For related podcast, see The Disruption Decade: Thriving in a New Era of Volatility and Inflation.
The 2020s are shaping up to be a decade of immense change and disruption. The COVID-19 pandemic, large stimulus spending, increasing debt levels, geopolitical conflicts, and technological innovations have combined to create an environment of heightened uncertainty, volatility, and inflation. Understanding these dynamics and adapting to them will be crucial for navigating the challenges and opportunities that lie ahead.
Long-Term Disruptors
This decade of disruption was initiated with the massive economic shocks that began with the Covid pandemic in 2020. Accompanied by unprecedented global lockdowns and restrictions on personal mobility, the pandemic ground economic activity to a halt. As a result, faced with a depressionary-like contraction in demand, financial markets went into panic, leading governments to rapidly expand their debt levels though record-breaking fiscal and monetary stimulus packages.
In the United States alone, debt ballooned from $22.7 trillion in 2019 to $34.7 trillion today, an increase of over 50%. The Federal Reserve's balance sheet as well exploded by 123% from $4 trillion to $8.9 trillion after Covid. Altogether, an estimated $17 trillion of combined fiscal and monetary stimulus was injected into the markets and the economy.
This deluge of stimulus and deficit spending, which is still ongoing, helped to fuel inflation not seen since the 1970s and early ‘80s. The consumer price index rose 7% in 2021 and 9.1% in 2022 – the highest levels since 1981. In the face of rising prices, the US Federal Reserve repeatedly forecasted that these price increases were ‘transitory’ and would soon reverse, especially once the global supply chain had fully healed.
It became clear in 2022 that the transitory argument was no longer holding up to reality – especially as the US government continued to engage in massive spending programs while supply chains faced longer-term disruptions. In response, the Fed scrambled to contain persistent inflationary pressures by launching a series of aggressive rate hikes.
The sharp rise in interest rates triggered a significant downturn in the bond market, devastating numerous bank balance sheets and leading to the second and third largest bank failures in U.S. history, with Silicon Valley Bank in California and Signature Bank in New York both collapsing in 2023.
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At the same time, geopolitical disruptions were also erupting across the globe. Russia's invasion of Ukraine in 2022 led to a spike in fertilizer and agricultural prices, large trade frictions with sanctions and tariffs, an energy crisis throughout Europe, and massive increases in spending on defense in preparation for military conflict. Tensions between the US and China continue to escalate as well via a new cold war over trade, advanced semiconductors, and many critical sectors (see We Are in a Cold War With China, Says Russell Napier).
Outside of the Russia-Ukraine war and the US-China cold war, we also see ongoing conflict in the Middle East between Israel, Hamas, and neighboring countries. Domestically, culture wars and protests rage on college campuses.
Technological disruptions also loom. AI is now able to pass most IQ tests and exams at superhuman levels, threatening to automate white-collar jobs. Traditional sources of energy and vital means of transportation also face disruption while economies worldwide attempt to balance the tradeoffs of greater renewables vs. grid stability amongst rapidly growing electricity demand. This battle over economic efficiencies vs. global climate policies will remain ongoing for many years, likely leading to many gyrations in the price of oil, natural gas, nuclear/uranium, and electricity prices more broadly. For all these reasons and more, it is likely that the 2020s will be looked back upon as one of the most disruptive in recent history.
Echoes of the 1970s: A Period of Upheaval
The 1970s were characterized by high inflation, social unrest, economic instability, climate concerns, and geopolitical tensions. Today, we witness striking similarities:
- Economic Shocks: The COVID-19 pandemic and subsequent lockdowns triggered massive fiscal and monetary stimulus, echoing the inflationary policies of the 1970s. This unprecedented injection of capital, coupled with supply chain disruptions and rising energy costs, has fueled inflation to levels unseen in four decades.
- Geopolitical Conflicts: The Cold War between the US and the Soviet Union finds its modern counterpart in the escalating tensions between the US and China. Proxy wars, Middle Eastern conflict, and the decoupling of supply chains are reminiscent of the 1970s, further contributing to inflationary pressures and potential shocks.
- Technological Disruption: Just as the 1970s witnessed the beginning stages of the internet via the ARPANET (Advanced Research Projects Agency Network) as well as the development of microprocessors, CPUs, and personal computers, today's world is grappling with the rapid advancement of artificial intelligence (AI). AI's potential to disrupt white-collar jobs and reshape entire industries mirrors the anxieties surrounding automation in the past.
See related: Ten Striking Parallels Between the 1970s and Today
Embedded Disruptions
While many hope for a return to "normal," I believe the events and forces outlined above are longer-term in nature, reshaping the global economy and financial markets in a way that will lead to higher-than-average inflation and volatility for much of this decade. We repeatedly warned of this in 2020 (see below) and each year since has continued to align with this longer-term outlook.
- Zero-Bound: The Return of Inflation (April 15, 2020)
- Richard Sylla on the Return of Inflation (April 21, 2020)
- Jim Puplava on How MMT Will Change the Way You Invest (July 7, 2020)
- There's a Major Inflationary Trend Brewing and We're in the Early Stages, Says Russell Napier (November 17, 2020)
The days of record-low borrowing rates and inflation are likely gone for the foreseeable future. Interest rates, I believe, will likely trend higher or remain at a ‘higher-for-longer’ level throughout the decade as the Fed keeps rates restrictive to battle inflation. Supply chain disruptions and shortages among key commodities will likely continue due to geopolitical frictions and government policy decisions. Furthermore, investors will need to navigate market and economic disruptions caused by fiscal dominance, which will also be a major investment theme for the remainder of this decade.
At a fundamental level, the past decade of stimulus cannot be unwound overnight. The deficits and debts accumulated will take decades to pay down. Until that happens, inflation will eat away at any cash savings. The purchasing power of consumers and governments will remain impaired compared to the pre-2020 period.
Why Inflation Will Likely Persist
Multiple factors suggest inflation could remain elevated in the coming years. The reorientation of global supply chains towards reshoring/friend-shoring of production in North America will be inflationary as companies diversify away from China, Russia, and other low-cost providers for the sake of national security concerns.
Monetary policy also shows no signs of restraint. Deficits are expected to continue rising as high debt service costs offset any political will to cut spending. The Fed's balance sheet remains double its pre-pandemic levels with only gradual reductions planned. Eventually, the surging debt levels warn of a possible loss of faith in the dollar and the potential for a devaluation.
Self-imposed resource scarcity also threatens sustained inflation. A lack of investment in expanding commodity production after a decade of low prices has left supplies inadequate. The continued drive towards renewable energy and electrical vehicles will continue to drive electricity, gas, and transportation costs higher given current economic, mining, and geopolitical constraints (see Renewable Energy, EVs on Collision Course with Global Anti-Mining Policies - Mark Mills Interview).
Thriving in a Disruptive Decade: Investment Strategies
Navigating this complex environment requires a strategic approach to investing. Here are some of the strategies I am employing:
- Focus on Necessities: With discretionary income under pressure, prioritize investments in companies that provide essential goods and services, such as consumer staples and utilities. These sectors offer relative stability and resilience during periods of volatility.
- Embrace Technology: Despite the potential for job displacement, technology remains a powerful driver of innovation and economic growth. Invest in companies at the forefront of AI, cloud computing, and other transformative technologies.
- Commodities as a Hedge: Precious metals and commodities may offer a hedge against longer-term inflation and currency devaluation. Additionally, consider a diversified basket of strategic commodities that may benefit from underinvestment and the ongoing green energy transition.
- Income Generation: Protect your purchasing power with dividend-paying stocks, especially so-called Dividend Kings and Dividend Aristocrats with a long history of consistent dividend increases. These companies provide a reliable stream of income that can help keep pace with inflation.
- Short-Term Bonds: Amid rising interest rates, consider short- to intermediate-term corporate bonds to capture attractive yields while minimizing interest rate risk.
Conclusion
The 2020s present a complex and challenging landscape for investors. By understanding the parallels to the 1970s, acknowledging the unique challenges of the current era, and adopting a strategic investment approach, individuals can not only weather the storm but also position themselves for long-term success. Remember, a long-term perspective, diversification, and a focus on resilient sectors and income-generating assets are key to thriving in this disruptive decade.
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