Mark Sackler 0:18
While most of us are focused on day to day survival during the current crisis, anyone who hopes to get past the pandemic will also need to be figuring out how to survive the extreme economic dislocation that is likely to last for months, years, or in some respects, even decades after the infections fade away. After all, many of the changes that came with the Great Depression in banking, monetary policy, regulation, the establishment of social security are still with us today. While we hear all sorts of prognostications on cable business news channels, they tend to be rather short term in their focus. For a view that spans a longer perspective, I put in a call to Jim Lee. He’s an investment advisor that also happens to be a member of the Association of Professional Futurists. I spoke to him to get his perspective on the post COVID economic outlook has projected over a variety of future time-frames. My pleasure to welcome Jim Lee back to Seeking Delphi. Jim.
Jim Lee 1:35
Hey, happy to be here, Mark.
Mark Sackler 1:37
Well, Jim, the world’s obviously a lot different from the way it was when we first spoke three years ago when you were one of the earliest guests on this podcast. Clearly, the world is changing drastically because of Coronavirus. Now, while we had a similar incident, back in 1918-19, the Spanish Flu – it doesn’t seem like that caused the depression. Of course, the reaction was different then. We understand more how to combat it, but combating It is also affecting the economy deeply. So we got the double dip, the perfect storm but it looks like it’s going to be another depression. Before we get into that, though, just to remind our listeners because it’s been three years a little bit of what your background is, just a minute or so and then we’ll go into the specifics.
Jim Lee 2:23
Sure. I’m a professionally trained futurist, market strategist and founder of strategic foresight investments, a boutique investment advisory firm here in Wilmington, Delaware.
Mark Sackler 2:35
Very good. So to get back to what I said here in terms of what we’ve been through before, before I get into some specific issues. And in those specific issues, I’m going to want to take a view that the future is taking, which is to look at three horizons; kind of short, medium and long term, the immediate next year or two, maybe more out to three to five years, and then perhaps 10 years to permanent changes. For example, after the Great Depression, we had changes in our financial system, at least here in the US and governance here in the US, that are still with us today 85 years later. So in terms of past downturns, is there anything we can learn that might help us moving forward just to move out of it over the next two or three years? Or is this so new that it’s totally uncharted territory?
Jim Lee 3:27
It is new, we’ve never had what I would term a flash depression before, right? And in one that was globally orchestrated, that is totally new territory. And part of what makes this different and a little bit more challenging to think about is that in a lot of ways, we’re insulated from the effects as a result of the quarantine and staying at home, so it’s hard to appreciate really, how hard everything has stopped, right? And we don’t even know how severe this is yet. And we’re just beginning to get the economic information to show that. So there’s a lot of unknowns here, as it were.
Mark Sackler 4:16
Kind of like with a little bit of comparison to the Great Depression. Short term, there were panic measures like, you know, the was Bank Holiday, we clearly have had drastic short term measures here. Although those shorter measures are really kind of borrowing and printing a lot of money to keep the economy afloat, at least here in the US. I don’t know what’s going on globally. You go into more long term, though, and there were changes in the Great Depression brought on by the great depression that are still with us all these years later, most notably, we went off the gold standard, social security and the New Deal and of course, the Securities and Exchange Commission’s and all sorts of regulatory issues that are still with us versus the short and the long term. What do you see in those three horizons in terms of what’s going to be the likely reaction to this? And what can we do? We’re futurists, we got to look at the long term.
Jim Lee 5:15
Sure, of course, I said the closest nearest comparison would be the financial crisis of 2008, which took about 18 months to unravel. And that was a long, fairly deep recession with considerable changes for the banking industry, in particular. And I would like to think that we learned something from that experience, and that is that you’re heading into some kind of economic disaster. The government needs to be responsive, and in this case, they have been. It took over six months for the TARP plan to be enrolled in the 2008 crisis. And this time around, if you look at the CARES act, that took just 11 weeks to roll out between the time that the Coronavirus was identified in China to the time that it was enacted. We’ve also had a very proactive fed, leading us to territory that we’ve never seen before. I mean, 0% interest rates in the US, that’s something that most economists didn’t really think was possible. So we have a much more responsive, much more engaged government. Now, if you look longer term at what the implications of that are, there is a lot of money being created, a lot of money being printed, you’re going to have enormous shortfalls on both the state and the federal tax level, which I believe will lead to greater instability as a result of increased reliance on government intervention. And I’d say longer term, that’s what I’m worried about, is more currency stability dollars to possible inflation. I would take a look honestly as cryptocurrency potentially as a hedge against the dollar, going out 5 to 10 years from now, that’s really when I start to get worried about solvency as it were.
Mark Sackler 7:17
That’s interesting because of course, we had the heavy inflation here in the late 70s and early 80s. But if you look at the forces that created that, it didn’t happen, it wasn’t created in a year or two. The Carter administration took the brunt of the flack for that. But in fact, if you look at policies, the Johnson and Nixon administration’s over the previous 10 years or so before that – you can make a pretty good argument that it’s that along with a lot of the labor contract practices with cost of living allowances kind of built, up so it’s not something you see right away. I mean, you’re seeing right now in a lot of areas, deflation. Look what’s happened to oil prices, and that’s not surprising, of course you had deflation in the 30s. But in the 30s, it wasn’t dealt with by effectively creating a lot of liquidity. And while the liquidity is just keeping people afloat right now, obviously, in the long run, I agree and I wonder what sort of signs we might need to look for to get the hint that inflation might be kicking in, and at what point it might kick in.
Jim Lee 8:23
Yeah, yeah. Well, you know, it’s a game of political hot potato and it gets passed from one administration to the next. And, ultimately, we haven’t felt the impacts of inflation because the last 20 years, I would argue, have been deflationary as a result of technological advancement. Making technology far cheaper, far more accessible, entertainment far cheaper, far more accessible, being able to do more with less across the economy. So that’s been helpful, you know, that’s been helpful keeping prices in check. Longer term you do have a few things. One is the increase of regional trade practices; less global trade, more local trade, more tariffs, more restrictions on trade, more restrictions on travel, and immigration tend to be inflationary, and again, monetary creation as well. So, this is an interesting environment that a lot of people haven’t seen over the course of their lifetimes. We haven’t had inflation since the late 1970s, early 1980s. Usually, that leads to higher interest rates, and usually that leads to lower returns on both stocks and bonds. So it’s going to be very tricky.
Mark Sackler 9:49
So in terms of that longer term, even beyond 10 years, again, looking at the kind of changes that came out of the Great Depression, like permanent things that are still with us and even grew like the Great Society grew out of the New Deal, for example, are there things potentially like that that are going to happen now? Are they going to be less economic and more logistical for dealing for this kind of crisis? I know even though your wife is an infectious disease specialist that epidemiology is not in your area. But in terms of at least the financial and regulatory stuff in the economy, what do you see? Do you see long term changes here? Or is it more in terms of just better preparation for a crisis like this?
Jim Lee 10:33
Well, yeah, as I said, we have a much more responsive government this time around. And then the question is, is when do we want the government to stop responding and open market sources to do the bulk of the adjustment? Looking at this from a generational perspective, what I’m seeing is that different generations, different age groups are sort of responding to this differently. Generation Xers like myself, were just kind of jaded and we’re kind of expecting it to begin with. The Millennials have been very quick to adapt to economic uncertainty, because they’ve kept their fixed expenses down. They’ve been really reluctant to have large mortgages, get married, get kids, because they never believed they had a stable income to begin with. But if you look at the Generation Z, the children of Generation X. They’re interesting, because they’re looking at the Millennials and sort of the whole startup boom. And they’re not as intrigued with the volatility of self employment. And this generation appears to be very interested in having some kind of guarantee in life, you know, some kind of stability and that stability may come from various government programs.
There’s a big push right now towards universal basic income (UBI). We may see that at some point, but honestly, you know, I was reading an article in MIT Technology Review saying that in order to have UBI work you have to have enough productivity in the economy to support that. And we’re not going to have the automation in place until maybe 2050 to make that something that’s truly viable. So we’re at the point between when we want something and the point that we can actually provide it.
Mark Sackler 12:36
Yeah, well, you read my mind on the UBI question. I happened to go to an event with Andrew Yang. Back in January, he was a big advocate of it, and I felt like I was the only one over 35 years old there. And it was a 30 year old friend that dragged me into it. And I think I agree with you on that is that while in the long run if automation is going to kill enough jobs, we may have to have it to keep the economy going. It’s a long ways away. But in a way, in one respect, this has sort of been a short term trial of UBI, hasn’t it? In terms of the stimulative payouts that the government is giving to people up to a certain income level?
Jim Lee 13:16
Well, yeah, it’s very interesting. And I think that it reinforces the idea that the government is here, you know, coming to the rescue, when, in fact, a lot of this has been triggered as a result of government policy. So I’m happy that they’re doing it, it was necessary. We’ve had huge displacement in careers and jobs with this. There’s going to be a bill at the end. And I don’t know how we’re gonna pay for it necessarily. It’s a social experiment of significant magnitude, and we’re still trying to figure out what the results are going to be.
Mark Sackler 13:55
Well, it’s interesting when you go back to that inflationary issue, there are those out there who’ve been advocating a different view toward finance and deficit spending, thinking that, you know, you’re only going to ramp up inflation with more liquidity if there’s not enough abundance out there, not enough productivity. And even as we’ve been deficit spending and the like, for the longest time and having a strong economy because of the productivity and the leveraging of our economy by technology, we haven’t had it kick in. But as we start to come out of this, the problem is, we’re looking at the potential, at least in the more medium term, like the two to five years of shortages, because a lot of production in non essential goods and services has kind of been choked off. And so we might see that liquidity kicking in before the abundance can kick up. Do you see that viewpoint as having validity?
Jim Lee 14:55
Yeah, I do. But to build upon that, I think that you’re gonna have a lot of supplied disequilibrium, meaning that on one hand, you may have a shortage of things like toilet paper and tissues and you know, spam. On the other hand, you may have an oversupply of other things such as oil, or asparagus or actually come to think of it, ham products. Because you can’t ship things globally anymore, particularly if it’s food. And you may have too much of whatever you are producing locally, and not being able to sell it. And that’s part of the reason why oil briefly went negative. People were paying other people to accept delivery of their oil because nobody wanted to pay the local storage fees and America isn’t that export. So we don’t know the full effects of this, but in the short term, it is radically both inflationary radically deflationary, depending upon the product that you’re looking at.
Mark Sackler 16:06
Sounds like chaos. Well, you know, let’s go to oil. Right now clearly, this is talking about a depression, it’s one of the most hardly hit industries other than those that have been completely closed down like a lot of the restaurants, theme parks, hospitality and the like. How would you think this is gonna play out? And you know, you as an investor, if you had a three to five year or more time-frame, would you consider buying natural gas or oil companies right now?
Jim Lee 16:41
Possibly, yeah, you know, it’s interesting because I’ve been getting out of oil for the last few years. I’ve had a lot of clients that have held on to their Exxon and Conoco stocks, you know, back to the 1980s. And I’ve been getting out of that position, even going into this year and at this point, it’s almost like a fire sale in the energy sector. I haven’t seen enough signs of life yet, or positive momentum yet suggesting that we want to load up on that, in part because dividends are getting cut so quickly and so hard that there’s almost no point in doing it if you’re looking for income. So I haven’t done that yet. I’m sorry, what was the rest of your question? Mark?
Mark Sackler 17:24
That’s a good question. I got to remember. My question was if you’ve got a three to five year or even longer time-frame, I guess the question is, to what extent is it going to recover? Is it something that you really got to stay away from long term because the world is going to be so drastically changed? Hopefully this sequester at home isn’t a permanent state of affairs.
Jim Lee 17:50
Yeah, hopefully not. Well, a lot of questions, a lot of discussion in terms of the shape of this recovery. Is it going to be a V shaped recovery, you know, quick dip with a quick recovery, or is going to look like a W, where we sort of bounce along with waves of infection, is it going to be a U, where you sort of hit bottom and then you take a long time to climb your way back out. I’m probably more in the camp, that it’s going to be a W, we’re going to have multiple dips and waves and problems as the shock waves of this roll through various sectors of the economy. What started out as a healthcare crisis became an economic crisis, which could become a debt crisis, right? As people can’t pay the bills on their rent, the landlords can’t pay the mortgages. So the banks end up with a lot of properties that they don’t know what to do with. So there are going to be some of these chain reactions, whereas the effects are not going to be felt all at once all at the same place, and as a result of that, I think it’s necessary to take a far more tactical approach to investing. I’m not convinced that buy and hold is going to be the solution for anyone here. And rather, I’m recommending a much more engaged response to portfolio management.
Mark Sackler 19:25
Interesting, very interesting. And you just brought up something here that you kind of touched on that I was gonna make my next question and that is, of course, debt. We are going to explode our debt which was already a little bit north of annual GDP in the US and I’m sure many other Western countries, I don’t know what Japan or Western Europe is doing. I have a feeling they’re gonna be doing similar things. What happens when this debt bill comes due? Can we keep having the Treasury keep it afloat? Particularly if a few years down the road inflation kicks in, those interest rates are going to go back up.
Jim Lee 20:14
Yeah. So what do you do, right? The word for that is monetization, meaning print money to pay or forgive the debt in some way, shape or form. If you look at the whole debt to GDP issue, Japan is really the model for that. Right? Because their debt to GDP ratio, I think, is something like 2X, okay, meaning that there’s twice as much debt in the federal government than there is relative to economic production. And usually, once you go past one x debt to GDP ratio, you’ve kind of passed the point of no return and that’s where the US is right now. So, yeah, at some point systems are going to blow up or they’re going to get reconstituted or you’re going to have new money to replace old money. But it’s going to be hard to pay the bills. And that’s why I would expect some truly significant government restructuring, probably by the mid 2030s. And what I’m looking at there is Social Security, by its own admission, will likely become insolvent by like 2033 to 2034. Right? And that’s going to create a lot of turmoil. You know, if the government isn’t there to provide the income that it promised and people are relying upon that income, people are going to get upset, and there needs to be some alternative systems in place. So yeah, I agree. You’re going to have some real insolvency issues that are coming out, you won’t necessarily feel them immediately, but they will be cooking in the background and I’m really expecting things to blow up again probably in the mid 2030s. Although it could be sooner than that.
Mark Sackler 22:18
Well, I guess that also depends on how long it takes us to come out of this and how robustly we come out of it. At this point, we may need the greater productivity from technology to make up the difference, but I guess that remains to be seen. So listen, I want to go into a few questions that might be of more interest to individual investors here. And you know, there’s all sorts of talking heads out there on the cable networks, on CNBC and Bloomberg and Fox Business channel. But the one thing that you have that a lot of us don’t have is you are a professional futurist. You and I are both members of the Association of Professional Futurists. So you do have that long view, you’re looking to the 2030s, which I don’t hear other people doing. And obviously different stages of life are very different. You’re a Gen X, I think I’m a baby boomer and looking at going into retirement here, and let’s look at that from your point of view. And, in general, do you have any specific suggestions? I might look at some individual industries in it. But any specific suggestions based on stage of life? Or how you’re going to deal with this looking long term?
Jim Lee 23:42
So we’re talking about generational responses to economic instability, is that kind of what we’re looking at?
Mark Sackler 23:51
Yeah, kind of more in terms of what you think the individual response ought to be in terms of stage of life, and how long term your view is considering this incredible certainty and a lot of people think we futurists can predict what’s going to happen. And that’s not what we really do. We try to anticipate the challenges and opportunities and look at scenarios. Many of us saw that there was a very strong possibility of something like this pandemic happening. But when it would happen, how severe it would be and what the global reaction would be were things that are very difficult to predict.
Jim Lee 24:29
So I actually wrote a book on this a few years ago, it was called Resilience In The Future of Everyday Life. And I looked at how different generations were responding to the financial crisis of 2008. And what came out of that is the silent generation, which was the generation before the boomers, really don’t have to do anything, you know, those pensions will be in place for the next few years. The boomers really were put in a position where they had to reinvent themselves in some cases, several times over the course of their career, right? So you need to establish multiple skill sets, as it were in order to transition from one job or one workplace to another. And I’d say that that skill of sort of going back to school and re educating and learning new things is going to be increasingly important for the boomers, right?
Because a lot of those jobs aren’t around anymore. I look at the Gen Xers as being sort of the Do It Yourself generation. And they’re the ones with kids right now. And they’re learning to do haircuts at home. They’re growing their own food, they’re doing more homeschooling, they’re a little bit more entrepreneurial, a little bit more startup oriented. Both they and the Millennials are part of what I call the patchwork crazy quilt of jobs. Meaning that people don’t have just one job anymore. They have several jobs that they stitch together in a way that’s flexible and covers their needs. And that seems to work for them. The Millennials are interesting just because they are what I refer to as the post consumers and they’re just not buying anything. Everything for them is sort of on demand. It’s access versus ownership. Whether it’s transportation, whether it’s clothing – actually, there’s a huge secondhand market for clothing online now, which is interesting. Whether it’s traveling somewhere for vacation home, they’re not going to buy a second home, they’re going to do an Airbnb somewhere. And then going on to the next generation, right beyond that, Generation Z, which again, is going to want a little bit more stability and they are just entering into college right now. So it’s hard to make too many comments about that as of yet, but on the whole, people are becoming more more resilient by being less committed to long term expenses, and being much more flexible with their careers. Fortune favors the flexible. And to the extent that you can do more different things. And to the extent that you have a broader skill set, you will be more resilient in an uncertain environment.
Mark Sackler 27:25
And I guess obviously, those characteristics are going to drive the investment profile for those groups. But let’s look at one last area that I’m curious both for the short and the long term, because talk about chaos and problem with deflation and inflation. And that’s real estate. I mean, what do you do with that? In the short term, I’m sure that real estate is going to be incredibly depressed, the prices are going to fall. But but in the long term, if we get into inflation, of course, you want to hold assets when you get inflation. So it a contradictory situation. Real estate is usually one of the things that does well in an inflationary period, so where are you with that right now? Because I’ve seen people saying get out of it. I’ve seen people say, well consider buying real estate investment trust as a hedge against inflation.
Jim Lee 28:19
I mean, the real estate investment trusts have been absolutely hammered over the last six months. So quickly, over the last two months that a lot of people didn’t even have time to respond. You’re right about real estate being a tangible asset which does well during hyper inflasive of hyper inflated times. Okay? Because they hold their economic value when the purchasing value of the dollar goes down. No doubt works out great. Early stages, though, it does not work out as well in a recession or a depression. Real estate prices can go down, especially for build properties. And then you also have this sort of issue of, you know, are we learning how to do more with less? Right? We’re beginning to learn that churches aren’t necessarily for worship, schools are not necessarily exclusively for education, and offices are not truly necessary for work. And we can do a lot of these things out of our home now. And if you look at demand for commercial real estate in terms of office buildings, this is really interesting. The square footage per employee has declined by 30% over the last 10 years, even prior to the pandemic, so these trends away from physical retail, from physical work and physical community socialization have been going away for the last decade or two. And this just accelerated that. So then the question is how much real estate will we really need? And I think people are going to figure that out.
Mark Sackler 30:17
Well, of course, the whole real estate thing is moving all over the place. I had some of this discussion with Cindy Frewen when we discussed the urban and social issues of COVID-19. Because the 250-300 year trend globally toward urbanization, which might have been slowing down as population growth slowed may be reversed as people want more space, but where they do have offices, they might want more space after this.
Well, Jim, as always, I thank you for your insights. This is always great to talk to you. Best of luck and stay safe.
Jim Lee 30:53
Wonderful. Thanks so much.
Mark Sackler 31:10
One of the big debates during the initial phases of shelter in place directives has been the determination of exactly which businesses and industries are considered essential. While food certainly is, eat in restaurants obviously are not. Emergency health care is essential. Most elective procedures are not. But one industry that is so essential it has almost been taken for granted and gone on mentioned is electric utilities. They seem to have been largely untouched. But other disasters from super volcano eruptions to massive solar flares can directly impact them. And what happens if we get another Sandy or Katrina here in the US, or a devastating tidal wave like the one that hit Japan in 2011 on top of the COVID-19 pandemic. Can our power grid cope with this, and is the industry’s long view taking these potential occurrences into account? That will be the subject of part three of this series.