A few years ago Tyler Cowen penned a little book, The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better (the eBook is on sale today for $3.79 and I recommend you buy it right now.) In usual Cowen style, the premise is highly controversial and has been pooh-poohed by both academics and innovators alike. It’s worthwhile, I think, to look closely to what Cowen sees.
In a nutshell Cowen is saying that our standard of living has not seen the big strides that came from things like the mass migration of people from farming to the industrial economy, the advent of truly life enhancing technology shifts like electrification and its derivatives such as refrigeration, washing machines, central heating, etc. And, I think most importantly, the mass education of the American population. As the book’s description reads:
Median wages have risen only slowly since the 1970s, and this multi-decade stagnation is not yet over. By contrast, the living standards of earlier generations would double every few decades.
Regardless of one’s opinion on that thesis, I think it has important implications; not for the future of the developed world but for everywhere else.
More recently, Marc Andreessen has been tweet-storming the tectonic shift in global economics that will be caused by the advent of the inexpensive smart phone. This is a simple idea; this new technology puts in the hands of everyone access to the sum of human knowledge and the ability to trade goods and services with near frictionless ease. Which brings me back to Cowen.
To me the important part of The Great Stagnation is not in the current state here but in the story of prior to 1970. Productivity exploded in the developed world as time was freed from the labor of managing household chores (the biggest economic boon in history by the way), the procurement of food and clothing and the extension of productive hours that came from the light bulb. The developing world, though the advantage of trade (read Recardo re: comparative advantage), is about to increase both productivity and, hence, earnings as a consequence of this rapidly proliferating technology. The smart phone will have similar effects to our history by bringing education to the masses as well. These are like the conditions in place that resulting in the mind-blowing advance in living standards we experienced from the first industrial revolution.
There’s a rub (there’s always a rub.) In the west we have been blessed by (classical) liberal institutions. There is no dismissing that The Enlightenment philosophers had a durable effect on free trade and the capitalistic construct. The developing world has some way to go to change there anachronistic government structures that will allow the type of trade we take for granted in the west. But we can see it changing everywhere – from China’s state capitalism model to the enthusiasm for India’s liberal new reformist prime minister, Narendra Modi. I expect we’ll see it continue everywhere in one form or another as access to knowledge sweeps the world at an increasing rate. But it will take time.
As a portfolio manager I understand the benefits of investing in EMs for both growth and portfolio diversification. That, however, is so pedestrian that it’s not much worth the time to write about.
But, what if time was no object in one’s investing frame? How would you invest then?
I manage my kids IRA’s and help them with their 401(k)s. I also am building accounts for my grandkids. For my kids I’m allocating 50% of their portfolios to EM. For my grandkids it’s the same but half of that I’m putting in Africa – the area where I think there is more potential in both the spread of liberal society and gains from access to knowledge. There is where the growth will be in the next 50 years. Will it be a bumpy ride? Probably. What does that have to do with the long term?
I might wrong and my kids push back a bit (although they don’t pay that much attention.) But if I were starting out today that’s what I’d do with my own money.
I’ll write about what I would do with the other 50% in another post. But investing looks different if one can take the time constraints out of the calculus. It’s an exercise worth doing.