HyperNormalTimes

Written by our Director of Equity Advisory, Jeremy McKeown, the HyperNormalTimes provides in-depth and considered long-term commentary on major macroeconomic and market-shaping themes.

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May 28, 2022

Turn it off & back on again – The Economy

When you turn your laptop or phone off and turn it back on again, you usually find that reconnecting the operating system (OS) to the applications improves its effectiveness. Your device works better after this procedure because it removes the Random Access Memory (RAM) that clogs it up. However, there is a pause while everything checks out and reconnects before you can enjoy the new user experience (UX). Sometimes, this pause is frustratingly long and involves downloading new versions of your operating system or new, improved applications. I find the likelihood of this happening directly related to the criticality of my immediate requirement for using the device. However, in the scheme of things, it is a positive outcome. The device is more effective as a result.

It is instructive to think of the above as an analogue for what has happened to the global economy over the last two years. In March 2020, the world authorities effectively switched off the economy. GDP, stock markets, and commodity prices went into free fall. In West London, I woke to the sound of woodpeckers rather than 747s arriving at Heathrow. We had turned off the global operating system.

By October that year, Pfizer announced the remarkable outcome of their vaccine study. Stock markets rallied on hopes that the world’s authorities would turn our operating system back on, but somehow we are still waiting for the improved user experience. Some eighteen months later, the applications that we used to run on the old operating system are struggling to reload. Indeed, some fear that we may have returned the device to its factory settings, or worse, there is a fatal flaw in the new version of our OS.

How long before we can enjoy our new and improved UX? Certain apps struggle to reload as they discover that the old certainties no longer apply. Who could have guessed that consumers might devote less time online watching videos or choosing their summer outfits? Where did all those semiconductors go for things like cars and white goods? (From Q1 2020 to Q1 2021, global PC shipments nearly doubled, a device category that had been in a gentle year on year decline since 2011).

Crucial applications, energy and food, essential resources for daily life, have become corrupted and distorted. While other critical factors, labour and money, have also found their older version unfit for the new reality. Suddenly, the global OS is under construction; just at the crucial moment, we are waiting for it to reboot.

The logistics app is wondering where all the truck drivers went. They have taken a well-earned rest from the ridiculous work conditions imposed on them, and as we paid them to stay at home, why not? Meanwhile, the global investment app has also failed to reopen correctly as the operating system excretes its clogged up RAM, such as malinvestments into worthless meme stocks and crypto bubbles. Then there is the popular ESG function’s misalignment which distorts the new version of both the energy and capital allocation apps. (But even the mere suggestion of this can cost people their job, so best not to dwell here too long).

Everywhere we look, we need to rebuild the world’s OS and the apps that sit on it. It is a never-ending job that typically adapts and adjusts with regular new version updates. As with the systems that power our devices, this is happening via centralised proprietary and decentralised open-source workflows. When working effectively, these changes are almost invisible but are prone to severe disruption when things change more quickly, and the updates are more significant. In this sense, we are in unchartered territory.

The global operating system and its applications might need a complete reset (a whole new international institutional framework), or maybe it will self-correct if we leave it alone (disruptive growth). It is too early to know. But the response of the rational investor is to not rely entirely on either outcome but to hold disruptive growth and real assets in some combination. That way, both bases are covered.

Jeremy

Ealing

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