Welcome to the new world order

Back from the Cabal

Photo by Evangeline Shaw on Unsplash

Hello,

Welcome to Known Unknowns, a newsletter that will tell you all the secrets from the cabal of world leaders who consumed nothing but regret for what could have been, canapés, and fine red wine for a week.

Davos, Man

I am just back from my third trip to the inner sanctum at the World Economic Forum. The vibe shift is real. Last year, it was edgy when someone pointed out left-wing hypocrisies or announced that soon we’d all be out of power—and I did hear those things—which was notable. This year, these views felt more mainstream.

I suppose it is in part because the old way went a little far, and eventually, we course-correct. But mainly, I’d say it was the realization that Trump is now the leader of the free world, and lots of people are OK or even excited about it. This term is different. In 2016, it felt like an aberration—fluky election results happen. Trump seemed erratic and unserious. Now, in retrospect, it turns out he had a more strongly developed worldview than many realized, and a (slim) majority of Americans want it. We are clearly in a new era. I said in an interview there that his second election marks the end of the post-war era. That may have been a tad dramatic (I was on three hours of sleep, and it was the end of the week), but you did feel that there. A Bloomberg anchor asked me what was the global leaders' reaction to Trump. I told her, “The Europeans are horrified, and everyone else is excited.”

As I thought about it, Trump is important but not the biggest of Europeans’ worries. I wrote for Bloomberg before I left about the difference between the German and American economies. America has its problems, especially with unsustainable debt, but it is better to have a debt problem than a growth problem. Growth problems are much more difficult to solve, and Germany’s (and most of Europe’s) growth problem is bigger than truly excessive regulations. The regulations are merely a reflection of their intense risk aversion, which is not at all conducive to growth. You just can’t grow if you don’t innovate, invest, and start new businesses. All those things take an appetite for risk and a regulatory structure that supports risk-taking. Europeans regulate because they don’t like big and unpredictable changes—reducing growth is the point. And for all their talk about deregulation, I did not get a sense they really want to live with what that will mean. Europe can’t be a dynamic place for growth until it takes on a big mental reset.

I kept hearing European policymakers lament, “I guess we have to solve our own problems now.” And that is notable. In some ways, it really is the end of the world order we’ve known. And there were many good things about the system that delivered peace and prosperity for decades. But we may need a bit of a reboot. After all, the old order was created for the Cold War, and we are in a different world now.

While in Davos, I discussed what to expect from the Trump administration, the future of retirement, and was on a panel moderated by David Rubenstein on financial fragmentation and the global economy.

Overall, what you heard was true: Americans were super upbeat; Europeans were depressed. And maybe that’s an ominous sign for the Americans after all.

It Bears Repeating

Private assets don’t belong in 401(k)s. Seriously. I thought everyone agreed after the 1929 stock market crash that retail investors should only have access to securities that are regulated and transparent. Regulation is not all bad.

And yet, the private equity market is lobbying to be included in 401(k)s. I don’t see how this ends well. The argument is private assets pay a premium because they are illiquid, ergo if you are saving for retirement, you should get a piece of that. But illiquidity is not the only risk here. Market pricing is not perfect, but it keeps your investments sort of honest. Sure, maybe the accredited investor thing should be rebooted too. It feels unfair that only rich people have access to certain assets. But the way to rethink accreditation is not to start with putting the least sophisticated investors in illiquid, lightly regulated, and opaque assets.

Besides, I don’t understand why the industry wants any part of the 401(k) market, given that it will invite so much regulatory scrutiny. I suppose they just want more assets, but that probably means 401(k) investors will just end up with lower-quality funds.

Who knows if they’ll be successful in their lobbying efforts? Last week, many people kept saying every country needs a bigger private asset market because it is associated with big tech and innovation. I am old school. I think you need decades of data and market conditions to make such an inference. It’s like saying crypto should be mainstreamed because its price is up in the last 15 years. Maybe the private guys will be successful then. The new administration is embracing crypto, so why not push another asset with some dubious qualities on the poorest and least sophisticated savers?

I reckon all of it—private assets for retail investors and the mainstreaming of crypto—will all sound crazy in 10 years. Like the lady I met in Davos who told me she invests in crypto because she is an “emotional investor.”

In other news, I went on the wonderful Mike Pesca podcast, The Gist, talked about more economic outlook stuff, and he is just delightful.

Until next time, Pension Geeks!

Allison