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Virtual Strategic Investment Conference 2020: Notes from Interview of Karen Harris

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Virtual Strategic Investment Conference 2020

Interview of Karen Harris by Ed D’Agostino

Please note: Please forgive any typographic or grammatical errors.

Karen Harris is Managing Director, Macro Trends Group at Bain & Company, a global consulting firm.

Karen spoke about the impact of this pandemic on some of the longer-term trends similar to what John has been writing about for years and how this and this shocking end of cycle is going to push us to accelerate some of the key trends. Here are a few short teaser highlights, then my full bullet point notes:

  • On demographics: The Baby Boomers, a critically important generation, created a distortion in the population curves around the world, as born right after the war, entered the workforce en masse in the 1970s. In the 1990s, they began to hit their peak savings years.
  • On interest rates: They are going to move higher over the next two to three years.
  • On supply chains: Costs more, lower profits but risks will bring manufacturing closer to home (regions).
  • On bail-outs: As a taxpayer, I would frankly be somewhat irked to hear that the money that I had paid to my government was supporting a company meaningfully investing abroad. The equity stakes, if you will, taken in companies that are struggling now will be rewarded with greater economic growth domestically, which is just another push for companies to think about a more close-to-home business model.
  • Automation, AI: It will displace up to 20% of the workforce.

Karen’s insights are helpful in terms of thinking about the types of investments you might consider. Disruptive technologies, GDP growth trends, global capital exposures (winners and losers) and the direction of interest rates (and what that means to your bond market exposures).

Thanks for reading. I hope you find this information helpful.

Karen was interviewed by Mauldin Economics’ publisher, Ed D’Agostino (who did an excellent job with the interview and hosting the entire virtual conference).

ED D’AGOSTINO: Our next presenter is one of the world’s best at finding the connections between trends in demographics, technology, and geopolitics and then predicting how these connections will impact businesses and market sectors. She’s an expert on pretty much everything, as far as I can tell. And she’ll be taking your questions.

I’m talking about Karen Harris. She’s the managing director of Bain & Company’s Macro Trends Group. Her team’s work forms the basis for how Bain & Company serves its clients across the world when it comes to all things macro. And she joins us today from New York City.

Karen, it is so great to see you. Welcome back to the SIC.

KAREN HARRIS: Thank you. It’s great to be here. I only wish we were live, especially here in week 12 of lockdown. It’s like being on house arrest but not having done anything fun to get there. But I am happy to be speaking with you. I look forward to your questions later and to chatting more with you, Ed.

  • This morning or this afternoon, this evening, depending on your time, I am going to be talking about the impact of this pandemic on some of the longer-term trends that we all have been discussing and John has been writing about for years and how this and this shocking end of cycle is going to push us to accelerate some of the key trends that we all, as a group, discussed the last time I was at SIC in 2018.
  • As you can see on the next page, if you look at a timeline of where things have fallen out over the last few decades, we can see that we were at the end of both an economic cycle and some multi-decadal secular trends and that created a lot of confusion around forecasting.

  • I’m sure you’ve all read and heard innumerable discussions about when is this cycle going to end, the longest cycle in history? Are we going to have a recession?
  • Well, it ended. And yes, I think is the obvious answer now. But the secular trends that we’re playing through are ones that we want to keep an eye on particularly as investors, because they are the tectonic forces that will underlay some major market changes over the next decade.
  • So looking through what has been changing over the last few decades, starting with the Baby Boomers, a critically important generation, they created a distortion in the population curves around the world, as born right after the war, entered the workforce en masse in the 1970s. In the 1990s, they began to hit their peak savings years.
  • And by that, what we’re looking at Bain is saying, when do people stop spending at their highest amount as a percent of income and start saving? And really, that happens for most of us, this is probably your lived experience, when your kids move out of the house. So when your children are around 18 to 22, you don’t upgrade your home and you don’t get another car, your food purchases tend to go down, et cetera, et cetera.
  • And around the world, that tends to anchor around 46 in most advanced economies. And so when the Baby Boomers hit that critical stage, 46 to 60, peak of their careers, peak earnings, but percent consumed past its peak, they were contributing an enormous amount both to global productive capacity but also to global capital and global savings.
  • In the next decade, they begin to move into retirement. They already have. And in some parts of the world like Germany, they are farther ahead in terms of moving into retirement. In China, we also see that workforce moving into retirement. Japan, France, it happened a little bit earlier, but for the most part, we’re seeing that movement into retirement that happens en masse in the next decade.
  • And as a result, expect more drawing down of savings from those Baby Boomers and less contribution globally to capital. And that matters because we have also been in a multi-decadal era of what we at Bain called capital superabundance. That is the growth of financial capital relative to real GDP, which, if you think about that ratio in 1990, financial assets were about six and a half times the real economy.
  • Today, they’re closer to 10 times that and sort of pop around and above that. What that means is that we’ve seen a big expansion in financial capital that has had an impact on multiples. It’s had an impact on the price of real estate. It’s also had an impact on the price of money or interest rates. So we’ve enjoyed since Paul Volcker and his actions in the 1970s and more importantly in the 1980s, we’ve seen a steady march down of interest rates with a little bit of vibration. We believe we are at the end of that cycle of constantly lowering interest rates.
  • Not today. Nobody’s going to argue that we are in a deflationary period where demand is repressed. People are at home. They’re not purchasing. We have financial accommodation from the world’s central banks in order to offset that demand deflation and hopefully keep us in a recession and out of a depression. But coming out of this pandemic, we expect to see some meaningful changes in the cost of money or in interest rates.
  • The impact of those Baby Boomers moving into retirement has a third leg or a third branch of that, as you can see on this timeline, which is not only have we been in a period of capital superabundance, but we’ve also been in a period of extraordinary labor supply, in part because of those Boomers entering the workforce in the‘70s, also because of the integration of women into the workforce. In the 1970s, we were looking at labor force participation for women at closer to 30% versus today’s 70%. So a meaningful increase there.
  • And finally, and most importantly, the integration of the global economy, in particular the workforces of China being part of global production, created a supply of labor that meant that for many businesses, it was a cheaper, more efficient, more effective decision to find a warm beating heart somewhere in the world, particularly China, rather than invest in capital. Productivity is just a human being, plus a piece of equipment, right? That’s what generates capital improvement. And so it’s unsurprising that we saw slowing productivity growth when, instead of having that labor plus capital, we had just another labor plus labor.
  • And so we are seeing that group retire and the labor force decline is most acute in what were some of the world’s biggest producers, namely China and Germany. We are in the US seeing a slow in growth of labor but not a shrinking workforce versus in the EU, where we expect that workforce growth to be -0.5% on an average annual rate over the next decade. So a big shift in the availability of capital already (prior to) coming into this crisis.
  • The fourth trend that we were following before the crisis was the impact on urbanization or what we call spatial economics, not outerspace, but just volume space. And that is that with the improvements in technology, with changes, and with shifts in the cost of moving information, the cost of moving people, the cost of moving goods, logistics, we saw the declining cost of distance. And as many of you learned in econ 101, when the cost of something goes down, all other things being equal, we’d expect people to use more of it.
  • And what concerned us is if you spoke with many business leaders, they assumed a rate of urbanization. In fact, there were articles in the paper talking about the challenges of providing plumbing to 400 story skyscrapers, et cetera, et cetera. What I found odd about that and my team was puzzled by this is if you talk to people who are affluent and these are the people many of whom live in cities now, and ask them, do you think it sounds nice to live in a mega city on the 357th floor? Very, very few, maybe one in 100, said yes, and I think they were just pulling my leg, to be quite honest with you. But let’s say one in 100, and yet there was an assumption built into a lot of business models that that trend would continue in perpetuity.
  • But when we looked at the census figures in the OECD, in the US, particularly in countries around the world that had land, Canada, Australia, France, Germany, what we saw was that the population of cities, the growth was slowing. And that, in fact, the middle class and the affluent were choosing in particular to leave tier one cities because the costs had become so high because some affluent people value having space over being in an urban environment. And so the growth was we’d have a concentration of wealthy and single people increasingly in tier one cities.
  • The marginal populations or the bottom 50% of the economy that lives off their income or government subsidies, living at the outer ring of the local public transit. So where the—not the commuter rail but where the in-city transit ends, so an hour commute from a central business district. They’re increasingly clustered there or in the suburbs in the United States.
  • And then another ring of more affluent or middle-class people living, working, playing, staying in the exurbs. And we call this post-urbanization. Again, this is not a developing market phenomenon. It’s really something we looked at in advanced economies.
  • And the last critical trend that we saw shifting, a multi-decadal trend was, of course, globalization. The justification for globalization started after World War II, both economically for the US to rebuild its own markets but also, politically, with the Cold War. Around 1990, with the collapse of the Soviet Union, we saw the second justification for globalization underwritten by the US military. The second-largest military spender was Japan, so again, underwriting US military efforts. The justification was convergence, crudely speaking, which everyone denies now. But if you look back at papers, you will see that the thought was as countries get wealthier, like gravity, they fall into democracy. And the expectation was that places like China under Deng Xiaoping opening up, would eventually be—that they would open up to increasing freedom as defined in Western markets to more liberal markets.
  • Well, the third most important justification beyond the fact that we would have convergence of values and open global markets was that those global markets would make everyone better off. In other words, that there would be a rising tide of affluence as a result of globalization.
  • It has been a phenomenal period of wealth creation in China, almost a miracle of lifting hundreds of millions of people out of poverty into a consuming class, but that wages and real income in the United States have stagnated for three decades for about seven deciles of the population. And that in other parts of the world, like Europe, where social safety nets are deeper, there’s been less topline stagnation, but certainly that has been felt. And we see that in movements like the gilets jaunes (yellow vests) and others around Europe—builders in the Netherlands, Brexit, a reflection of the fact that everyone definitely did not get richer off globalization, and is this really something that advanced economies should underwrite?
  • So that is where we were. And what we were asking ourselves about a year ago is what did that look like for the next decade? And if you click through one more time, you’ll see that we were looking at this period and calling it in some similar lingo to John and others as this great transformation.
  • So what does it mean now that we’ve had this cycle end with a bang in this global pandemic? What is going to happen to some of those key trends? Well, four of them, as you can see on the next page, are going to accelerate.
  • Global labor, labor scarcity that won’t… we’re not losing… thankfully, this is not a deadly enough pandemic aimed at the working population. It’s not like the Spanish flu where we see a meaningful impact on workforces.
  • However, we have just undergone the worst controlled experiment in history. If a client came to Bain and said, we’re curious about how much automation our organization can bear. What do we really—what are the best jobs for people if we use their skills? What are the jobs that we should actually be thinking about automating? Where do we have machine learning, human hand dexterity, sensors that are deployable in a way that could eliminate some of the worst parts of human labor? We would never say, hey, here’s an idea. Send everyone home and just bring back the people you absolutely need. But of course, in most of the places that you all are sitting right now, that is precisely what happened. The human workforce was sent home. Only necessary workers were allowed back or back at the workforce, necessary, defined by product or industry, not by their job type, of course. And now companies are struggling with what the right answer is to balance automation.
  • And we’re seeing around the world solutions that might not have been tried out before being pushed far more aggressively. For a bank, for example, many banks thought they had hedged, that they were resilient to this sort of change because they had a call center in both India and the Philippines until both of those locations shut down.
  • And then the question is, do you wait? How many of those people can you bring back to work to implement the sort of health standards and distancing that makes that possible?
  • Is that possible effectively, or do you just use a second-best artificial intelligence solution onshore that will rapidly become perhaps a better solution? And of course, most of them are opting for B. We’re seeing something similar with robots doing sanitation work in airports and then in hospitals using things like ultraviolet light that human beings can’t manage. So we are expecting that trend to accelerate.
  • There was a momentary pause in an earlier part of this year after the Phase I trade deal. I think it’s clear that the relationship between China and the United States is heading towards a phase that’s even worse than it was under tariffs. I can’t compliment either government on their management of that right now. I’d describe it as watching a football match of only own goals at this point. Neither one is really distinguishing itself in that field. But the consensus is building. It feels like certainly in Washington, possibly in Beijing, that this is a rift that is likely to persist going forward, which will accelerate, again, the end of what was a globalized economy.
  • In advanced economies, again, that growth of cities was slowing. With everyone working at home, the sorts of technologies that enabled remote work for white collar workforces in particular are improving by the day.
  • I’m sure we’re having some technical glitches now but you can imagine that every 24 hours there are improvements, patches, and our ability to navigate that remote work improves. It will be a while before people can go back into offices en masse around the world. And there really will be a question about does everyone need to be in the office? For some people, home work, remote work, even if it’s from a smaller facility, may be a better option. And I suspect that the pushing on that trend will help accelerate this decline, the declining cost of distance and the, indeed, dispersion of populations in advanced economies.
  • And then finally, I will talk a little bit more about why we think interest, despite being in a period of recession now and deflation and demand suppression, why do we think, why on earth could we possibly think that interest rates could be rising in the next decade?
  • So turning to the next page and looking in a little more detail at some of these trends, I spoke about automation and this grand experiment. The other thing to keep in mind is that companies often use recessions to invest in technology, that recession tends to propel automation because it gives leadership an opportunity to pause and take some extraordinary actions that are much tougher under regular day-to-day conditions. And so we would expect capital investments already to be accelerated and with the forced integration of automation, chances of that persisting are quite high.
  • In 2018 when I spoke with you all, we spoke about 40 million jobs potentially being displaced in the United States, and that’s as much as one in four to one in five of the workforce in that white collar, sort of blue collar, pink collarish zone, the classic middle-class jobs.
  • We expected that to happen over the course of the entire next decade, probably ending around 2030 but we could see a meaningful acceleration of that now.
  • Globalization post pandemic. We’re seeing blame being lobbed in every direction, particularly at China where the pandemic originated. All claims to the contrary feel somewhat less supportable. And there really is a question now whether some of the leadership in the US continues to push towards having financial reparations, which could have a big shock effect on US-China relations.
  • In addition, many economies have spent large amounts of money to bail out businesses. As a taxpayer, I would frankly be somewhat irked to hear that the money that I had paid to my government was supporting a company meaningfully investing abroad.
  • The expectation, I think, of most taxpayers will be that the investments made, the equity stakes, if you will, taken in companies that are struggling now will be rewarded with greater economic growth domestically, which is just another push for companies to think about a more close-to-home business model, or at least one that, rather than assuming as a first step one seeks out a 5,000-kilometer supply chain looking for cheap labor, that adding capacity closer to end markets may be a better investment from a risk premium standpoint. Add to that what we were just discussing, which is automation, and you can see that the capability or the possibility, the frontiers for what companies can reshore or near-shore shift in their supply chain, along with the political pressure to do so, and the risk premium if tariffs are added, if relationships really devolve, create much more momentum towards a more regionalized or block-based trading system. Expecting that governments that have taken on, become more muscular in this crisis are unlikely to quickly remove those powers. It’s unusual to see politicians take on a lot of power and then give it up quickly. Maybe it will happen but less likely as a scenario.
  • On the next page, you can see the other two trends I was discussing. First, spatial economics. In addition to being forced to go home, the perceived danger of living closely in a pandemic, the fact that it will probably be harder for places like Manhattan where I live, to come out to recover and resume full, normal life, that mass transit is a spreadable event and so that does create more challenges for people who are living in cities.

  • Also, just culturally human nature, people who said, you know, I could never leave London because I love the opera suddenly notice in this pandemic, they haven’t set foot in Covent Garden in five years, and may feel that they value a garden more. And we would expect that to accelerate for affluent people to move out of the city, along with the sorts of supports in terms of health, public health support that could again make it easier to live a greater distance from the urban core.
  • The last trend I want to discuss is the decades-long march downward of interest rates and why we think that could possibly turn around and turn around fairly rapidly over the next three to five years.
  • First, I spoke about demographics and the falling supply of capital from those Baby Boomers. Secondly, global relationships are not improving. And it is globalization that also under underpins the free movement of capital. We have heard discussions in many markets, the US included, about capital controls and investment controls in the last couple of years. If the virus—if the breakdown of the battle over fault on this pandemic turns into a financial or reparations-based one, those markets could devolve very quickly. But even if they don’t, even at a more natural pace, we’d expect more regulations and controls to come into a less globalized world.
  • And finally, the automation replacement. That addition of capital creates a big uptick in demand for all of that capital in a very positive way. And great returns on some of those investments. Really innovative ways of using them. But certainly a draw on capital.
  • And then adding to that post-pandemic, first, the discussions about whether or not companies needed resiliency in their supply chain. So we lived in a brutally efficient world where companies created one large- scale cheap source for many components. The trade wars and tariffs nudged tech companies into re- examining those supply chains and moving them. We saw Vietnam, for example, as a beneficiary of that.
  • The shutdown of Wuhan. So China’s being the first to battle this virus, using lockdowns created pressure in the auto industries and other industries, and then as China shut down even more components, again, alerting companies to the fact that having everything in one place was potentially efficient, but efficiency is brittleness and breakability in a volatile world. And I think if there’s one theme coming out of this conference so far, it is not, everything’s going to be back to smooth sailing over the next decade, ending with the contrary, where we expect to see a lot more volatility.
  • Medical equipment, pharma, many, many more sectors are being thought of as important for our national security, at least national stability. And it will likely be under pressure to be generated locally in markets that are at scale. To do that, for example, the US and companies for their own survivability in a more volatile world will need to build some resiliency into their supply chains. Which means more cost. There is no way to double the number of suppliers to create different sources without building some cost. Is it twice as much? Maybe not. But certainly it’s not the same.
  • And we’ve already seen supply destruction in some categories that may not persist. At-home grocery is unlikely to have the same demand once people are allowed out of the house and back to work normally. That may be 12 to 14 months till we hit normal, even if people are back in the office as they are at some Bain offices around the world. We are not. It’s not 100% of people.
  • So those are the four trends. And I think just to summarize on the next page, where we could land, it really is a restructuring and reviewing of the value chain.
  • If you think about where primary industries were and used to be, trade used to be part of getting finished goods in a container and sending them off from Hong Kong or Shenzhen or Singapore to a port on the West Coast of the United States or to Europe, to Hamburg, or other areas. And today, what we’re seeing if we look forward is that global trade could be increasingly anchored around basic commodities, things like iron ore that you have to pull out of the ground. Even energy, as we know, has moved. The US has become an energy producer and agriculture is increasingly—the efficiency of it, the innovations, they are making even that more disaggregated, the production of food.
  • So global trade becomes something of a primary industry along with changes in geopolitics that make it harder to move things around. Value-added transformation or this is that labor and capital added to those primary goods could increasingly move back closer to end markets as labor costs become less important.
  • The rising wages we saw in China, for example, over the past decade as they developed were already causing companies to question should we be in Mexico? The politics of tariffs, the pandemic, the resiliency upside to looking at other markets are all really accelerating those conversations. Can a company close up shop and open the next day in a new market? Not most of them, right? So it’s not that this will happen overnight, but certainly where is the direction of travel? Towards much more disaggregated production, automation, closer to end markets.
  • The challenge of this, just to put a highlight on it, and there’ll be a discussion later today on emerging markets, but the development strategy that has been a winner since World War II is far and away export-led growth, where Japan, the Asian Tigers and China became experts at highly productive, low-end manufacturing, serving wealthier markets and moving up the value chain that way. In an automated, regionalized world, export-led growth is a non-starter. It’s not a development strategy that works, and it becomes an exigent and difficult question for emerging markets that aren’t part of that ecosystem already. So Vietnam may already be, especially since tariffs, able to sustain growth in an export-led way as a packager of and entrepot between different large markets like the US and China. But for other countries, particularly in sub-Saharan Africa, it is a real question about what possible development path remains.
  • On the far end of the value chain is experiential delivery. How do you get those goods to people? Well, we talked about the impact of automation on jobs. The implications of that are, either we see much more government intervention… So I mentioned governments keeping power. If you lose 40 million or if you lose one in five middle-class jobs, in a democracy, you get much more muscular government redistribution programs, most likely. Or you end up with a lot of displacement and an economy where you have a 20/80 at best, distribution. And so you have a concierge set of customers at the top end and the good-enough set at the bottom 80 percent, a much more bifurcated market than the affluent middle class, than the lower bottom 50% of households that we’ve been used to for decades in advanced economies, particularly in the US, in Europe.
  • With the disaggregation of the population, we also see a lot of innovation and logistics and much more delivery from potentially company to atomized individual delivery, the ability to serve homes rather than retail. And a real question about what is the role of the retailer and the wholesaler in this new sort of structure. Retail becomes as much entertainment as delivery of goods, and omni channel becomes more important and so forth.
  • So you can see that we land in a place that was already moving in a very different direction than we’d seen for the last 30, 40, even 50 years globally, that this pandemic almost put a period on that last cycle and is the starting gun, to mix metaphors, for the next cycle, but doesn’t fundamentally change the direction. It merely accelerates some aspects of it and gives us a point at which to pull up and notice that turn in the road.
  • And so with that, Ed, I would love to hear questions from you or questions from the audience.

D’AGOSTINO: Absolutely, Karen. I have lots of questions for you. And my jaw dropped, I think four or five times, while you were delivering your presentation. Thank you for that.

Let’s start out with an audience question. A longtime reader of ours, Scott Shram, he asks, if the decades-long downward march of interest rates reverses next decade, what happens to the ability of governments, particularly the US, to service their debt? I would expand that to say, and what does it look like?

HARRIS: That’s a superb question, Scott. And the more complex implications of this are, we would frankly expect or certainly in our view, we always look at scenarios, we never look at predictions but we like some scenarios better than others.

And the one that we are at the moment pretty fond of looking at that pressure is to say we will have to see some sort of policy that manages the yield curve, because the affordability of debt, particularly the way we’re accumulating it now like it’s an Olympic sport and we’re trying to win a gold medal, would not be sustainable with 8% rise in interest rates. But 4 to 5% may look more normal and we certainly haven’t seen the central bank manage interest rates that way and manage the curve before. So there would be continued pretty extraordinary intervention through that period. But still for private investors and for companies that would be a big increase in their cost of capital.

D’AGOSTINO: Wow, Okay. The theme of this conference has become pretty obvious and that is trend acceleration. Everyone’s talking about it. And there’s two points that I wanted to state to you and then get your reaction.

Jim Bianco spoke a couple of days ago at our conference and he said that he believes—he was saying New York, I think what he meant was Manhattan, that Manhattan’s population is down by 20 to 25%. People have just left. And part of his argument is a lot of them aren’t coming back.

And you couple that with—earlier this week where, you and I are neighbors of sorts in that you’re in New York, I’m in Connecticut. The governor of Connecticut said earlier this week the age of a daily commute to New York City is most likely over and that he’s hearing big employers say they’re looking to shed at least 30% of their office space in New York. These are these aren’t just, like, trend accelerations. This is right now. This is today. What do you see the next couple of years looking like in terms of these big shifts?

HARRIS: So I think there are a couple different forces moving in different directions, and Jim’s right, I’m in a building right now that’s at 30% occupancy. I’m beginning to feel like the idiot that forgot to leave once the army has invaded and sort of crawls out of the basement, and oh, the Soviets are here, that ended well. But certainly there has been flight.

  • I think the countervailing trend to that is that Manhattan and cities themselves have become the places where affluent families raise their kids. There are amenities, there are schools. There are anchoring principles that do keep people here.
  • I do think that he’s got the right of it in some ways, and as I was joking and people who say, oh, I could never be away from the museums. And then remember, they never go to museums. So there may be some movement out of that but I also think one of the aspects of cities for the very high end, so for the rich and to be frank, San Francisco, Manhattan and particularly New York City, the West End of London, have become places where really it’s mostly, by any global standard, rich people living.
  • There are sectors of the economy that tend to be knowledge-based that grow, the clusters, as Michael Porter called them, that do benefit from having an ecosystem around. You see that in Boston and in Cambridge in biotech.
  • Can that happen remotely? I don’t know. There isn’t a lot of evidence to support that a bunch of disaggregated people in their own space are the great innovators. So it will, I think, depend on where people work. That being said, I don’t disagree. I disagree with a lot of what the Governor of Connecticut says. But that particular statement, as hyperbolic as it is, there is certainly some truth to the fact that the need to commute all en masse at the same time for white collar workers really should be called into question.
  • And to add to Jim and Jim’s statement and Ed what you were saying, if you think about what a city is, it’s a technology that was invented for the industrial revolution. We put companies and people clustered together so that when we got primary goods, we’d have a lot of workers to smash them together and then we could take the receipts upstairs and count them and our lawyers could get involved, and all the things you did in an office tower that we don’t do anymore in cities.
  • And so the features of cities become both more and less important. Being able for many people to work in a city may diminish, and you may need to be just somewhat connected with the city.
  • But the amenities that are offered can be very competitive. People like to live in certain places because of what it has to offer. And that at the very high end, I think cities around the world because they’ve become so expensive, have also become increasingly livable. If you think about the bike lanes that were put into London, for example, that if you took away all that horrible traffic, which they’re doing now, would it attract and continue to retain people?
  • So I’d be hesitant to—maybe I’m just too loyal to my hometown. It’s not actually my hometown. I’m not from here, but where I’ve lived for a while to see that it’s the death knell. But I do think that even the acceleration of trends just says that cities become less dense—tier one cities. I’m not talking about Kinshasa, but cities like Manhattan, San Francisco, become less dense, more livable, and that it can end, and also that those commutes do begin to go away because for white collar workers who say, rightly, why do I need to be in my car at the same time everyone else is? Why don’t we all just meet in the middle of the day… or I go in once a week and so forth.

D’AGOSTINO: And to be clear, in your heart, you’re a Red Sox fan, right?

HARRIS: You know, the wonderful thing about me is my indifference to all sports teams means that, and that infuriates my husband, who thankfully is British and supports the Tottenham Hotspurs which just shows loyalty beyond all rational recognition. But also that my total indifference to sports is less frustrating for him because it’s not a US-based sport. But I’m pretty sure the Red Sox play with the little small round ball, not the elliptical one.

D’AGOSTINO: So, you know, one of the things that we’ve been working on at Mauldin Economics with our analysts is just looking at who are the winners and the losers, because there clearly are going to be a lot of both, really. And right now, I think the tendency is to focus on the losers, right? On the negative. But there are going to be companies that capitalize on this and a lot of our viewers right now are asking, you know, what should we invest in, assuming your vision of the future is correct? That’s the exact question.

But, you know, I can’t ask you for specificity but give us a couple of examples of maybe some pockets of either sectors or industries that do stand to benefit wildly that maybe people haven’t thought about yet.

HARRIS: Well, robotics, automation is the infrastructure of the next decade. And so any companies that help support the… and these aren’t speculative technologies. These are basic machine learning, human hand dexterity, sensors that allow for automation, also the digital backbone, that becomes incredibly important.

  • We’ve seen that companies that were able to pivot to online because they had the modularity, using perhaps Amazon web services or other sorts of digital infrastructure to shift their orders, were far better off than companies that were not able to do that. Oh, my goodness, the articles reading that many state governments couldn’t process unemployment claims because they couldn’t find COBOL programmers. I mean, oh my goodness.
  • I studied computer programming in college and we weren’t studying COBOL then and I’m not 15 years old. I mean, this was—it is just astonishing.
  • But those sorts of digital modularity certainly will help.
  • Anything that creates… the theme or the question to ask is, does this create optionality and flexibility for the company? So is this 3-D printing that allows me to make component parts at home, but not a single one, but lots of different component parts? Think about our food supply chain here in the US. We do not have a shortage of food, but there is not a single measurement by which… now some grocery stores have had to reduce SKUs in order to simplify their staffing process.
  • But when we run out of things like flour or even meat, with the restaurants of the country, in large part, shut down with only a small amount of capacity utilization for home delivery, that is a packaging issue. That is not a food production issue. That is the… it turns out I don’t, I really would like to get 10 pounds of flour, but I really don’t need 200 pounds of flour. And if you could imagine, if a company could have had within its production facility that sort of modularity, which I’m sure is much more complicated than it sounds, that is the sort of thing that has huge upside value.
  • So what does the retail of the future look like in a way that allows, that creates a shared experience, but not necessarily the cost of having inventory in expensive street-level rentals that are larger than what you need for that?
  • So those are the sorts of sectors that we are looking at that I think will be rewarded for investors over the next 10 years.

D’AGOSTINO: How does artificial intelligence play into this, and is that something that your clients are starting to earnestly look at adopting?

HARRIS: It’s a term that I find is so vague as to be tough to understand. A few years ago, people were talking about sprinkling AI over things. I can’t even figure out what that means. Like it’s like some sort of Robin Williams-esque fairy dust act. But will there be machine learning and more complex abilities of algorithms to process data in ways that we don’t look at? Sure. How does that play in? It really depends. And I think the interesting questions to ask as an investor are, how much data do I need to own? I think there’s almost an instinct, a risk aversion to say as a company, I should own all of my data. But is there actually a threshold like we see in a sampling threshold where investing in the costs of housing, owning, using all that data actually isn’t accretive? Are there aggregators who could be smarter about it?

  • I worry about how we’re educating the statistical analysts of the future versus AI because at least when you talk to some of them, there’s a classic regression analysis that’s designed to take out the outliers. And any new innovation is definitionally an outlier. So if I remove everything interesting, then the answer is we keep doing things exactly the same way. So I do think we’ll find new, and in my business, certainly new analytical techniques that help prevent that sort of way of looking at data.
  • But I do think for AI—and the other thing I would say is, I mentioned the challenges of export-led growth. I also worry about should kids learn to code? Absolutely. Is teaching kids in developing markets to code useful? Sure. I mean, of course, any sort of learning is useful and being conversant in today’s language is useful. Will there be any need for if-then coders in five minutes? No, right? So the difference is between understanding that that’s a life skill, because you should understand what choices an algorithm is making on your behalf and question whether you want those made versus saying, if I learn how to, well, maybe COBOL for the next 12 months, but if I learn how to code JAVA, does that set me up for the future? No, it doesn’t. So those I guess, are just a few thoughts on AI.

D’AGOSTINO: We’ve got time for one more question from the audience. You talked a lot about demographics. One of the more popular questions: If Boomers had peak savings starting in 1990, why do we hear repeatedly about the lack of savings for retirement by this group? And maybe I would add to that, how serious of a problem is it?

HARRIS: Right. Well, let’s think about the other piece of that, which is that seven deciles of the US economy didn’t have an increase in real income. So there’s an income inequality element to that, and as wealth concentration happens for the top 1%, 5%, 10%, to lapse into economic wonky language, the marginal propensity to consume goes down. In other words, and I made this joke once at a presentation and said, my husband happened to be there, and I said, they’re only so many Birkins you can fit in the trunk of your Ferrari. And afterwards he said, you’re such a girl. Ferraris don’t have trunks. But that little small detail aside, the savings rate of the wealthiest is very, very high. That tells you about the total savings. It says nothing about the distribution. Not to mention, so that’s in the US, in advanced economies. In China, you have a system that is set up to create forced savings and cheap capital on the part of corporations and governments. And so remember that savings doesn’t just sit in the hands of households, but also in other hands.

  • But to answer that specific question about how is it possible that we are both at peak savings and that the majority of households in the US don’t have $400 for an emergency? That’s the answer, is that the total volume may be high but the distribution is, as you point out, very poor.

D’AGOSTINO: Karen, I wish we could continue this for another hour, though I’m really glad that you’re going to join us again later in the day for a discussion on emerging markets.

HARRIS: Thank you so much.

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