Will We Ever See Capital Scarcity Again?

[Nomad]

TL;DR: Demographics may have contributed to current decade developed market tailwinds in the form of cheap capital. Central bank intervention, globalization, and the lowered capital intensivity of business could turn out to be secular trends. Will we ever see prolonged periods of capital scarcity again, and if not, does capital oversupply mean lower returns on equity going forward?

 

I was recently reading Peter Zeihan's book, The Accidental Supowerpower. Zeihan is known as being somewhat of a snake oil salesman in geopolitics, and his book makes a number of bold claims about the economic and political futures of various countries. Among these, however, Zeihan makes one contrarian argument that I believe warrants further discussion.

 

Zeihan contends that developed world financial markets have benefited from capital inflows due to demographic factors. In particular, he argues that the Boomer generation represents an "unprecedented" bulge in the working age population that has provided tailwinds to developed countries in the form of low-cost capital for investment. Fast forward to 2020, and the youngest Boomers are now 55 and looking at retirement, if they haven't retired already. Following the Boomers is a small generation (X), a broke generation (Millennials), and a generation that has not yet entered the workforce in appreciable numbers (Z). Zeihan claims that the tailwinds in financial markets are about to subside and that capital scarcity will become the norm for many years as the Boomers withdraw their savings from investments to fund late-life consumption needs.

 

I find Zeihan's argument difficult to accept, for a couple of reasons. First, he seems to completely ignore the huge, coordinated interventions by the world's central banks since the financial crisis to provide cheap capital to the system. There appears to be no posture too dovish and no money-printing scheme too untouchable for the major central banks, and that's when they don't decide to just buy equities and corporate bonds outright. Next, although Zeihan touches on globalization, he doesn't appear to give enough weight to the capital surpluses being produced in many populous, fast-growing emerging markets. A large part of this capital surplus from the developing world has diffused to the comparative safe harbor of developed world markets. Third, the nature of business has shifted to favor companies with largely intangible assets, and these companies can generate enormous amounts of surplus capital. Finally, it seems to me that Zeihan misses the big picture: In a world where communism is no longer a viable alternative and most countries have adopted market systems, we should expect the overall amount of capital generated by the system to increase as countries get richer and more productive in the aggregate.

 

This has implications for investing: If we never again see prolonged periods of capital scarcity, then doesn't it stand to reason that returns on equity should dramatically and permanently decrease due to capital oversupply?

 

Very curious to hear your thoughts.

[scorpioncapital]

", a broke generation (Millennials), a" - and what do broke people do in Socialist countries? - steal your stuff! Expect taxes to rise dramatically.

 

[Spekulatius]

", a broke generation (Millennials), a" - and what do broke people do in Socialist countries? - steal your stuff! Expect taxes to rise dramatically.

 

I guess no one here remembers the late 60‘s Hippie generation. The Hippies were far more radical and socialist than the Millenials are now and look at where we are.

[DooDiligence]

", a broke generation (Millennials), a" - and what do broke people do in Socialist countries? - steal your stuff! Expect taxes to rise dramatically.

 

I guess no one here remembers the late 60‘s Hippie generation. The Hippies were far more radical and socialist than the Millenials are now and look at where we are.

 

Someones always trying to take my stuff.

[rkbabang]

", a broke generation (Millennials), a" - and what do broke people do in Socialist countries? - steal your stuff! Expect taxes to rise dramatically.

 

I guess no one here remembers the late 60‘s Hippie generation. The Hippies were far more radical and socialist than the Millenials are now and look at where we are.

 

Someones always trying to take my stuff.

 

"All Complex Ecosystems Have Parasites" --Cory Doctorow

[Gregmal]

", a broke generation (Millennials), a" - and what do broke people do in Socialist countries? - steal your stuff! Expect taxes to rise dramatically.

 

I guess no one here remembers the late 60‘s Hippie generation. The Hippies were far more radical and socialist than the Millenials are now and look at where we are.

 

Its funny but this is so true. On of my ex gf's father was a self proclaimed hippy. Really cool dude. Still smoked pot every Friday night and weekend, drank his Pinot Noir daily, listened to Eric Clapton and all that. Had all sorts of war stories from his days as a hippie. During the day he was an executive at a major insurance company with a nice big corner office on Lexington Ave....

[Nomad]

and what do broke people do in Socialist countries? - steal your stuff! Expect taxes to rise dramatically.

 

The tax discussion is very interesting to me, because assuming that one rejects the MMT hypothesis that debt-to-GDP ratios don't matter, tax increases are one of the only ways for the developed world economies to get their fiscal houses in order. The other options appear to be default (for countries excluding the US, which owns the reserve currency) and financial repression.

 

Of those three, it seems like the most politically feasible option is a redux of the financial repression tactics used post-WWII. However, unlike the last time around, GDP growth and productivity growth have both been anemic in most of the OECD countries since 2008. To me, it seems like the big risk is high inflation without commensurate GDP and productivity growth, leading to long-term pain for asset owners.

 

With financial repression, it seems like we're back to square one - too much capital chasing too few productive assets, leading to lower prospective returns going forward. It's hard to see how tax increases or defaults wouldn't also do the same thing by different methods.

[Guest cherzeca]

"Zeihan claims that the tailwinds in financial markets are about to subside and that capital scarcity will become the norm for many years as the Boomers withdraw their savings from investments to fund late-life consumption needs. "

 

I go the other way on this. while I agree that we shall see increases in consumption as the boomers pass through retirement, this should accelerate economic expansion, which will bring with it wealth creation (to supply the consumption expansion) and in turn capital creation.