Weird and wonderful

“Without music to decorate it, time is just a bunch of boring production deadlines or dates by which bills must be paid.” (Frank Zappa - author of ‘My guitar wants to kill your mama’ and multiple other classics - 1990)

Like Frank Zappa, Steve Jobs had some unusual hairstyles. ‘So what?’ you rightly wonder. What link could possibly exist between an edgy roof, economic growth, and investment returns?

Well, one recent study¹ used the wonders of machine learning to chart style differences (and similarities) over time using 14 million US high school yearbook photos. Interestingly, the study found a link between innovative style and patenting activity.

Steve Jobs was one such example – “Jobs appears with bow tie and tuxedo, sporting long hair and no beard or moustache. At this point in time, fewer than 0.3% of US male graduates had ever worn this style, qualifying him for the ‘style innovator’ category. Jobs also went on to apply for 1,114 patents, of which 960 were granted.¹”

We have discussed the role of culture (see ‘Does gloom beget gloom?’) and individual freedoms in economic growth many times. As new inventions have landed in our midst down the ages, the rewards have often gathered to the societies able to bring to bear at least some of the diverse might of their human capital – the provision of civic space for the iconoclasts, misfits, and eccentrics is often seen as key to the success of the now developed world.

Free speech, press, and other often uncomfortable inputs to (and outputs from) this individualism are seen as inseparable² from the past, present, and future of productivity growth.

But just apes?

However, in various tests against our chimpanzee and orangutan cousins, we seem all but indistinguishable in a variety of cognitive tasks. The one area where we humans stand clear is social learning – the ability to mimic a dominant strategy quickly and effectively.

As an aside, this co-operative trait can be seen not just across a civilisation, but across time. Our gains, our knowledge is cumulative. The Austrian philosopher Karl Popper’s description of scientists as “workers who are adding to the growth of objective knowledge as masons work on a cathedral³” rings mostly true.

Even so, our aptitude for mimicry shows up in the world of investing a lot. Just as in nature, various studies show how we locate the perceived dominant strategy through the mostly unconscious search for tells. This is why price momentum is one of the most powerful forces in the world of investments. A price of an asset going up bellows ‘copy!’ at instincts honed over the millennia. The reverse is also true of course.

Investment conclusion

Of course, there is more to us than all of this, good and bad. For the purposes of investors eyeballing what looks a very different investment world to the one in our rear-view mirror, they are important. The trend growth rate of the US and global economy may have already stepped higher. That does not mean that there are no cyclical bumps out there, but it has implications all the same.

For those looking at interest rates of all tenors, it suggests risks in anchoring to rates seen in the decade running up to 2020. There is potential for the floor in base rates to be a chunk higher. Some will also plausibly argue for a bigger threat from inflation spikes in a world where workers are no longer so abundant.

Others will add the transmission to zero net emissions, climate-induced supply shocks, and heightened geopolitical tensions amidst fading US hegemony to the list. We would be careful of feeding our inner doomers too freely. Nonetheless, upward sloping yield curves (the plotted path of market interest rates over different maturities) seem reasonable to expect.

There will be many other surprises when we look back on the decade coming from a decade hence too. Perhaps these incoming technological marvels do not confer yet more market power on the corporate titans of the moment but serve as a democratising force. Valuations of smaller companies certainly reflect how out of fashion they have become relative to the mega cap darlings this last few decades (Figure 1).

Figure 1: Valuations of smaller companies relative to mega caps are very low

Source: FactSet, Barclays

The usual message applies. Get invested in a diversified batch of capital markets assets and try not to look too much. There is room for mimicry in investing, but this should be augmented with a healthy dose of contrarian style.