Israel, Tel Aviv – January 9: Market display on monitor shows latest international currencies… [+] Interest rates and the stock market. (Photo: David Silverman/Getty Images)
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A few years ago, Coen de Loos began to feel uncomfortable: Despite a career spanning decades, the chief economist at BNP Paribas Fortis hadn’t found a framework for making sense of what he was observing in global markets.
His colleague, Chief Strategist Philip Giesels, stepped in to help, and together they developed a new framework, which they explain in their book, The New Global Economy.
If you are looking to develop a long-term investment thesis, this book is a good starting point. The book outlines the slowly evolving forces that will shape the markets over the next decade. Translating the themes of this book into concrete trades will require some work. The recommendations in this book are mostly high level, but we will provide some concrete ideas below.
The five trends are: (1) innovation, (2) climate, (3) multi-globalization, (4) debt, and (5) aging. I’ve written about these topics in previous posts, so instead of reviewing each trend, I’ve borrowed the framework from the book to distill five key ideas:
1. Four trends point to rising inflation and interest rates.
We get it. You’re tired of all the bad news. Don’t despair. De Leus & Gijsels’ (DLG) book is largely optimistic.
But interest rates and inflation are so important that we need to have a clear view on them. DLG expects interest rates and inflation to remain at or above current levels at all times, but not on average.
An aging society creates inflation: older people buy more goods and services than they produce. And the world is aging at a faster rate than was expected just a few years ago.
Government debt has reached levels unprecedented in peacetime. The temptation to allow inflation to rise to ease interest payments will be hard to resist. Markets are not yet convinced this will happen. If it did, interest rates would price in a higher risk premium and bond yields would remain high.1
Multi-globalization also creates inflation. Complex supply chains have resulted in super-cheap goods. “Friend-shoring” production is more expensive. We are already seeing the US trade deficit widen as goods previously manufactured in China are now assembled elsewhere.
Mitigating climate change will be costly: huge capital investments will be required, putting upward pressure on the prices of required inputs and on capital prices (interest rates).
2. Process innovation is the catalyst for productivity improvement
Now, the good news is that innovation may (eventually) be powerful enough to counter the upward pressures of interest rates and inflation.
DLG believes we are heading towards a wave of “process” innovation driven by AI, additive manufacturing (3D printing), synthetic biology, and ultimately cheap renewable energy.
We’ve seen this kind of innovation before, and the results have been hugely beneficial: consider the combined impact of electricity and the assembly line on car manufacturing: production volumes increased dramatically, lowering unit costs and leading to growth in GDP and higher real wages.
This is different from the digital product innovations of the past few decades: those innovations benefited users but often did not result in GDP growth.
They use Wikipedia as an example. Wikipedia is a digital product that clearly has economic value. But we don’t pay for it. Wikipedia’s existence enriches our lives in broad terms, but that increase in happiness does not translate into increased economic activity.2
Process innovation is already happening, but DLG believes it will take another 5-10 years for the full effect to kick in. When it does, productivity could rise by 1.5-2% per year, which could result in faster economic growth, lower debt/GDP levels, and a virtuous cycle of lower inflation and interest rates.
3. Copper/gold: Demand barriers and supply limitations
Copper and gold are both trading near all-time highs, and DLG believes they will go even higher. Why?
Of the metals critical to the energy transition, copper seems the least likely to be replaced by new technology. Existing mines cannot meet projected demand, and new mines take a long time to develop. Commodity fund manager Andurand posted a similar article saying demand far exceeds supply.
There are a few things to note:
Copper is not an easy investment for most investors, and emerging market governments are so aware of the metal’s value that they are likely to nationalize mines and form OPEC-like cartels to control the market.
DLG’s bullish view on gold stems from two factors: rising inflation expectations and a desire to diversify away from the dollar. Gold supply is expanding by a few percentage points each year, so increased demand from those looking to diversify could easily drive the price higher.
The book proposes deals with gold mining companies that have untapped copper deposits in their existing mines. These copper supplies could be developed quickly, allowing the companies to benefit from rising prices for both metals. No specific names are mentioned, but it’s an intriguing story for investors willing to get in on the action (sorry, couldn’t resist).
4. Bridge made of natural gas
DLG sees fossil fuel companies as long-term losers, as their assets become stranded due to falling demand, taxes and regulations.
But in our conversation, I pointed out that there is a big gap between now and then. For now, fossil fuels will continue to be needed to produce electricity when renewables can’t, and to meet the surging energy demands from AI. Natural gas, being the cleanest fossil fuel, seems to be in a great position to be the bridge.
DLG said I was “totally right” – it’s unclear how long that bridge will be, but betting on natural gas infrastructure seems like a good way to hedge against inflation and gain exposure to AI.
5. Grandmas won’t crash the market
One story related to the aging population is that baby boomers will sell stocks to fund their retirement, causing the market to collapse.
DLG is skeptical. There isn’t much evidence that the percentage of assets invested in stocks decreases as people get older. Why is that?
Maybe Grandma has friends who have turned 100 and is holding stocks to build up her portfolio for when she turns 100. Or maybe she’s saving to cover the costly costs of elderly care.
Or maybe she just wants to give you more money!
Listen to the conversation between Koen De Leus and Philippe Gijsels.
