At the average conference, over the course of several days and several dozen presentations, I usually expect to hear only a handful of truly original ideas… but not here at the Strategic Investment Conference in San Diego, California. Here, I can hardly keep up.
Day one started off with the king of modern-day economists, David Rosenberg, who goes on ruffling a lot of feathers. Dave argues that inflation pressures are building. I know this sounds odd to a lot of us who are still worried about deflation but Dave notes that out of 140 million workers in the large, closed US economy, roughly 40 million higher-skilled workers have the bargaining power to push wages higher and turn the inflationary dial… even as low- and medium-skilled workers see their wages decline.
Next up, we had an epic debate between Bloomberg senior economist Rich Yamarone and Jefferies chief market strategist David Zervos. Yamarone is worried that after six years of fragile growth, the US economy is prone to recession. He argues that the middle class is getting hollowed out because no positive wage pressure can be exerted by the vast majority of Americans. More people are being forced to take multiple jobs to make ends meet, in part because the Affordable Care Act is changing the way businesses employ nonessential workers.
With a powerful faith in central banks, Zervos asserts that deflation cannot take hold as long as the Federal Reserve is pouring money into the system. Today, sitting in low-volatility cash is more dangerous than being in higher-volatility stocks, he argues.
Then we moved on to a comprehensive look at the global economy as the always-brilliant Grant Williams and Jonathan Tepper shared their ideas about China, Japan, Europe, and other markets. Jonathan argued that low volatility and tight European credit spreads are not necessarily signs of lasting recovery but rather the sort of irrational calm that always comes before a crisis. Expanding on Jonathan’s point, Grant warned that if and when this bubble of complacency pops, the impact will shake the world. And then he explained how sudden shifts in confidence in China and Japan could tip off the next global panic.
Patrick Cox, who writes Mauldin Economics’ Transformational Technology Alert, predicts that the US energy boom will enable the widespread adoption of robotics here, which will reverse 40-plus years of manufacturing outsourcing.
John Mauldin took the stage on day two with a powerful message: While the human brain struggles to anticipate exponential change, our economic future depends on a race between two accelerating curves – debt and innovation.
Just as exponential growth in government debt starts to destabilize the global economy – with enormous and growing risks to growth and productivity in Japan, the United States, Europe, China, and even many of the emerging markets – John believes the constant doubling of computing power since the late 1950s means our technological capabilities are taking exponentially bigger leaps every year. That constantly accelerating computing power is enabling innovation so profound and disruptive that it looks and feels like magic.
That’s a worrying dynamic if we pay attention to the Heritage Foundation’s Stephen Moore, who harps on the distortions in public policy, or if we consider Hoisington Management’s Lacy Hunt, who explained to us that, in aggregate, total debt-to-GDP across the world’s major economies has increased by nearly 35 percent since 2008. And even more importantly, the new debt has been taken on disproportionately by the real problem economies: Japan, the eurozone, and China.
Contrary to the optimistic and technologically promising view of the future shared by John Mauldin, George Gilder, Newt Gingrich, and Jack Rivkin, GaveKal Research co-founder Anatole Kaletsky suggested that the jury is still out on the future path of productivity growth. The still-open question about productivity (which Anatole says may take 15 years to answer) has enormous implications not only for the climax and resolution of the global debt drama but also for the very structure of the global economy.
The writer is chief strategist of Mauldin Companies.
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