What does the Great Stagnation hypothesis mean for investment strategies?
Tyler Cowen proposes that there's been a level of technological stagnation for the last several decades that is likely to continue at least for the next decade. If true, what does this prediction do to the standard investment advice of "diversified index funds"?
2 Answers
There is a reasonable probability of an extended period of stagnant economic growth, as measured by some of the important indicators Tyler Cowen mentions in his book, including flat-lining average wages for most demographic sectors, the relatively low job-creation nature of many advanced technology sectors, and the deer-in-the-headlights character of our policymaking bodies when confronted with finding solutions to the challenges. That said, I am somewhat wary of the notion that “all the low-hanging fruit has been picked” and that this necessarily bodes ill for many decades to come. One calls to mind Thomas Malthus’s predictions of a world famine that never came to pass – his calculations were accurate based on past precedent, but failed to account for future, as-yet unseen leaps forward. There are many variables at play in a very interconnected world. I believe that the best way to be positioned for whatever is to come is to be broadly exposed to the preponderance of global wealth, which would mean both equities and fixed income instruments encompassing mature, developed markets as well as growth engines (such as China and Brazil) and frontier markets. Diversified index funds, as part of a broad based asset allocation that take these evolving variables into account, should continue to be able to generate positive real returns at different points along an efficient frontier.
