Macro Digest: State of flux. Productivity trends tells us we will have low growth for much, much longer...

 

This may be one of the most boring and data driven notes from me ever(Yes, I know – what news?)  but… it's probably one of the most important in terms of understanding the present economic condition which I have coined: 2014 – A state of flux:

 

Productivity and demographics remains the two most powerful drivers of our economic model – it's almost ex-ante assumed we can always keep growing (despite both the mathematically and practical limits to that concept), but how well are we doing in the one factor which have "saved" us in the past: New innovation and technology?

 

There are two major reports out:  The Conference Board – 2014 Productivity Brief – Key Findings  (Financial Times note on the report here) & Economic Report of The President where Chapter 5 deals with productivity. Both have bad news for you:

 

 

 

Chart online: http://www.tradingfloor.com/posts/macro-writing-report-productivity-morning-conc-1380444010

 

The trend is very clear – innovation/technology is reversing dramatically down in emerging markets, which of course explains the dramatic negative return on investment experienced in China and rest of Asia.

 

More concerning is the long term trend of the mature economies – an easy, and probably too easy, assumption would be that we have not 'really' invented much since the 1970s. There could be measure problems with a big data economy, but aligning this chart and the sub-par growth the world is experiencing under the easiest monetary conditions in history does however prove a point. The world is locked a lower rates unless we initiate and support innovation and technology use.

 

The problem as often stated by me being that under the Bermuda Triangle of economics model pursued by policy makers: The 20% companies listed on the global stock market gets 90% of all credit and 95% of political capital, while the SME's which is 100% of all private sector job growth gets 10% of credit and 5% of political capital. Failing to understand and get these numbers will only make the above chart and trends worse, not better.

 

The world is in a dire need of abolishing big business support and focus on SME's – which would even have the added advantage of reducing the inequality as QE and QQE supports directly the top 1% of the population relative to middle class and lower income.

 

The President report, of course, is less negative but using their own charts I think you get the point:

 

 

 

This shows how 52% of productivity since WW II is driven by "innovation/technology" – and how labor itself only directly adds 10% while using more capital production increases productivity by 38% - so again: access to financing and technology is the main drivers of long term growth. The lesson should be simple, but yet every government in the world fail to act on this.

 

This chart show overall non-farm productivity and multifactor productivity (innovation et al) side by side. Again – there is lead from investment in tech/innovation.

 

 

The San Francisco Fed does a "real time" time series although its relative late to market:

 

Finally, my inspiration to look at productivity came from reading this excellent blog: Conversable Ecnomist, Timothy Taylor: The US Productivity Challange

 

Timothy have a number of conclusions:

 

 

 

And the key point (as it supports my SME vision J):

 

'The agenda for productivity growth is a broad one, and it would include improving education and job training for American workers; tax and regulatory conditions to support business investment; innovation clusters that mix government, higher education, and the private sector; and sensible enforcement of intellectual property law. But here, I'll add a few words about research and development spending, which is often at that growth in innovative ideas that are a primary reason for rises in productivity over time'

 

The biggest problem? It means policy makers and politicians needs to step away from macro and let the micro-economy take its proper role that of the engine innovating, finding new markets and working with one of the few laws of economics that makes sense: Say's Law, in short: Supply creates its own demand  - the world is stuck in the middle of the road and as the late Baroness Thatcher said: Standing in the middle of the road is very dangerous; you get knocked down by the traffic from both sides.

 

Strategy:

 

This trend is not new, but its entering a dangerous phase as its moving into negative  - the immediate conclusion on investment remains the same:

 

#1: Asia needs to rebalance and invest in "better" quality

#2: Growth will be lower for longer than market and consensus dictates.

#3; Being long fixed income remain my asset of choice in 2014, as I expect it to be the only asset class up on the full year.

 

Safe travels,

 

Steen

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

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