The year since the advent of the covid pandemic has been unprecedented — to such an extent that the word “unprecedented” has become a cliché. Some readers may remember Alvin Toffler’s 1970 book Future Shock, which diagnosed the cultural disorientation that he identified and predicted would be a side-effect of accelerating change and the transition from an industrial to a “super-industrial” society. Today, we would instead say the transition from the earlier industrial revolutions (steam, mass production, and electricity) to the later ones (digitization, automation, networking, and artificial intelligence). In any case, his point was prophetic and highly relevant to investors: change is not merely accelerating — the pace of that change is itself accelerating, and that has far-reaching effects on market psychology and behavior.
Because this is an investment-oriented letter, we mention market psychology and behavior, yet the changes taking place certainly transcend investing, as we will discuss.
The half-century since Future Shock’s publication has sustained the thesis. As global macro investors, we predicate much of our work on awareness of changing global social, economic, financial, and technological change. The pace of that change has certainly been accelerating. Being in the midst of it, we may not notice it easily. But certainly the birth of the internet, 9/11, the launch of the smartphone, social media (and the ubiquity of instantaneously shared information, whether true, false, or somewhere in between), the Great Financial Crisis are a few inflection points that have dramatically accelerated the pace of change in many domains. To those, we can now add the 2020 pandemic in terms of the disease itself, the policy response, and the social reaction. The depth and speed of the changes inaugurated by the pandemic are extraordinary. However, as dramatic as they seem, they are really only the amplification of other “unthinkable” novelties that have become realities over the past 20 years.
Hence the title above. “The Great Reset” has become a shorthand for the “new normal” allegedly ushered in by the pandemic. For some, such as World Economic Forum (WEF) founder Klaus Schwab, “Great Reset” is viewed as a positive. To the leaders of the WEF, the International Monetary Fund, various high-level non-governmental organizations, and other Davos votaries, this “Great Reset” is a shock that offers the opportunity to redesign global capitalism in a more “humane” direction. The WEF launched its “Great Reset” initiative last year, saying:
The Covid-19 crisis, and the political, economic and social disruptions it has caused, is fundamentally changing the traditional context for decision-making. The inconsistencies, inadequacies and contradictions of multiple systems –from health and financial to energy and education – are more exposed than ever amidst a global context of concern for lives, livelihoods and the planet. Leaders find themselves at a historic crossroads, managing short-term pressures against medium- and long-term uncertainties. As we enter a unique window of opportunity to shape the recovery, this initiative will offer insights to help inform all those determining the future state of global relations, the direction of national economies, the priorities of societies, the nature of business models and the management of a global commons. Drawing from the vision and vast expertise of the leaders engaged across the Forum’s communities, the Great Reset initiative has a set of dimensions to build a new social contract that honours the dignity of every human being.
However, to others, the “Great Reset” has less rosy implications. To some, the WEF and its annual Davos confab are posh junkets that flatter the conceits of well-heeled and fur-clad elites, while reliably getting almost everything wrong about the titanic forces of change that have shaped the world since Davos’ 1971 inauguration. These naysayers paint the supposedly humanitarian “Great Reset” agenda as a mask for the elite’s program of central control and the erosion of personal liberty and national sovereignty.
The term “the Great Reset” has been referred to among other skeptics. Since the 1970s, for example, it has referred, sometimes positively and sometimes negatively, to the end of the U.S. dollar’s global dominance, or the end of the currently existing global financial system. Depending on the skeptic’s orientation, that could mean either the restoration of a gold standard, or the imposition of a new and inescapable global fiat currency. We’ll discuss the role of gold and cryptocurrencies, and the prospect of dramatic changes in the global monetary system, in future letters.
The confluence of the Davos “Great Reset” and the conspiracy-oriented “Great Reset” has produced a whole literature in 2020 and 2021, focused mostly on prognostications of imminent catastrophe, whether environmental, economic, financial, or social.
To us, all these trends are just manifestations of what Toffler predicted in 1970: as the pace of change accelerates, people suffer “future shock,” lose the ability to think coherently, and retreat into various forms of fear and wishful thinking. Both the mandarin elites of Davos and the prophets of imminent financial doom, we believe, fall into this category.
The reality is that the Great Reset is already here, already happening, already underway, and just needs to be identified, diagnosed, and responded to.
When we refer to the Great Reset, we mean neither the catastrophic end of the existing global financial system feared and hoped for by some precious metals enthusiasts, nor the dark vision of global elite conspiracy seen by some contrarian soothsayers. We mean what Toffler observed fifty years ago: change is accelerating; the pace of that change is itself accelerating as well; and the result is dislocation, disorientation, and the ongoing arrival of previously “unthinkable” things. For investors, this is not a reality necessarily to be abhorred, or happily welcomed, but simply recognized and adapted to. When others are wrongfooted and disoriented, that gives an edge to investors who approach the future with open eyes, and open mind, and the ability to keep their heads. More significant and uncomfortable changes are on the horizon, and our message to investors is that it is not the time to “put it all in index funds” with a static asset allocation, and go golfing… nor is it the time to panic.
To illustrate why we say the Great Reset is here, look at some of the “unthinkables” that we have seen these past decades — and in some cases that we’ve become accustomed to:
- A decentralized virtual currency, whose computer network consumes more power than a midsized country, has seized the imagination of investors and speculators and is upstaging gold as a store of value or a hedge against central government profligacy.
- An army of retail options traders using gamified trading apps have the ability to destabilize the U.S. stock market, and the market’s response is to create an ETF following their obsessions.
- Direct transfer payments to citizens (i.e., “helicopter money”) went from the outlandish proposal of a fringe Democratic candidate (Andrew Yang) to enacted bipartisan policy in less than a year…
- …so much so that in January 2021, some data suggest that 27% of U.S. household income came from government transfer payments.
- “Blank check” special purpose acquisition companies (SPACs) accounted for a significant share of 2020 new equity issuance… demonstrating the depth of the flood of liquidity created by central banks.
- Negative interest rates have become widespread … and accepted. In Europe, some banks have been telling would-be depositors to take their money elsewhere. Investors in some countries have to pay for the “privilege” to lend money to governments.
- The global economy was shut down, to varying degrees, and worldwide citizens endured lockdowns and stay-at-home orders to combat the spread of a novel virus that turned out to have a 99.7% survival rate among the population as a whole.
- “Quantitative easing” entered the normal toolkit of respectable developed-world central banks, having previously been viewed as a policy tool for dissolute and financially irresponsible regimes.
- The Federal Reserve and Treasury Department stepped in to backstop the corporate credit market without any authorizing action taken by, or needed from, the legislative branch of the U.S. government.
- Congress (including conservatives and liberals) have embraced passing several multi-trillion dollar fiscal packages with little to no discussion of the long-term consequences of the accumulation of debt.
- Major segments of the global workforce transitioned to at-home work, kicking off a major migration, and possible permanently changing how billions of people work and live.
- Most non-urgent medical care moved from in-person to virtual delivery.
- Wealth confiscation taxes moved from a fringe position to serious discussion in the United States.
- Several major U.S. municipal jurisdictions declined to enforce laws against petty theft, looting, and arson; various authorities have excused and justified the behavior of violent armed mobs.
- Views concerning traditional marriage have moved from a majority opinion to a position that attracts public opprobrium.
- Elementary school curricula became unrecognizable to many parents.
- Airline travel now involves dramatically more intrusive screening than pre-9/11 travelers remember.
- Leaks revealed the ongoing mass surveillance of U.S. citizens by intelligence agencies of their own governments.
- A long-term Democratic Party supporting celebrity was elected President of the United States by a mass movement of populist Republicans.
Many of these changes are simply generational cultural shifts on steroids, making their way as well through the political and economic spheres. This has much to do with cultural sensibilities, but most of the changes are also deeply related to technology. It seems highly unlikely technological innovation and society’s increased dependence on technology will reverse. Global demographic shifts are definitely not going to reverse any time soon. The mantle is passing from the large cohort known as Boomers, to an even larger segment of the population. The young generations have, to varying degrees, grown up as technological natives rather than more or less willing adopters.They may have no concept (or understanding) of why any of the things they are accustomed to were ever deemed “unthinkable.”
Investor implications: The way to navigate the ongoing and already happening Great Reset is first and foremost to buck the trend which keeps many people locked in “echo chambers.” Those echo chambers — in which people only hear ideas and opinions of a single color — tend to perpetuate an attitude of “fight or flight,” which is not conducive to seizing opportunity.
The changing mentality of investors as new tech-native generations take the reins from the Boomers is leading to a greater enthusiasm for technological change and a greater willingness to look further out for the fruits of that change to manifest. Over time, that will change how companies’ anticipated future revenues are reflected in current stock prices, and could permanently shift the calculus of value vs. growth investing and reshape the “traditional” asset-class level allocation of portfolios. Long-term changes in government fiscal behavior will contribute to this revision.
Make sure that the person managing your money — whether that’s you or an advisor — is an open-minded individual who is capable of seeing, evaluating, and responding to the accelerating pace of social, financial, and technological change. As every financial disclaimer implies, past structures and techniques of portfolio management are not a guarantee of future results.
