Two articles in this this weekends’ US printed edition of the Wall Street Journal brought into sharp contrast for me the differences and impact of short cycles and really long cycles. The two articles were:
The first article (Baby Bust Effects Could Last Decades) highlights how the Covid effect has reinforced trends already in place in many advanced economies, but also those less well advanced. Fertility rates have been dropping in many countries for a while; and if you have not been reading the news for the last few years, you would have missed how some countries had dropped below their replacement rate – the number of births per female at which a population remains stable.
The article explains how it can be quite hard to spot and interpret implications of fertility changes but also how interesting it is to explore it. First it is hard to collect such data. Second such data might be hard to understand and compare across countries and regions. Third is what drives fertility, and what does it itself then impact? There are several examples, notably US, UK and France, where falling fertility rates are thought to be key drivers to the depression of long dated bonds which has the impact (or is the result of?) depressing economic growth. A Federal Reserve paper is cited that suggests fertility might be one if not the main factor in slowing growth in the USA.
The article goes on to explore what this means. Given that the article is published in the Exchange section those implications are related to business and finance. For example, the ongoing and falling fertility impacts, short term, those organizations that serve infants. Firms such as those that make powdered milk and consumer goods for young families will be negatively impacted. Beyond that period, as the working population in future years contracts, goods and services for a smaller population will see less demand.
Don’t you sometimes wonder where all those busy shopping malls have gone? Why are they so empty and desolate? Is poor competitive behavior in the market the cause, or is it due to drops in fertility rates 20 years before? Freakonomics comes to mind, only in this case many more economists believe the root causes mooted here.
Another implication is drawn out by the article. Really large markets obviously play an oversized role in impacting the global economy. Many years ago, we all heard the phrase, “when the US economy sneezes, the world world catches a cold.” This oft used phrase reflects the fact that the US, practically its currency, its bond market, and sheer economic size, reaches into many other parts of the world more than any other. When China entered the World Trade Organization the balance of power shifted to a degree since China expanded, at a stroke, the size of the worlds’ working population that was more accessible.
The article highlights how the US market, as well as China, and I would add India and to a lesser degree, the disunited EU, play a key role in anchoring policy changes that impact or are impacted by, changing fertility rates. These economies are always in competition with each other, but they also rely on each other to cooperate in certain ways, such as with global trade and long winding supply chains.
This all has implications for senior executives. The biggest and most impactful decisions of any organization is made, most often, by senior executives. Big decisions that impact merges and acquisition, new plant or facilities, new markets and business models all are impacted by global conditions, and they in turn are formed by the conflagration of many short- and long-term cycles and trends.
With the fertility trend flat or down, how should you plan your organizations’ destiny? You can model the changing dynamics of the demand for your markets; you can model inflation and interest rates over the same time frame. Should you look to make investments today that may pay off in 10, 15, or 30 years? You and I may not be around to find out if the bets paid off. But you know as well as I do that someone is doing that right now. We all look to the future for a better life.
The second article (Labor-Market Recovery Isn’t a Done Deal Yet) brings into stark relief the alternative view that our lives are dictated to by very short cycles. The second article looks at the recent jobs market and reports that in February 379,000 jobs were added in the US. These were mostly leisure, food, restaurants which suggest that more of the hard-hit Covid sectors are moving in a positive direction. January’s jobs data was revised upwards too.
The article explores trends related to job, labor-force participation (itself a medium-term cycle or trend), and the impact on the Treasury market. If the market continues to grow well, it is possible the Federal Research will reduce its asset buying (e.g. bond buying efforts that are part of its Quantitate Easing program – remember that?) and even raise rates earlier than planned.
This is a very short-cycle conundrum that has so many variables. Not just a week ago we heard the Federal Research Chairman suggesting rates will continue low for some time, even if inflation in the short term ran hot. This view is consistent with new thinking at the Fed that overshooting its inflation target is acceptable given that it is undershot its inflation target. The problem with that view is not that the Fed has undershot its target – for so long. The real problem is its inability to forecast the inflation rate at all, and its use of the levers that impact it.
As economists we just don’t know what really happens in our economies. We guess. We use models. We have hypothesis and we test them. Sometimes a model seems to fit data from the past and all hail, we have a new theory to apply to the future. All goes well until the theory falls apart because some other factor kicked in. Take inflation as a great example. Monetarism was thought to be the new silver bullet for tackling inflation. It was thought that inflation was a money-supply driven phenomenon. It was, for a time. But today there is so much money in the economy (see M2 and M3) that this cannot be the case. M3, whichi includes what you and I would call money but also the funds organizations use to fund acquisitions, innovation and investments have ballooned. What changed?
Other factors kicked in and the huge amount of cash and credit available in the market today is tied up in very few organizational and investment bodies. In other words, the market is hugely distorted. It is not that we all have huge wads of cash to spend and many places to go spend them. As such there is great potential that with just a few small changes, we might see a short, sharp, uptick and trend driving inflation. Then again, as an economist, we could be wrong. haha.
This again has implications for executive leaders. How do we frame our short-term decisions given all these uncertainties? Which is the right lever to pull back, or push forward? Surely there is a clear answer? Surely CEO’s of winning companies can tell you the secret? Surely all those management books on the shelf, half-read, contain all you need to know? Nope. Despite all the rhetoric and public speaking and white papers, it seems the best strategy for success is to be both fleet of foot, and to keep something in reserve for when an opportunity appears – and then go all in. Any other option perhaps leading to a big bet is fraught with disaster. I am enjoying Jeff Immelt’s new book, Hot Seat. He seems to be saying that there is no such thing as a single, winning strategy. He should know from his experience at GE.
So, after a fun Saturday morning reading the news paper and writing this blog, I am left wondering how to end it with pithy advice for executive leaders. My guess is nothing fancy but maybe its practical, even for the 30-year horizon. As I noted in my last couple of annual forecast (Your Assumptions for 2021, Plan B and Road Maps) for the US economy, I would think that the use of scenario planning can help you weigh the variables you know about and can handle, and also explore the boundaries for the variables you don’t know about and understand.
Judicial use of such knowledge may help inform you when to move, when to hold back and wait. It may not lead to blockbuster, all-in one-off gamble, but it might lead to that. I guess the question might be: Do you seek to survive over the long haul with nimble, incremental bets that seek innovation here and there, or are you looking to blaze a path and tell us all how to do right as only you know how. I can’t wait to read that book.
Another book just landed on my mat at home, thanks to the US postal service: The Great Demographic Reversal by Goodhart and Pradhan. Should be a good read tomorrow.