Client Portals

The Hidden Productivity Boom4 min read

Jun 19, 2019 - Max Osbon ( 6 mins to read)

GDP growth is the clearest sign of a healthy economy, however it is difficult to grow GDP without population growth and productivity gains. With improving productivity, more people can do more things in less time and for less money. There are two kinds of productivity: labor and multi-factor. We need both kinds to grow. Both are thought to be at their limits now. The reality is quite different. In the case of a long-lasting productivity boom, equity returns would have a healthy rationale for continuing to trend positive for quite some time.

Technology enables both kinds of productivity

Someday not too far from now, relatively small teams of engineers at Tesla, Google, and/or Uber will be responsible for simultaneously “driving” millions of cars. There is an obvious short term worry – all of those replaced taxi and delivery drivers will have to find new jobs. Fortunately, the same technological innovations that displaced workers can enable creative entrepreneurs to find new ways to harness available human capital remotely and at scale.

Self-driving cars are one example of the big strides in multi-factor productivity that are coming. The US is in a prime position to invest the capital needed to create the autonomous driving network and in turn free up many people for better jobs. There are plenty of venture capital firms and auto companies willing to invest the amount of money needed. It’s the same story in other productivity-boosting industries as well.

The main point on productivity is that it can be difficult for the Fed to track. When you look at your own life, I’m sure you could quickly list ten ways your iphone, the internet, and software have enabled you to be siginificantly more productive over the past 5 years.

Population growth through immigration

While productivity gains can be hidden, population growth is easy to track and is a vital factor in keeping the economy growing. Since the birth rate in the US is at its lowest in 30+ years and continuing to fall, the US must replenish its population through immigration. With more skilled worker-citizens we can meet the demand for more workers now and in the future. Despite all the negative immigrant talk from left and right, immigrant-citizens are the key to our future. Expect significant immigration growth in the coming decade. 344 new citizens were welcomed at Faneuil Hall on June 13, including my wife Rachel. These ceremonies are taking place all over the country every week. They just don’t make it into the headlines regularly. Positive immigration stories are a good reason to be confident in the future of the US economy.

The swinging pendulum of confidence

In the normal course of business and daily life, things tend to fluctuate between “pretty good” and “not so hot.” That’s not the case in the world of investing where confidence regularly swings from “flawless” to “hopeless” and back again. The contrast can be jarring for investors when a 1000 pt drop in the Dow makes a headline. It’s par for the course but market dips always make people question if the end is near.

What if we are facing the end of the business cycle?

As Howard Marks, founder of Oaktree Capital Management, pointed out in his memo last week, optimists would be wise to pay attention to warning signs.

After all, recessions do eventually happen. The US government can’t print infinite money (QE), run perpetual spending deficits, and/or disregard national debt levels without consequence. Inflation is curiously absent today. It’s hard to cut rates to stimulate the economy when rates are already low. The presence of an inverted yield curve may signal a storm, or be just a passing cloudy day.

On the other hand, even Howard Marks would say we are moving to a permanently higher quality and level if you look closely at his fund positions. Just take a look at IPO activity from Silicon Valley. If the $20B market cap for a newly public unprofitable company seems crazy, consider the alternative. The US generously funds and has patience for big new companies and concepts. That risk and innovation tollerance is why the US leads in technology by a long shot.

Be balanced and thoughtful in investing

Luckily we aren’t forced to choose sides between optimism and pessimism. Like any independent, we are free to invest for the long term. Undervalued productivity gains are one reason we can be optimistic and look beyond the obvious challenges investors face today. Investors who follow only one set of principals (perma-optimist or perma-bear) will eventually get burned or misled into unprofitable trades. There are reasons to be cautious and there are reasons to be cautiously optimistic. We make sure that our investors are earning enough cash flow, are able to participate in growth when it shows up in markets, and have enough cash on hand so that they are not forced to sell when the pendulum swings.

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