It’s not as fanciful a question as it first seems. Globalisation, for decades the engine of economic growth, has gone into reverse. Automation, AI and Big Tech have irrevocably changed the business and investment landscape. At the same time, rising inequality has resulted in populist politicians, from the US to Europe, either surging to power or having their policies adopted by mainstream politicians. The intergenerational divide appears wider than ever. Worryingly, faith in our institutions (political, economic, cultural) is dwindling at a time when climate change threatens us all.
Dramatic stuff. However, as investors, our job is to look through short-term noise to try and identify long-term trends. When we do, there is much to consider.
The Great Divide
It’s been more than a decade since the global financial crisis (GFC), but its reverberations continue to this day. The global monetary policy response, while seen as essential at the time, has caused a marked redistribution of wealth away from savers and towards risk-takers. According to Wells Fargo, US savers lost up to $600 billion in interest payments from their bank accounts due to Federal Reserve policy.
Meanwhile, quantitative easing (printing money to buy government debt) has, as intended by many of its authors, pushed cheap capital into risk assets. Equity markets have been on the march ever since, despite the faltering global economy. Adding fuel to the fire, share buybacks are at an all-time high. According to Ned Davis Research, between early 2011 and 2018 US S&P 500 companies bought back over $3.5 trillion of their own stock – a new source of demand that further added to the handsome returns made by shareholders over the period.
Unfortunately, not everybody owns risk assets like equities. For those who do not, the last 10 years have looked a lot different.
Real wages have stagnated in the West despite historically low unemployment rates. Since President Trump came to power, the S&P 500 has climbed 40%; workers’ pay has only increased 9% during that period. According to the Economic Policy Institute, in 2018 the average CEO’s pay was 278 times higher than the annual average US workers’ wage; in 1970, the ratio was 30x.
The root cause lies beyond the GFC. For decades, the economic and business consensus has insisted that deregulation, privatisation and globalisation would bring prosperity to all. Outsourcing of production and jobs was tolerated if it meant better living standards and cheaper goods back home. In reality, this outsourcing marginalised huge swathes of the economy, affecting industries from manufacturing to mining. Many workers lost their jobs thanks to automation, ‘off-shoring’ and A.I. President Trump’s Make America Great Again tapped directly into this sentiment.
This wealth divide is mirrored in the UK. According to a report by the Institute for Public Policy Research, Britain is the fifth most unfair economy in Europe. One-fifth of the country lives below the poverty line, despite most households working. Meanwhile, 10% of the population owns 44% of the country’s wealth. Further, households in the south-east of England have combined wealth of £2.46 trillion, compared with £368 billion in the north-west.
Given these factors, a political reaction was perhaps inevitable. In June 2016, 52% of Britons voted to leave the European Union (EU). The result exposed deep divisions. Every part of the country except London, Scotland and Northern Ireland voted to Leave. On education, a report by YouGov indicated that 70% of those with only one GSCE or lower voted to exit the EU, while 68% with a university degree opted to Remain. Meanwhile, 71% of under-25s wanted to stay in the EU, compared to 36% of over 65s. The common argument was that Leave voters felt ‘left behind’. Whether this was due to the years of austerity (also part of the post-GFC ‘medicine’) or the EU is now a moot point.
But, cut to four years later, and an even more fundamental shift occurred in the UK.
The Iron Lady
In December 2019, the Conservative Party won the general election by a landslide. During campaigning, Boris Johnson promised to tax and spend, and to bring the north of England back into the economic fold. Austerity died overnight. This was a new Conservative Party. Most importantly, though, he promised to “get Brexit done”.
The results also saw the political map turned on its head. Labour voters abandoned decades-old allegiances and defected to the Tories across the UK’s industrial heartlands. From Durham to Wrexham, the so-called ‘Red Wall’ crumbed. It was Labour’s worst election result since the 1930s.
The Margaret Thatcher parallels are easy to make. She, too, was swept to power with a thumping majority from a disenfranchised British electorate eager for change.
Both are also "not for turning". Many pollsters thought that Mr Johnson would pivot to a softer Brexit once he held the keys to 10 Downing Street. His decision to legally prevent an extension to EU trade talks past the end-2020 deadline put that faint hope to bed.
Further out, it’s hard to tell whether Johnson will stick to his populist agenda. It is also worth highlighting that the Thatcher revolution was much more gradual than it felt at the time. The first actions of Keith Joseph, the newly appointed Secretary of State for Industry and the intellectual powerhouse behind the Thatcher revolution, was to offer financial lifelines to British Leyland and British Rail. Additionally, the decision to allow voters to buy their council houses came in 1980; deregulation of the Stock Exchange and privatisation came in 1986.
It may therefore be some time before we can judge the true economic hue of the Johnson government – and whether it, like its 1979 predecessor, will result in such a changed version of capitalism. The recent high-profile changes in personnel at the Treasury certainly suggest some strong policy views at No.10. The upcoming budget will, I suspect, make the direction of travel a little clearer.
All this partially explains the current situation – but what of the future of capitalism?
Let’s go back to money. The wealth gap between generations has grown markedly since the ‘60s. In the US, according to Federal Reserve data, Boomers (those born between 1946 and 1964) currently own 57% of the wealth. This compares to Gen X (1965-1980) and Millennials (1981-1996), which own 16% and 3% respectively. Millennials earn 20% less than Boomers did at their age in real terms. Compounding matters is the cost of education. According to the AARP Public Policy Institute, a four-year private college course in 2015-16 averaged $39,529, compared to $14,618 for the oldest Boomer. The cost of housing has soared over that time. This means younger generations tend to buy fewer homes and get married later.
We are also all living for longer, which will require Millennials and those that follow to fund lengthier retirements for themselves and their families.
Traditional copper-bottomed pensions, enjoyed by their grandparents, are no longer viable. As such, the next generations will be expected to work longer and save more. Hardly the stuff to get you out of bed in the morning. It’s therefore easy to see why there is friction between the generations.
This schism is showing up in the US presidential polling numbers. Millennials overwhelmingly support Bernie Sanders over Donald Trump. The reason? Sanders’ contention that capitalism is not working for the many but for the few. He is promising ‘radical’ policies to redress the balance, from higher taxes to ‘Medicare for All’.
This message is resonating with Millennials: in a 2019 poll by YouGov, 70% of those between the ages of 23 and 38 said they would support a socialist candidate for president. Over half also had a negative view of capitalism. By contrast, only 36% of Boomers said they’d support a socialist nominee.
If Millennials get out the vote (a big if), we could see a Sanders victory in November. That would fundamentally change the shape of the US economy. Even if he doesn’t win, the direction of travel seems clear. Another term of Trump – with his plans for further tax breaks for the wealthy and cuts to the social safety net – could further embolden the next generation of voters.
But perhaps Trump and Sanders aren’t as different as they first seem. True, their policies couldn’t be further apart, but both, in their own way, are targeting sectors of society that feel ‘left-behind’ by modern capitalism. When capitalism is being attacked by both the ‘left’ and the ‘right’, then it surely must be time for a rethink.
A rapidly changing climate
There are other – arguably more vital – factors at play, too. Take the environment. It’s fair to say 2019 belonged to the issue of climate change. A United States Conference of Mayors survey conducted in December found that 80% of 18-19 year-olds view climate change as a “major threat” to humanity. The 2020 World Economic Forum Global Risks Report was also an eye-opener. For the first time, all top-five risks in terms of ‘likelihood’ of occurrence were environmental. Additionally, three of the top-five in terms of ‘impact’ were also environmental – rising sea levels, increased weather events and loss of habitat.
To tackle climate change will require concentrated action from governments, investors and business. The financial world also has a prominent part to play in the large-scale realignment of the capital that is needed to decarbonise the economy. This includes investment in renewable energy, electric vehicles, storage and energy efficiency.
Such a sea-change will (and should) increasingly shape the investment world. Indeed, a 2018 report by TD Armitage found that most of the Millennials surveyed (60%) had at least one-fifth of their money in ESG (environmental, social and governance) investments compared to 45% of Boomers. A survey by Finimize (an investment app aimed at Millennials) found that 64% of its users would accept lower returns in order for an investment to be more socially responsible. This challenges the very notion of risk-return that has been the bedrock of investing. With Millennials set to inherits trillions in the coming decades, this type of investment will only grow. The industry must adapt accordingly. It would certainly be pleasing if, in the decades ahead, this generation saw the financial sector as part of the solution, rather than part of the problem.
Caring isn’t always sharing
Of course, any conversation about the future must address Big Tech and the ‘sharing’ economy. The former has changed every facet of our lives, from the way we shop to how we consume entertainment. This dominance has led to calls for tighter regulation. Many want to see the break-up of the monopolistic FAANGs (Facebook, Amazon, Apple, Netflix, Google).
And then there is tax. In 2018, US federal records show that Amazon paid $0 income tax on more than $11billion of profits. It also received a $129 million tax rebate. Big Tech isn’t alone, with the likes of General Motors and Goldman Sachs reportedly receiving similar benefits in 2018.
This has led to righteous indignation in some quarters; the idea that the playing field isn’t level and is rigged against the little guy. Why should I pay my taxes when billionaire companies get off virtually scot-free? It’s a fair question and one that policymakers have yet to truly address.
Which leads us onto the sharing economy. As a business model, it promotes consumption without ownership. Via apps (e.g. Zipca Car Sharing, Couchsurfing) sellers become providers, while buyers become users. This means people can access products and services that would normally be unavailable to them.
However, while this rental culture may suit when applied to music, films or cars, it is not so obvious to me that this generation has any less desire to own their own home than I did at that age. Mrs Thatcher realised this 40 years ago and changed the market to solve the problem. Current politicians may grow similarly impatient with ‘the market’ if it proves incapable of addressing today’s housing crisis.
Additionally, with new tech comes old problems, such as monopolies and a rentier structure. The latter has seen only a few companies dominate industries. There have also been issues with labour rights, including the recent high-profile lawsuits at Uber. The sharing utopia may have to wait.
So, while Western capitalism isn’t dead, it is changing. How policymakers address rising inequality, the intergenerational divide and environmental issues, will determine the shape and nature of that change. Whatever happens, they must ensure that they fully engage the next generations. Politicians who think that the younger generation will accept renting rather than owning, working rather than retiring, economic growth over climate action, will continue to be tested at the ballot box. The context in which today’s version of capitalism operates will also have to accommodate this new reality. But I believe it will – its success as the pre-eminent economic model has been, in part, due to its adaptability.
Written by Richard Dunbar, Head of Macro Investing Research
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