This post is a guest contribution by Niels Jensen*, chief executive partner of London-based Absolute Return Partners.
It is not universally appreciated, but the last 25-30 years have, in general, been staggeringly good to most investors. Technology induced productivity enhancements combined with favourable demographic trends, minimal government involvement, accommodating labour unions and the globalisation of international trade have all contributed to a benign inflation environment and strong economic growth, leading to arguably the biggest bull market of all times in both bonds and equities.
So much for the good news. The long lasting tail winds have finally turned around, and we now face, and will most likely continue to face, head winds for years to come. The list is long, but some of the most important factors contributing to this change include:
The demise of the Anglo-Saxon consumer driven growth model:
The Anglo-Saxon consumer is exhausted; he has over-extended himself and must reduce his debts for years to come. This may shift the powers from West to East, but only if Asia can drum up sufficient domestic demand to replace the western consumer.
The shift from small to big government:
Ever since Reagan and Thatcher stated that small is beautiful, at least as far as government is concerned, investors across the western world have benefited. Now, with most OECD countries suffering the implications of the worst crisis since the Great Depression, small is out and big is back in. This has dramatic implications for tax, productivity and hence also for corporate profits.
An ageing population:
Baby boomers (those born between 1945 and 1960) are now retiring in large numbers and will continue to do so for the next 15 years or so, with all sorts of negative implications. As the experience from Japan shows, an ageing population slows down economic growth and becomes a drain on public finances at a time where we can least afford it.
Dwindling energy supplies:
Evidence is growing that the world’s largest oil producers either cannot or will not maintain oil supplies at levels sufficient to support continued economic expansion. The facts are few and far between in the world of oil, but there is plenty of circumstantial evidence to suggest that the oil markets are getting tighter and tighter.
In a series of articles over the next few months I will tackle these issues one by one, as they are all critically important. I open this month with an essay on oil. In March 2004, when crude oil was trading just below $30, I predicted $100 prices within the next decade. Please note I made that prediction way before Goldman Sachs made the same projection, for which they got the whole world to sit up and listen. Before I get too carried away, though, it should not be forgotten that Woody Brock, our economic adviser, inspired me to make the $100 projection back in 2004. Likewise, new research from Woody has inspired me to write this month’s letter.
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* Niels Jensen has 24 years of investment banking, private banking and asset management experience. He founded Absolute Return Partners LLP and is its chief executive partner.
