The pandemic will end. Will there be significant changes in the economy? I believe there almost certainly will be. Will the investment strategies of the pre-COVID work once we have a vaccine? Probably not. My purpose in writing these newsletters is to help you the reader, and my clients, look forward and anticipate the changes in technology, demographics, and lifestyles that will guide the best investments in the post-pandemic period.
Think about this: Fifteen years ago, had someone said that you could fly to another city for business or pleasure, get into a stranger’s car, and be driven to a stranger’s house where you would stay, you would not have believed them. But that was reality up until just last year, prior to the pandemic, and will be once again when the pandemic is done.
I believe we can learn a lot from history; the same patterns won’t repeat but there are lessons we can learn so we don’t make the same mistakes twice. Or, to put it another way, “history does not repeat, but it does rhyme.”
Let me take you back to 1973. Wages had been rising steadily through the 1950s and 1960s. Then, in 1973, real wages (discounted for inflation) flatlined. For the last 37 years, real wages have not risen. In the period from 1947 to1973, income across all levels had been increasing at the same rate. The increase was the same for the bottom 5% as the top 5% as it was for the middle. But beginning in 1973, the top 5% of earners saw their incomes continue to increase while the bottom 95% stagnated. It has reached the point that today the top 1% of all earners make close to 25% of all income.
When worker productivity increases, wages increase as well. The productivity per capita from 1948 to 2017 was double that of income. That is unusual. In that time, GDP tripled.
Think about other changes in demographics and lifestyles we have seen over the decades since 1973. Healthcare expenditures skyrocketed 15- to 20-fold! The median age for marriage increased from 21 and 23 to 28 and 30 for women and men, respectively. The number of children born to unmarried women in every racial group has soared. Childhood obesity has quintupled. The number of young adults 25-29 living with their parents began to rise in 1973 and has tripled since 1972. The savings rate has tumbled. On a national level, budget and trade deficits have soared.
Why 1973? It was probably the oil crisis that set all this into motion. Oil had been a significant improvement over coal in manufacturing. Oil was the key to the growth of transportation, in cars, trucks, buses, and airplanes. The oil crisis changed that. William Nordhaus won a Nobel Prize by estimating that, beginning in 1973, oil intensive industries cut productivity by 2/3. There was a significant shift from manufacturing to services.
So, the question is, how does that apply to today? Last week, I wrote about BP’s forecast and Exxon-Mobil’s projection for energy demand for the next two to three decades. The two companies reached completely different conclusions for the role of oil. BP said oil demand would shrink to a minor energy role while Exxon Mobil forecast oil would be 50% of all energy demand. If BP is right, and I believe the odds favor their prognosis, it has significant implications for investments and investors.
Last week, I used the example of Eastman Kodak missing the advent of the digital camera. Eastman Kodak had invented the digital camera first, but they failed to foresee that it would replace film, and as a result Eastman Kodak failed. Will the same be true of the fossil fuel companies? I believe investors should be aware and prepared.
It again comes down to changes in technology, demographics, and lifestyle. Investors must be ahead of the curve, not riding the wave, in order to be successful. I believe that is the reason my equity clients have seen their accounts outperform the S&P 500 total return over the last 15 years. And, of course, I am required by law to say that past performance is no guarantee of future performance.
