How Did We Get Here? | Our New Market Environment
The US economy has grappled with foundational challenges since 2001. We choose that date as a reference point as it marks the admission of China to the World Trade Organization (WTO). The acceleration in globalization trends beyond that point was notable after the Great Distortion (China’s economic rise) began. From that point to now, a considerable amount of the US manufacturing economy moved offshore. Services moved from 70% to 76% of the US economy as measured by GDP, as the goods component shrunk in relative size.
Coincidentally, this century kicked off with the Tech and Telecom bubbles of the early 2000’s. These bubbles resulted from overinvestment in the innovation cycle leading up to that point. As they are prone to do when greed kicks in, financial markets got a bit ahead of reality. In the end, the internet did change the way business was done with major disruption bringing productivity to the aggregate economy, but a lot of pain to those that did not adapt. Yet even some of the eventual winners experienced share price declines that took years to recover from once fear ultimately won the day.
That economic downturn never really ended. It was addressed with standard tools of Fed easing and fiscal spending cycles and it appeared like business as normal. The Great Financial Crisis (GFC) was eventually a shock wave from the earlier market corrections. It resulted from excesses building up from the provision of liquidity to pump financial assets at the expense of real assets.
The US economy was financialized over this period in a trend that continues to this day. Financialized refers to moving economic value from the future to the present as the market bids up values of financial assets – primarily stocks and real estate. Companies focused on short-term cash flow and earnings growth at the expense of making adequate real investment in future growth. Asset-light business models and financial engineering squeezed more growth from future to present. This is all happening at the aggregate economy level, not to overly generalize about a corporate sector issue. Some of the disruptors that invested in the future to build dominant market share in new industries are now mega-cap companies.
The same thing happened at the household level, the average household experienced declining savings rates, relied on credit to maintain current lifestyle and is ultimately less wealthy in real terms unless they had significant holdings in financial assets that offset declines in purchasing power. Governments also sold the future in terms of budget deficits and money supply growth – taking value from the future for now.
We have now exhausted the potential for financialization and we need to make up for sins of the past. The US economy needs to invest like there is no tomorrow, but that investment needs to be productive. That critical need for real direct investment now points us to where the best investment opportunities will reside.
Disclosures
All written content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your individual adviser prior to implementation. Advisory services are offered through GenSphere Private Wealth, LLC, a Registered Investment Advisor in the State of Washington. Being registered as a registered investment adviser does not imply a certain level of skill or training. All investing involves risk including loss of principal. Past performance does not guarantee future results.