Unplugged to discuss economic cycles, inflation, institutional policies and much more. Read on for highlights from our conversation.
Demand-driven inflation and demographics
As the “age of abundance” wanes, we’re seeing prices soar.
I recently read that the Stonegate Group, Britain’s largest pub chain, just instituted dynamic “surge” pricing during peak hours — increasing the cost of a pint by 20 pence. That’s a kind of inflation.
The cost of travel is another notable example: “Everybody I speak to here in London is complaining, coming back from the summer holidays, about how expensive it was,” Christian notes
That’s why he predicts we’ll experience “more unpredictable inflation in real time and over time.”
Situational, demand-driven inflation (like rideshare surge pricing and the sky-high cost of hotel rooms during holidays) is a “shift for the consumer and a shift for investors.”
This kind of fast-moving inflation isn’t due to supply issues, it’s “a lot of demand of the same supply,” Christian explains. But he finds the “slow-moving stuff” is much scarier: changes in the demographics of the workforce, like the dependency ratio.
“I think that’s a very important metric to track,” he says. “Everywhere in the world, the dependency ratio is coming down: in China, in the U.S., in Europe to different degrees. How many people are actually in the workforce … contributing to the overall GDP, and how many people are retired?”
He argues that these questions matter for two reasons: Retirees tend to spend their savings; they’re often the ones going on holidays, creating demand and incremental costs.
“And at the same time, they’re selling assets,” he notes. “Guess what? The dependency ratio means they have to rethink how much equity they actually want to have. … Possibly, they might not even want to take the ratio risk anymore. They might want to lower their duration because they’re getting closer to their peak consumption. So they’re driving asset price disinflation, and real economy inflation.”
Meanwhile, the labor force is shrinking — and gaining more bargaining power. Some of the biggest unions in the U.S. are renegotiating their contracts. The UAW, which represents workers at the “Big Three” auto companies, is demanding a 40% raise. Significant “societal shifts in attitude towards work” emerged as a result of the pandemic — and as Gen Z entered the workforce.
Altogether, these labor demographic trends create a dynamic backdrop for economic cycles.
The Gold(ilocks) standard
In recent interviews, Christian has invoked what he calls an “inverse Goldilocks” macro framework to understand inflation and growth.
I can’t help but wonder: What’s in his porridge?
The structural cycle is typified by a longer-term trend in growth inflation policy. Christian notes that there’s a lot of uncertainty about what the structural cycle will look like in the next 10 to 20 years. But he’s fairly certain that the cycle will look much different than it has in the past two decades.
As we approach the end of the year, Goldman Sachs’ focus is “the interaction of the business cycle with the sentiment cycle, which is a bit more short-term relevant,” Christian says.
Since the beginning of the year, many investors have been surprised by the strength of the risky asset recovery, how well markets have performed, how risk premiums have compressed and how volatility has settled.
Risk-friendly backdrops happen during ‘Goldilocks’ circumstances — “periods in which growth accelerates without inflation,” he explains. “That, for obvious reasons, is good. Because it generates good outcomes for risky assets without a drag from higher rates.”
But we haven’t had that this year: “The growth backdrop hasn’t really improved,” Christian notes.
Bearish on an ‘inverse Goldilocks’ economy
What has happened this year? Inflation has decreased but growth is stagnant.
That’s why Christian characterizes our current milieu as an “inverse Goldilocks” situation. But in spite of this inversion, the U.S. has been remarkably resilient. This phenomenon is a “big surprise” to him — but it suggests the American economy can have a “soft landing and disinflation,” he adds. “That’s something most investors haven’t been prepared for.”
Christian’s research has found “significant disconnects between growth, inflation and policy.” He notes that when most of us think about business cycle investing, we predict outcomes according to a “template”: Growth and inflation increase, then central banks tighten policy; Growth and inflation decrease; then central banks ease policy and we “start fresh.”
However, over the last 20 to 30 years, we’ve seen quite a few times when growth picks up without inflation, policy gets tightened without inflation, and there are “huge disconnects between these three variables,” Christian notes.
“That’s why it's so interesting. To me, that’s been a big surprise: You can have inflation come down without the growth damage, especially in the U.S. That’s the inverse Goldilocks.”
Banking on large-cap companies: risky but potentially revolutionary
Christian thinks the last business cycle in the U.S. has been characterized by a combination of “innovation and conglomeration.”
We saw investable technological progress as well as “access to the technology revolution” provided by large-cap companies.
It’s “remarkable” that the largest tech companies in the U.S. have little to no debt, says Christian.
“They are cash generative. That’s a big difference from the tech bubble [of 1999-2000].”
Back then, the cost of capital was “critical,” he adds. “And to some extent, it contributed to the bubble. But I think this time around, incumbents come from an incredible position of strength because of the last cycle. So there’s a lag effect. That might disappear soon if they make the wrong investments; if they put too much money into the wrong projects. We know the R&D spent for these kinds of large tech companies is absolutely mind-boggling.”
As tech companies spend billions to develop new products and platforms, we’ll need to wait and see if they invested well and “generate revolutions that are more meaningful for society,” Christian says. “At the margin, it will be highly path-dependent.”
In terms of asset allocation, he says investors should create a portfolio that deals with risks but provides offset options.
“The biggest threats to your portfolio will always be inflation and stagnation,” he notes. “So you need to find ways in your portfolio to address those and preferably … via SAA [structural asset allocation], because it’s a structural cycle risk and it can take a long time to actually manifest itself in asset prices. That’s the way I think about it: I just want to have these kinds of ways to tilt the portfolio without being too aggressive.” Tilting a portfolio without going overboard? I’m inclined to agree.
This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.
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