Here's your soft landing
This is as good as it gets, even if it doesn't all make sense
Hello,
Welcome to Known Unknowns, a newsletter where markets are passive and we work until we drop.
Markets are crazy, but don’t blame me
Is this the soft landing? I suppose it may be. Inflation is still high, but not crazy high; the economy is still growing, and so are wages. Interest rates are higher than they’ve been in recent memory, but not that high in the grand scheme of things. Although I’d call the economy a little hot, we are not headed for imminent disaster. But I am not sure how well we’d weather an unexpected shock. I always thought getting to 2% inflation was a high standard for a landing. We may have just ended up in a new place called higher-rate-and-inflation-world. It’s not terrible—in some ways better, in other ways worse. But that is how the economy works. The last—low rate and inflation world—was not going to last forever anyhow.
And hey, what about that stock market? It is still up in the last few months. Up a lot. Up much more than other countries and valuations seem awfully high. I can’t explain it. Maybe AI will make everyone much more productive and the market is pricing in all those juicy profits.
But that is far from certain, and the road to our productive AI-powered world will be rocky and create some unpredictable winners and losers. One popular explanation is it’s all the passive money. Passive investors like me keep buying stocks with our 401(k)s; just based on size, that is pushing up prices. I explain in Bloomberg why that is not quite right. You can’t blame indexers; we are neutral—like Switzerland. We don’t change relative prices, and that’s what matters. Sure, I keep buying Nvidia with 5% of my money, but I am also buying 0.45% of McDonald’s.
Besides, it does not take that many active investors to keep markets efficient as long as they are smart. And there will be some smart guys buying stocks, as people are paid fees to manage money. If anything poses a threat to efficiency it’s private markets, which are not efficient at all. That’s where the talent and institutional money is going. And it may get even bigger, some countries want retail investors to get in on that action (sigh). But for now markets are still efficient because there is enough active money.
I can’t explain why stocks are so expensive. Maybe everyone just thinks the American economy is so resilient and there’s nowhere else worth investing. I am not sure if that is true. After all, there’s all the debt and some objectively bad economic policies. Though other countries seem to have even worse ideas.
Keep in mind that market efficiency does not mean prices make sense, it just shows that you can’t out guess them
The solution to all our problems
I am not done with my retirement manifesto. We also need to talk about work. Or, not retiring is the new retiring. We need to imagine a world where it is the norm, rather than the exception, to work into our 70s.
We honestly have no choice. From a macro perspective, we face rising debt and a shrinking labor force, which will reduce growth. This is a toxic combination. The obvious solution is people working longer—which means less spending and more growth. It also makes a big difference to your personal and financial health; it provides meaning and purpose, which are both important for healthy aging.
The only problem is that delaying retirement is toxically unpopular. And it is true that it is not an option for many people, even if they want to do it. Some people have physically demanding jobs and can’t work longer. But we can just redefine disability and subsidize their early retirement. Just because some people can’t work longer doesn’t mean everyone gets to retire early.
Age discrimination is another serious issue. I think eventually employers will have no choice but to get over their age issues. We can offer incentives to hire older workers and make some tweaks to Medicare and subsidies. And with more remote and gig work, work is becoming more fluid and less demanding anyhow. This is great for people who still want or need to work, but just want to do less of it. For many people 70 is the new 50, even if 80 is still 80.
Other news
I joined Zachary Karabell and Emma Varvaloucas on their excellent podcast, What Could Go Right? We discussed my second favorite topic: why we hate this supposedly great economy.
Until next time, Pension Geeks!
Allison
We are going to look back and realize immigration is a huge factor in avoiding the recession. There's a reason why outside of a few politicians in the West, all elected officials, regardless of their campaign, do not crack down on immigration once in office. Just look at Brexit and Meloni from Italy--both campaigned on lowering immigration, and now it's higher than it's ever been. The extreme example is Canada, which may have overdone it and is facing backlash from the natives. Productivity is the most important part of the economy and it's much easier to juice the economy by using poor immigrants who won't ask for benefits and raises. Note that this isn't a right-wing diatribe against immigrants, if anything, they are the Ponzi scheme victims in all this, propping up the rich Western capitalist class, in exchange for the possibility of entering the Western middle class and beyond. Since globalization is reversing, the policymakers have decided to just bring the globalization home.