The Trade War in the Context of Broader Themes

Rick Rieder and Russ Brownback argue that while most investors are focusing primarily on trade-related supply chain disruptions today, they need to continue to situate this turmoil in the more fundamental changes at play in technology and demographic trends.

Myopia in life/death and in investing

The leading causes of death in the United States, by an overwhelming margin, are heart disease and cancer. Yet one would not be able to tell this based on the share of mass media air time these illnesses received. If we had to guess, we’d judge that this relative lack of attention was due to the longer time frame these illnesses often take to play out. In reality, the media spends an overwhelming majority of time reporting on terrorism and homicide – abrupt causes of death that dominate the air time even though they are (relatively) few and far between. We believe a similar attention-deficit dynamic exists in investing today, where the leading drivers of portfolio health (durable long-term returns) can often be the least covered by the media, because they take the longest time to play out. Still, as investors, it is our role to bridge that divide and focus on what we think are today’s structural drivers of tomorrow’s cash flows, and of forward returns, to help clients achieve the outcomes they seek.

In our view, chief among these drivers is a structural deficit of yielding assets. During the late-20th Century, a young and growing population that was devoid of a need for income-generating assets was, nonetheless, contributing impressively to robust growth and inflation, as it entered the workforce, in turn engendering elevated nominal interest rates. Today, however; that same cohort is an older and rapidly aging population that is tapering its economic contribution, which results in dwindling systemic growth and inflation that is ultimately forcing yields lower. Thus, at the same moment that the global population has become ever more reliant on retirement savings, and actually needs the very investment income it once helped generate, there is a large and growing deficit of precisely such income.

These acute demographic influences are being exacerbated by the global economy’s ubiquitous evolution away from a traditional manufacturing economy toward an ever-greater reliance on services – a transition that has immense implications for global investors and savers. Historically, corporations issued debt to finance the capital expenditures associated with hard assets that generate goods-centric operating cash flows. But, in today’s service-oriented, capital-light and asset-light world, there is a diminished need for debt financed cap-ex. Today’s leaner, and more competitive, economic environment, when combined with slowing demographics, forces companies to aggressively preserve margins by cutting costs and creating efficiencies, further inhibiting systemic nominal growth. The places where robust operating cash flows actually do still exist are more concentrated around specific sectors, like technology.