SLIDE 6 – THE NEW ECONOMY

Covid was the largest shock we have had to the way we live since WWII. After WWII, the economy was undergoing a rapid change as soldiers who had been overseas returned home to their families that had been managing without them. The US had effectively become the last economy standing, and post-Bretton Woods, the economic leader of the world. As the Baby Boomer generation quite literally came to life, families expanded into the suburbs leading to new and different business opportunities.  This period was unsettling and led well into the 1950s.

Fast forward to today, we have an immensely large generation of retirees, many of whom are Baby Boomers, who are looking to sell their businesses – some stats say 40% of the businesses out there are owned by baby boomers and 30% want the sale of their business to fund their retirement.

When you look at demographics, the challenge is further shifting. By 2034, there will be more Americans over 65 than children. When you couple this with the challenges and time it takes for manufacturing reshoring with the requisite expenses to do so, and increased wage pressures, we are facing an era where we will arguably be living with less.

Let’s apply the demographics to what we could anticipate with the tech sector. If you want to do tech at scale you need people in their 20s and 30s to imagine the future, develop and prototype the tech, and then bring its operalization to mass manufacturing before going to market. To do this, you need a huge amount of cheap capital, which has been flowing into tech since the early 90s, because operating expenses need to be paid until when, and if, the company takes off. But the days of cheap capital are over. Baby boomers are retiring and shifting focus, the oldest millennials turn 44 this year, people in their 20s and 30s are demographically shrinking, and GenZ is the most educated but smallest generation we have ever had. Demographically speaking, if you are a tech company and aren’t at operalization today, you may be too late.

Now let’s touch on inflation and interest rates. The US response to Covid authorized $5t in govt spending. This coupled with rising commodity prices and supply chain disruptions were the principal triggers of the burst of inflation. But, as these factors have faded, tight labor markets and wage pressures are becoming the main drivers of the lower, but still elevated, rate of price increases.

In February of 2021, CPI was 1.7% but rose to 5% in June 2021 to peak at 9% in June 2022. Or viewed differently since May 2020 our currency has lost 19.7% of its purchasing power.

These inflation numbers would likely abate over time without Fed intervention, but that doesn’t happen. Historically, and these days this is potentially subject to adjustment, the Fed aims to have inflation at 2% and short-term interest rates 2%-3% above inflation for an extended period. Once there, then and only then will the Fed decrease rates if necessary. Unless a crisis strikes, don’t expect this to happen anytime soon.

Also, historically speaking, one can argue we are actually returning to normal rates. Over the last 700+ years, average global nominal interest rates clocked in at 5.98% with inflation at 1.59%. For comparison, the current risk-free rate is 5.3% with inflation at 3.18%.

Also, for history buffs, the Fed stopped raising rates in July 2006. Then they held steady until August 2007. New Century Financial declared bankruptcy in April 2007. Bear Sterns collapsed in March 2008. The entire financial industry collapsed in September 2008 – There was a 2-year lag.

Now going back to today, when you consider the $5t plugged into the economy coupled with access to cheap capital, you can see the link that has led to massive malinvestments in businesses fast approaching distress.