The future The future http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\futuristic-green-city-small.jpg October 4 2021 October 6 2021

The future

And now for something completely different ...

Published October 6 2021
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[Vacation time! So, in place of my normal weekly, I’m offering this special look at the future. My regular column will return a week from Friday.]

The Jetsons, for real. Holographic meetings. Virtual therapy. Bionic humans. The pandemic that accelerated the development and use of new technologies was just a start. In the next few years, expect to see 6G technology that’s 100 times faster than 5G, emotional artificial intelligence (AI) software that lets our cell phones know more about our feelings than our families, and brain-computer interfaces and synthetic biology that inch us closer to the holy grail of “immortality.” Who needs Zoom or Teams when you can attend meetings as a hologram or in person via a flying car? Mind blowing. Bank of America says none of these developments are that far off and believes we may soon spend more time in the metaverse (where virtual and physical reality converge) than in “real life.’’ (If the pandemic’s any indication, that virtual therapist is going to be busy—depression and anxiety surged due to isolation from remote work and social distancing.) This paradigm shift comes amid an explosion in data (2.5 quintillion bytes are generated every day and that’s doubling every 2-3 years), faster processing power (a trillion-fold increase since Apollo 11) and the rise of AI (already the same IQ as a 6-year-old).

Tech, not surprisingly, is leading the capex recovery. It now accounts for a third of total capital expenditures and continues to grow. New U.S. battery plants, solar farms, windmills, microchip facilities, electrical vehicle factories and vaccine R&D are on the way, spurred in part from stimulus measures aimed at climate change and supply-chain issues illuminated by the pandemic. Digitization is paving the way for a productivity tailwind that could offset inflationary pressures and lengthen the expansion, Cornerstone Macro says. Contrary to conventional wisdom that tech replaces/hurts labor, it says tech on net creates jobs and accelerates income growth. When productivity rises as it did in the 1990s, real median family income goes up. Ditto the last expansion when poverty collapsed to a record low. Directly and indirectly, innovation boosts income. Take the Summer Olympics. Advances in tennis, swimming and the high jump came from challenging the “best practices” and finding better ways of doing these things. Likewise, the pandemic challenged best practices on how we work, do business and shop.

On the other hand, a San Francisco Fed study casts doubt on the staying power of a productivity pickup. It notes workers who suffered no income loss during the pandemic generally were the higher-paid, more productive ones—an effect that might reverse as lower-end service jobs return to full strength. (There are questions, however, over how many service jobs will return. Fast-food outlets such as McDonalds are opening more drive-thru-only outlets and using automated ordering, changes that slash the need for workers. Other service-oriented companies are considering similar changes.) Wolfe Research sees stagflation ahead, with higher inflation remaining sticky and the economy slowing dramatically once all the stimulus money fades. It notes federal debt has exploded above 100% of GDP amid the Covid stimulus and Dems’ “Build Back Better” spending spree, and it doesn’t end there. Businesses and consumers (ex-mortgages) are more levered up than ever. Against this backdrop, the Fed seems certain to try and artificially depress interest rates, particularly if progressives get their way on new appointments to the central bank board. Inflation is hard to get going but, once started, hard to stop without a significant tightening of financial conditions and economic pain.

Some sort of guaranteed basic income seems likely in the years ahead. Republicans and Democrats both agree Covid-related legislation providing stimulus checks, $300 in extra weekly jobless benefits and expanded child-care payments helped stave off the worst by boosting savings and propping up spending. Progressive Dems want to take it further, not only maintaining some of the pandemic-related stimulus but also creating a program that ensures all Americans a minimum income. U.S Rep. Omar, a Minnesota Democrat, has introduced legislation providing $1,200 monthly to individuals earning under $75,000 and $600 for each dependent child. The 5-year pilot wouldn’t take effect until 2028. More than a dozen cities, most in California, are testing smaller basic income programs. Omar’s would require massive spending—and tax increases—on top of the multitrillions in the Dems’ “soft” and “hard” infrastructure packages. Switzerland, where 80% of voters struck down a plan to enact a basic income plan five years ago, also is trying it again. But prospects appear diminished after Swiss voters late last month overwhelmingly rejected a new capital gains tax on the country’s affluent—a tax source basic-income proponents there are targeting. I wonder if a basic income plan in the U.S. would face a similar fate if it were put to a public vote? Hmm. The future? Guaranteed to be very interesting, indeed.

What else

Innovate or die Just 1.5% of companies generated all the net wealth in the global stock market over the past 30 years as accelerating innovation placed S&P 500 incumbents at risk of displacement. In 1958, the average company lasted 61 years on the S&P. By 2016, it was 24 years. By 2027, it’s projected to be just 12 years, Bank of America says.

Lost in the deluge Studies suggest the average person is exposed to 5,000 branded messages a day … and that only 12 will be remembered.

Perhaps digital gold? So-called “Gold Bugs” believe the metal is the only true source of value given its scarcity and accepted use through history. However, since the United States unilaterally terminated the convertibility of the greenback to gold in August 1971, moving the dollar to a fiat currency, global equities have vastly outperformed the price of gold and gold mining shares.  

Race to the bottom The U.S., Europe and Japan have unsustainable long-term fiscal situations, suggesting each will be looking to artificially suppress longer-term interest rates and weaken their currencies over time. Wolfe Research says this could spur a perpetual round of competitive currency devaluations, creating significant headwinds for global growth.

A growing economy needs a growing population The world fertility rate was halved from 5 in the mid-1950s to 2.5 in 2016, and the United Nations projects it to fall to 2 by the end of this century. Many countries, including the U.S., already are under 2, with the pandemic adding to the drop-off. This means working-age populations have or will soon peak the world over, with Europe ex-U.K., Japan and China confronting significant declines. Despite a fertility rate under 2, the U.S. working-age population is expected to grow due to immigration.

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DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

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