Just over 10 years after the global financial crisis the global economy has still not reached escape velocity, with the 10 year US treasury still hovering around 2.5%. This has been unlike typical cyclical downturns which were nudged into positive territory by fiscal and monetary actions but which has seen the need for novel actions such as quantitative easing. He said that the Federal Reserve’s dramatic recent pause on both rate hikes and balance sheet reduction was a ‘hammer on the pause button – an admission of defeat’.
He characterused the post GFC period as featuring ‘Five Great Disruptions’ - disruptions that were ‘crystallised or triggered at that time and which continue to affect all of us’. ‘The first I would characterise as the Great Deflation. And by that I mean the disruption caused by a low growth and low return environment.’
‘It is fueled by aging work forces, widespread over capacity, weak global demand, excessive global savings and weak productivity growth amid one of the slowest and longest recoveries in history.
The Second Great Disruption has been the dramatic deleveraging and derisking of the banking system. One of the great lessons from the GFC he said, was about systemic risk and the role a single player or a single institution could play in concentrating risk and potentially collapsing the system as a result of its failure.
The good news, he said, is that I don’t think that’s the risk going forward.
‘Risk hasn’t necessarily disappeared, risk seldom disappears, it is moved around, largely through the asset management industry’. So rather than credit risk concentrated in a few banks it’s now dispersed to thousands of risk consumers, basically investors rather than banks. One sign of that he said is the dramatic growth in fixed income being found in bonds and ETFs since the great financial crisis. ‘We don’t know whether systemic risk has been decreased or whether it’s just different – risk is dispersed and I’d be the first to say that”.
His third is the ‘Great Cost Disruptor’. Investors post GFC finally woke up to the reality of the cost of investment, stimulating a feeling that enhancement of return was the only way by lowering your cost. This revelation has been accelerated by the lower for longer environment and downward pressures on fees. That has occurred against a background of costs going up , the costs of regulation, distribution, technology, compliance costs, leading to lots of pressure on an industry, which, for most of its short life did not have such pressures previously. These factors are leading to profound changes in how people are thinking about investing, around the role of data & technology as well as how we think of our investment decisions, and, a great sign of this is the dramatic shift from active capacity.
The Fourth is about data. Since the financial crisis we have seen the rising importance of macro factors in figuring trends, and this has tended to de-emphasise the traditional role that the individual stock picker or bond picker plays.
Moreover new regulation of financial disclosure have really levelled the playing field and this has diminished the edge once possessed by the great pickers. Everybody now gets this information at the same time.. There’s vast new data generated every day – so in the battle between the person and the machine in investment – the machine is increasingly winning. We have tools we didn’t have 10 years ago to think about unstructured data, the data that doesn’t lend itself to an Excel spreadsheet.
Finally the Fifth Disruption is the shift in value drivers that determine a company’s long term performance.
We are gradually moving away from a world in which most of the company’s value is derived by tangible assets. A growing proportion of the winning companies of today are deriving their value from things of an intangible nature, intellectural property, software I.P. branding, design, drug IP. ‘This shift in what derives value in these companies coincides with the recognition, since the GFC that the liabilities of the asset owners, the institutions and people, who actually own the money, are inherently long term.’