Correction?

“I find your lack of faith disturbing” (Darth Vader)

Perhaps the most sensible course of action for many investors is to buy (or stick with) a globally diversified batch of investments and then turn off your news feeds for as many years as you can manage. If that means you read no further, then so be it.

There is very little edifying in the daily deluge of noisy commentary and opinion for the long-term investor. You are simply taking a view that humankind’s restless ingenuity and underappreciated capacity for error correction¹ will continue to unevenly drive progress, productivity and therefore investment returns.

Such faith is founded on a careful assessment of the past several hundred years. We simply cannot know where, when, and how this progress will unevenly occur. There is of course a chance that it is at an end, that somehow, we have misplaced one or more of the still-debated ingredients to this incredible success. That seems unlikely in the context of the multiplying technological wonders arriving on scene.

AI bubble?

Nonetheless, we are certainly at a precarious moment for investors interested in the short term. Elections so far this year show democracy’s pulse as stronger than its many obituarists. However, the big one is still to come and continues to provide plenty to feed the social media outrage machine. Stock markets continue to ring in all-time highs, but increasingly this seems at odds with a more mixed tone to incoming economic data.

There are also growing mumblings about another technology bubble. Generative AI is not delivering as quickly as some of its most unrealistic hypers wanted. From a technology that only months ago was widely thought to spell humankind’s obsolescence, many now worry that it is another crypto. Perhaps.

We have warned before that contemporary assessments of the potential of a particular technology are nearly always wide of the mark. Remember when the bicycle came on the scene, its detractors worried about spinal damage, decimated local economies, and unchaperoned women.²

The real risk

The risk that longer-term investors face is both subtler and more profound. As we’ve pointed out before, the macro economy on which investments rest is subject to sometimes long and always unpredictable trends. These are sometimes not even obvious with hindsight. They are defined by hard-to-quantify factors, such as the setting of institutions, cultural mores, and how these interact with ‘events’.

Such trends help to underpin market trends that move (or don’t) with corresponding uncertainty. The period since the Great Financial Crisis in 2007/08 has certainly been one such paradigm. Certain investments have soared, others have languished, and reputations have been made and lost accordingly. Our innate desire to ascribe agency, mixed with the impatience of the modern age, can lead us to overinterpret the successes and failures therein.

Fifteen years can feel like a lifetime, the only truth as such. However, the risk is that these trends are as specific to the moment we’ve been living in as previous investment paradigms were to theirs. Bank crises have historically been followed by protracted periods of low growth and low inflation. Meanwhile, new technologies have been either slow to deliver on their promise or just productivity cul-de-sacs.

The literature increasingly identifies this long period of slow growth as being able to explain much of the rise of ‘anti-system’ parties and politicians. This mix, combined with the setting of anti-trust and other institutions tasked with managing monopoly risk, can perhaps explain more of the investment world around us than widely realised.

Towards a new paradigm?

The question we must always ask ourselves surrounds a future that may not resemble the recent past. What eternal investing ‘truths’ do we lean hard on now that are really only artifacts of this last 15 years and the very specific cocktail of political, societal, and macroeconomic factors at play?

This is why we spend so much time here thinking about diversification. It sounds boring and mealy-mouthed of course. Marketing ‘cut-through’ in a world full of strident opinion requires more of the same. However, not all the futures we see ahead extend in a straight line from the recent past, and there are plenty of opportunities in currently less fashionable parts of the capital markets complex.

The UK’s latest GDP data joins a collection of statistics the world over pointing to a rupture with the period running up to the pandemic. The outlook for growth, inflation, and almost everything else is up for grabs. Beware fixation on the wrong bit of the past in the organisation of your investments.