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The “Ok Boomer” Decade

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The “Ok Boomer” Decade Quantitative & Strategy Cam Hui, CFA [email protected] THE “OK BOOMER” DECADE December 30, 2019 Table of Contents EXECUTIVE SUMMARY ‘Tis the season for strategists to publish their year-end forecasts for 2020. Instead of Is Demographics Really Destiny? ............. 2 participating in that ritual, this is the second of a series of think pieces of what might lie ahead for the new decade (for the first see China: Paper Tiger). A Focus on Inequality ............................... 3 It is said that demographics is destiny. As the Baby Boomers age and fade into their golden A Tilted Playing Field? ............................. 5 years, the Millennial generation is entering its prime and is poised to seize the baton of consumer spending and, eventually, political leadership. Future Policy Implications ........................ 7 We believe the coming decade is likely be the “OK Boomer” decade that sees a passing of the baton to the Millennial cohort characterized by: A Leftward Political Shift .......................... 9 A greater focus on the effects of inequality Expect Rising Inflationary Expectations .. 12 A political shift to the left The Dawn of ESG Investing ................... 13 There are two policy effects that can be easily identified: o The rise of MMT as a policy tool o The rise of ESG investing The question of whether these developments are good or bad is beyond our pay grade. However, investors should be prepared for these changes in the years to come. Confidential — Do not duplicate or distribute without written permission from Pennock Idea Hub Cam Hui, CFA | [email protected] Page 1 December 30, 2019 Quantitative & Strategy Is Demographics Really Destiny? ‘Tis the season for strategists to publish their year-end forecasts for 2020. Instead of participating in that ritual, this is the second of a series of think pieces of what might lie ahead for the new decade (for the first see China: Paper Tiger). It is said that demographics is destiny. Tom Lee at Fundstrat recently highlighted changes in spending and debt patterns. As the Baby Boomers age and fade into their golden years, the Millennial generation is entering its prime and is poised to seize the baton of consumer spending, and eventually, political leadership. Exhibit 1: The Millennials Enter Their Prime Source: Fundstrat Demographics is destiny holds true only inasmuch as people’s desires at different ages are roughly the same. But their desires are constrained by financial circumstances. The combination of a generational shift and differences in financial circumstances has profound implications for the political landscape, policy and investing. Cam Hui, CFA | [email protected] Page 2 December 30, 2019 Quantitative & Strategy A Focus on Inequality The biggest issue is inequality. While every generation thinks it had a hard time, inter- generational inequality is very real. Yiqin Fu, a political science Ph.D. candidate at Stanford, found that the wealth accumulation of each generation, Boomers, Gen X and Millennial, at specific ages have diminished. In particular, the flatness of the Millennial line is astounding, and graphically illustrates the headwinds faced by the age cohort. Exhibit 2: Millennial Wealth Accumulation Lags Older Cohorts Source: Yiqin Fu This inequality gap can be observed in many ways. Variant Perception pointed out that an enormous gulf in consumer confidence has opened up between the people under 35 compared to those over 55. Cam Hui, CFA | [email protected] Page 3 December 30, 2019 Quantitative & Strategy Exhibit 3: A Generational Gulf in Consumer Confidence Source: Variant Perceptions A Yahoo Finance article documented how Millennials simply cannot afford to buy a house: Many millennial renters won’t be homeowners anytime soon – even if they want to be. Among young adult renters who want to buy a home, 7 in 10 say they simply cannot afford one, according to a recent study by Apartment List, an online real estate company. The analysis was based on responses from over 10,000 millennial renters across America. Renters said poor credit and the burden of future monthly mortgage payments were major obstacles. But the most commonly cited challenge was saving for a down payment, with 60% of young adult renters saying this is what has kept them from buying a home. “Millennials today will need a 20% larger down payment than baby boomers,” said Dean Baker, chief economist at the Center for Economic and Policy Research. “Housing prices are higher [even] when adjusted for inflation.” A Bloomberg podcast with freelance writer Karen Ho explained the circumstances that Millennials find themselves in. Simply put, the Great Financial Crisis has scarred the cohort. Millennials began entering the workforce just as the GFC cratered the global economy, and many were unable to get on the first rung of the ladder to wealth and financial stability. Instead, the economy restructured them out of promising entry-level jobs, leaving them only gig work with little stability, benefits and pensions. Is it any wonder Millennials can’t afford to buy houses, or their wealth accumulation is so low compared to previous cohort? Cam Hui, CFA | [email protected] Page 4 December 30, 2019 Quantitative & Strategy A Tilted Playing Field? We are starting to see a radical re-think of economic assumptions and policy since the GFC. Martin Wolf recently reviewed a book by Thomas Philippon in the Financial Times that concluded that the U.S. is no paragon of laissez-faire free market economics: It began with a simple question: “Why on earth are U.S. cell phone plans so expensive?” In pursuit of the answer, Thomas Philippon embarked on a detailed empirical analysis of how business actually operates in today’s America and finished up by overturning much of what almost everybody takes as read about the world’s biggest economy. Over the past two decades, competition and competition policy have atrophied, with dire consequences, Philippon writes in this superbly argued and important book. America is no longer the home of the free-market economy, competition is not more fierce there than in Europe, its regulators are not more proactive and its new crop of superstar companies not radically different from their predecessors. Competition policy has allowed large corporations to earn monopolistic or oligopolistic profits: [Philippon] crisply summarises the results: “First, U.S. markets have become less competitive: concentration is high in many industries, leaders are entrenched, and their profit rates are excessive. Second, this lack of competition has hurt U.S. consumers and workers: it has led to higher prices, lower investment and lower productivity growth. Third, and contrary to common wisdom, the main explanation is political, not technological: I have traced the decrease in competition to increasing barriers to entry and weak antitrust enforcement, sustained by heavy lobbying and campaign contributions.” All this is backed up by persuasive evidence. Those prices of broadband access in the U.S. are, for example, roughly double what they are in comparable countries. Profits per passenger for airlines are also far higher in the U.S. than in the EU. The analysis demonstrates, more broadly, that “market shares have become more concentrated and more persistent, and profits have increased.” Moreover, across industries, more concentration leads to higher profits. Overall, the effect is large: the post-tax profit share in U.S. gross domestic product has almost doubled since the 1990s. Cam Hui, CFA | [email protected] Page 5 December 30, 2019 Quantitative & Strategy Exhibit 4: American Companies Enjoy Better Margins Source: Financial Times Brad Setser at the Council on Foreign Relations described the US external position as "A Big Borrower and a Giant Corporate Tax Dodge". The argument that the United States functions as a financial intermediary that borrows cheaply to buy higher yielding financial assets—e.g. a skilled user of leverage—has a long intellectual history. And it naturally has a certain amount of appeal to many American financiers. It dates back to the original French critique of the exorbitant privilege the Bretton Woods system accorded the United States. Under the (brief) gold-dollar standard, the rest of the world was more or less required to build up dollar reserves—providing an inflow to the United States. And back in the 1960s, the U.S. current account was in balance, so the United States was using the inflows to fund riskier and higher yielding investment abroad. France was complaining that it was funding the takeover of Europe by U.S. multinationals… The belief that the U.S. uses its position to buy higher returning assets while issuing debt is no longer true. Setser found that the excess return on foreign investment is largely attributable to tax arbitrage, or a favourable tax treatment of offshore corporate profits embedded in the U.S. tax code. The excess return is entirely a function of the large profits U.S. firms book in the world’s corporate tax havens — the U.S. surplus stems from the large returns the United States appears to earn on its investments in Ireland, the Netherlands, and Bermuda. Basically, it looks to be a function of the United States’ willingness to tolerate a world where American tech and pharma companies’ offshore earnings aren’t really taxed by the United States at anything like the rate onshore profits are taxed at. Previously those profits were tax deferred, now they are largely taxed at the low GILTI rate of 10.5 percent. In short, U.S. policy has tilted the playing field in favor of large corporations, and this has exacerbated inequality. Cam Hui, CFA | [email protected] Page 6 December 30, 2019 Quantitative & Strategy Future Policy Implications There are signs that the Overton window, or the ideas that define the spectrum of acceptable discussion, is changing on inequality policy. Even the Federal Reserve is becoming more concerned.
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