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The Road Ahead

Updated: May 17, 2022

Last month’s column was about predicting financial markets over the medium term. This month I thought it would be fun to look much farther out and to look beyond financial markets. The industry of futurology is thriving, and the predictions of its practitioners getting ever wilder.

"Too many people in this country have virtually no savings"

One way - often a good one - to predict the future is to extrapolate the past. It seems inevitable that decades from now, electronic devices for communication, information, navigation, etc will be implanted into our bodies.

I can also imagine there being no need to learn foreign languages: tiny sensors in our lips, tongue and cheeks will pick up their movements as we mouth sentences, converting them into Chinese or Spanish. In view of how much has changed over the last few decades, these predictions if anything feel a bit tame.

Advances in biotechnology are also set to transform our lives. It is possible we are on the cusp of harnessing an understanding of our longevity. Telomeres are protein structures that protect chromosomes, and experiments have found that they get shorter as you get older. Their length at any one time may provide a guide as to one’s natural expiry date.

Knowing when we are likely to pop our clogs could have benefits both to individuals - we may have a bucket list, but we do not generally know how long we have to get through it - as well as to societies at large. With the closure of defined benefit pension schemes, responsibility for meeting retirement needs is being passed from employers to employees.

It is a sad fact that far too many people in this country have virtually no savings - a 2016 Money Advice Service study found that more than 16 million people in the UK have savings of less than £100.

While this lack of savings is certainly a problem, there are also many who are saving too much. If you are responsible for your retirement needs, you likely err on the side of caution and assume you are going to live for a very long time. This will almost certainly cause you to over-save, and while this may be great for your beneficiaries, it is not so wonderful for the broader economy.

A thriving economy relies on there being the right balance between the thrifty and the risk takers. If you want to live within your means, you need others to live beyond theirs. This is a truism that is best understood by thinking about trade balances - a country with a trade surplus requires there to be deficits elsewhere. This is why the likes of Donald Trump are to be celebrated: by persuading banks to lend him money, he creates growth that filters down to the rest of us - perhaps ‘celebrated’ is too strong a word, but you get the idea.

Rising wealth and income inequality in general seem to be becoming a problem that may need attention in the decades ahead - can it be good for society that 42 people own more than half the world’s wealth? To put it another way, the richest 42 own as much as the poorest 3.7 billion.

The world’s first billionaire is purported to have been American oil baron John D. Rockefeller. It took him 77 years of his life to reach that yardstick while Facebook’s Mark Zuckerberg did it by the age of 23. Will it continue to get ever quicker to become mega rich? Will we soon see the world’s first trillionaire? I’m all for incentives, but there surely has to be a balance.

The reason this is important for investors is that the structural deflationary pressures the world has been battling the last couple of decades may be due to wealth and income inequality having risen too high. Median incomes in key parts of the developed world have stagnated in real terms in recent years, leading to lower expenditure and thus lower growth and inflation.

The rise of populist movements seems to be a response to these trends, and while it may take some time for them to reverse, the next two or three decades could well see much higher inflation. The implications of this for balanced portfolios are vast.

Published in What Investment

The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

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