The lifecycle of most financial ideas is shorter than a mayfly’s: they are born, put into print, and die, unlamented. Occasionally one catches the zeitgeist and survives; those who buy in early make money, while those who catch on late typically do not.
The popular idea of 2009 was Mohamed El-Erian’s “new normal”, which morphed into “lower for longer” interest rates and then “secular stagnation”, the new name for slow economic growth with little inflationary pressure.
This notion is now deeply embedded in economic thought, with the consensus forecast for long-run US growth at 2.2 per cent, equal to the low set in 1996.
It is easy to be gloomy. Demographics are likely to hurt, with baby boomers retiring and immigration a dirty word. Regulators are more likely to resist a new borrowing binge after the 2008 experience. The rest of the world is in a dire state, too, so an export boom is unlikely.
Short-term misery is as easy. Lower unemployment and early signs of rising wages have not offset the stronger dollar’s damage to revenues. Third-quarter sales fell slightly for S&P 500 companies which have reported the first drop since the aftermath of the global financial crisis.
Investors should not confuse the short-term cycle with the long-term, though. Demographics and the effects of debt are far harder to predict than they appear, as the failure of past long-run forecasts shows (see chart).
When the panel surveyed regularly by Consensus Economics were last expecting long-term growth to be this dismal, it turned out quite a bit better. When they were far more positive, during the 2000s, it turned out a lot worse.
One obvious lesson is that economic forecasting is not very good, but regular readers know that already. More usefully, it tells us that the secular stagnation thesis is now deeply embedded. Investors should worry that positions designed to benefit from the theme are also widely held. These include bonds, boring companies with safe dividends, new technologies able to grow whatever the economy does, and a broad trend of higher leverage and more buybacks. More could be made if the gloom intensifies. But after a great run, the best days for these investment ideas may be behind us.