Three Powerful Forces Reshaping the Economy

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Chris Davis:

There are three powerful transformations happening at the same time in the world and in our economy and in the market. And transformation number one is technological. What's happening in AI is enormously powerful in terms of the impact it's going to have on businesses. We already see it in GDP numbers and so on, but it is also going to be an enormously disruptive force for some businesses and accelerant for other businesses. It increases all sorts of fringe risks, but also increases all sorts of spectacular opportunities and things like healthcare. But let's just put that as one massive vector of transformation. The second massive vector of transformation is geopolitical, right?

We have all spent our entire careers. I came into this business in the late '80s. I was living in Europe when the Berlin Wall came down. I was in Czechoslovakia when it was still communist. We have been in a 40 plus year period of globalization and of relative geopolitical stability. All bets are off on that front as we know. That greatly increases risk. It also is a powerful lid on margin and return on capital assumptions because as you break down globalization, you reduce efficiency, you increase redundancies in supply chain and so on. So that is another headwind or transformation that is unfolding. And the third is what we just saw with interest rates. We have been in a world of monetary reduced inflation, monetary stability, constant falling rates for 40 or 50 years. That changed not that many years ago, and the rumbling of that transformation into the economy is still unfolding slowly, and we think that is going to continue to play out.

So with those three transformations in mind, what are our working economic assumptions? One, long-term monetary inflation remains the key risk. There's upward pressure on all sorts of costs and prices, and we can see that where there could be some deflationary forces and so on, but right now we just don't see the government discipline with the printing press that could take us off this trajectory of paper money becoming less and less valuable, of wage inflation, raw material inflation. The second is we expect unemployment to trend higher in aggregate. That's really tied to the technological shifts that are happening. That is an unusual combination to have rising inflation and rising unemployment. I lived through that in the '70s, but we would say on balance, we would expect unemployment to trend higher. We just see the amount of labor, especially white collar labor that can be replaced with AI functionality, and we expect AI to do to the white collar workforce really what factory automation and globalization did to the blue collar workforce.

So that's a long-term trend we see playing out. And the third, as I mentioned, is that AI is transformational. It needs to be a lens that you use in evaluating businesses, their competitive advantages. It also needs to be a technology that you incorporate into your own businesses and practices, and there will be advantages to that. So anyway, those are the sort of background economic framework I would share.

 

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