OPINION:
The new decade offers great opportunities for the American economy and investors.
After 20 years of slow growth — bedeviled by halting productivity advances and sluggish labor force participation — breakthroughs in artificial intelligence (AI) and the Internet are about to turn that around.
AI will reduce the number of mid-skilled jobs — for example, on factory floors and among real estate attorneys — but not extinguish those occupations. Mechanization did not eliminate farmers altogether, but it did consolidate holdings — a trend that continues today with computer- and GPS-assisted soil management, irrigation and pest control.
Internet-connected autos and homes will provide consumers with more accurate, granular information about product performance, and competition will winnow laggards and accelerate smarter design.
All will permit fewer people to do more and labor in less strenuous circumstances. Those will enable people to work longer and mitigate challenges posed by falling birth rates and aging populations.
Labor is not about to become too scarce — as economists fret. Rather overcrowding and pollution will become less urgent, thanks to plateauing populations and paradigm-changing green technologies — electric cars and renewable power.
Energy and other commodities will stay inexpensive and capital super abundant. Not in diminishing supply as was the constant worry in the closing decades of the 20th century.
Central banks are getting a lot of help keeping down nominal interest rates.
An aging global population saves a lot more — the tough challenges of raising children fall into the background and financing retirement must be addressed. The resulting rising supply of funds pushes down inflation-adjusted (real) interest rates on CDs and bonds.
Transparency in pricing — Amazon’s and Alibaba’s great gift to civilization — along with automation, robotics and abundant energy are pinning down inflation for everything except government-subsidized, monopoly-enabled drugs, medical care and higher education.
The combination of low real interest rates and low inflation begets low nominal rates on CDs and safe government and corporate bonds. And on junk bonds issued by shaky companies that borrow to finance a last few big paydays for CEOs who otherwise would be liquidating their stumbling enterprises.
These are global phenomenon, and the world is awash with financial capital that can’t get a decent return on fixed-income investments. The wealthy seek out private equity and hedge-fund gambits and more prudent ordinary investors focus on shares in reputable businesses that actually make a profit.
The United States boasts the world’s largest capital markets, because Wall Street recruits very bright people from the Ivy League — and occasionally some intelligent ones from places like the University of Maryland — but smarts alone are not enough.
More than 40 percent of all cross-border trade and 60 percent of international debt financing are denominated in dollars, even though the United States is less than one-fifth of the global economy.
Citigroup and other U.S. banks’ global networks provide the plumbing for all those transactions
Those make American real estate, bonds, legitimate startups and sound equities a global magnet for financial capital. Foreign banks, businesses and individual investors of all sizes now hold dollar-denominated securities — and that will keep interest rates down and permit large federal deficits.
When interest rates on sound debt are low, the premium investors are willing to pay for stocks goes up — that’s measured by the price-earnings ratio or what investors pay for profits.
U.S. equities are fairly priced — the P/E ratio on the S&P 500 is about 24 and that’s nearly equal the average for the last 25 years. Moreover, falling inflation and interest rates and global dollarization have pushed up the 25-year trailing average from 15 at the turn of the century and 12 when President Kennedy was elected.
The sustainable price-to-earnings ratio is likely to trend up as the EU continues to stumble. It talks about a continental response to the China challenge, but can’t even solve chronic air traffic delays by combining its 28 national air-traffic controllers. Multinational corporations will risk capital to establish facilities in China, but authoritarian states are not good destinations for portfolio investments.
U.S. growth will continue to outshine peers in the developed world, corporate profits will advance on the fruits of AI and Internet innovation, and sustainable P/E ratios will continue to rise.
In laymen’s term: U.S. stocks are poised for a hot decade and ordinary folks saving for retirement will do well investing in a diversified portfolio like an S&P 500 index fund.
• Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.
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