Parents couldn’t possibly borrow any more - Or could they? The Contrarian Investor, David Stevenson, does some blue-sky thinking and imagines what the future might hold. And it’s not that far-fetched!
I once had the great privilege of meeting a real in-the-flesh futurologist. I was thoroughly enjoying the experience until the point at which he angrily reminded me he was actually an imagineer: “My job is not necessarily to predict the future but to imagine it,” he proclaimed before sipping his cafe latte with extra skimmed soya milk.
The careful delineation between the imagineer (to imagine the kind of world our children will grow up in and how they will touch/feel/ experience it) and the futurologist (taking existing trends and mapping forward) is, I suspect, as thick as Gordon Brown’s joke book but there is an inkling of a general truth in there.
I have no idea what the future for investment holds – I am with Keynes on the ultimate futility of the project – but I think good old Donald Rumsfeld has a point with his now notorious word mangling. We do not know how equities will pan out (the things we do not know we do not know) but there are some things we know that we know: that the baby boomers will massively deplete their skimpy accumulation of savings over the next few decades; that governments will be forced to come up with ever more complex ways of paying back vast accumulated debts; a daunting task awaits all of us in the developed world as we work out how to compete against the Bric big boys.
There are also some things that are unknown unknowns – whether mean reversion will produce a stunning decade of equity returns is perhaps the biggest open question (odds are high I would suggest) .
But my imagineer and his coffee-induced methodology could come in handy here. Forget the big trends and concentrate on reimagining the world our children will inherit based on our experiences.
Accumulated debt and a declining tax base will force higher tax rates, which will in turn force ever more devious tax avoidance – good news for all forms of wrappers. Our kids will also be the ones who have to force a massive re-allocation of wealth away from investing in UK property, bonds and equities to finding the right way of investing in a low-carbon economy and a multi-polar world, in which Bric countries will be chomping at the bit to use our accumulated wealth to finance their continued infrastructure splurge and first stabs at a welfare state.
Crucially, our kids will be forced to save more – let us be honest, their parents could not possibly borrow any more money even if they tried!
With my imagineer’s hat on I would say this all looks like a stressed world where the penchant for taking risk will drastically increase as investors become unhappy with sub 4% normal real equity returns (GDP growth plus a bit more for equity risk). This all suggests to me much greater volatility.
Barcap’s top strategist Tim Bond is already mining these rich themes in the upcoming Equity Gilt study which will not only examine ‘easy ways to spot a bubble’ (many more of them on the way) but also remind investors to relentlessly focus on demographic trends as the motor for long term returns.
And what does this mean for the investment business? The obvious trends are already with us – greater focus on costs, a gradual move to passives, an ever more important role for advisers to be proper asset allocators, greater tax avoidance and focus on structure plus the inevitable commodification of fund management as PADA/Nest starts to eat into the lower end of the market with its new national pensions.
Personally I would stake my fiver on the following grand bets.
The first is that a major developed world sovereign will in effect default – with catastrophic consequences for bonds as an investment class. This will prompt a major flight from fixed income assets. My money is on Japan, Greece, the UK, or Spain. The nature of the default will be messy and not at all clearcut but default it will be in all but name. Related to this is a bold view that taxes on savings will be abolished as governments try desperately hard to kick start savings.
My next bet is that one of the major existing fund management groups (or maybe a racy up-and-comer) will decide to dump advisers and the existing intermediary world of wraps and platforms and build a direct investor relationship sparking a massive price war, a war that has not happened yet but is coming within a decade or so.
Lastly, I think we will face not one but three or four different equity bubbles spaced every two to four years. They will not all happen in the same country but we will see 60%-100% rallies followed by devastating falls.
I would also add one really ‘out there’ long shot – that a hedge fund will take over a major pension fund and then crash spectacularly with calamitous consequences, leaving investors to ask: “Anyone seen that black box?”
David Stevenson is a Financial Times columnist and consultant. Email him at davidcstevenson@gmail.com
