Changing Investor Concerns: II | Seeking Alpha

Yesterday, I wrote about changing investor concerns.

I received sufficient comments on the article in a certain way that I felt a follow-up article was necessary.

I focused on two particular points supporting the changing environment.

First, I presented the idea that the way monetary policy was conducted was going to have to change.

Particularly in the 2010s monetary policy took on the form of “quantitative easing.”

As former Fed chairman Ben Bernanke designed it, monetary policy was constructed so as to generate rising stock prices so that a wealth effect could be created, a wealth effect that would drive consumer spending.

The idea was for the Fed to get asset prices rising so that the “wealth” effect would have a foundation.

The approach was successful. Asset prices grew throughout the decade.

Quantitative easing was carried over to combat the effects of the Covid-19 pandemic. But, the quantitative easing that took place was quantitative easing on steroids. Never before had the central bank driven so much liquidity into the financial system in such a short period of time.

This approach to monetary policy fostered a change in the investment community. With asset prices continuously rising, trying to pick out specific stocks that were special and had a great chance of becoming a real performance star moved into the background.

Investing in market portfolios or index-following assets became the norm. Not only were these portfolios profitable…they rose and they rose and they rose…but they were less risky because they were constantly rising in price.

Value investing not only required more work, but it also did not provide the steady returns. So, more and more money went into funds that traced the market.

Second, this “fund” investing became worldwide as “globalization” fostered cross-border success. The whole world was experiencing asset price inflation.

Notice I did not say consumer price inflation.

Consumer price inflation was not a factor of any importance. For the decade as a whole, consumer price inflation came in at a compound rate of increase at approximately 2.3 percent.

People were not completely happy that the economy grew during the decade in the same range. It was the lowest in the post-World War II period for any recovery.

But, they learned to live with this, given all the money that was being made in the investment in rising asset prices. The U.S. economy showed a substantial rise in the wealth/income distribution during the decade. The rich got richer.

And, companies changed their mode of operations during this time period. Many more companies, especially big ones, spent more of their funds on stock buybacks and increasing dividend rates during this particular time period.

These, obviously, helped them to raise the price of their stock.

Things Have Changed

Recently, I heard a comment that one of the major reasons that the economy was able to maintain itself in the face of all the economic and political turmoil going on was that people were focusing more and more on “making products for the future.”

That is, the focus of many U.S. leaders, political and otherwise, was not on aggregate or macroeconomic performance.

The focus was on sectors and innovation in those sectors.

The aggregate economic performance was not the statistic that was filling in the future. Creation was the important factor. Supporting discovery and transition was the driving force.

A place where one can see this focus as real and successful is the work of Steven Pinker, especially his book “Enlightenment Now.”

Mr. Pinker never talks about aggregate performance. Mr. Pinker focuses on the process of discovery and advancement. He focuses upon how the future is created.

The largest part of his book is the fifteen chapters where he discusses “progress.”

The “progress” he talks about is in specific areas of advancement like “life,” “health,” “sustenance,” “wealth,” “the environment,” “peace,” “safety,” “knowledge,” and “quality of life.”

He expounds on how progress has been made in all these different areas, and the successes far overshadow anything that might have been accomplished in aggregate economic growth.

The emphasis is on “making products for the future.”

If some politicians are focusing on this, then many of the efforts to stimulate macroeconomic growth pale in terms of performance.

And, this is a part of the changes taking place.

So much is happening, outside of the view of aggregate economic discussions. The suggestion is that more attention needs to be paid to generating these changes rather than achieving another 0.1 percent rise in real GDP next year.

No, To Quantitative Easing

Quantitative easing does not foster the kinds of microeconomic results mentioned above.

Quantitative easing creates disequilibrium situations in the economy, but ones that are not productive to the “progress” that Mr. Pinker is talking about.

Quantitative easing produces disequilibrium situations in debt markets, in the offering of stock buybacks, the focus on “financial engineering” rather than on productive efforts, and more “macro” economic issues.

To me, the world has changed from one that will focus less on rising asset prices to one that will put fuller attention on building the “next generation” of the world.

Quantitative easing directs corporate leaders away from this focus on building the future to one that is very current-orientated, like buying back one’s stock.

The Federal Reserve must realize that it is not the “show” and create a world in which “Enlightenment Now” can take over and prosper.

The world has changed.

Globalization

Globalization must also prosper, although the concept of information that people think about may be different than the one that builds and grows.

Information is growing and spreading.

Information growth and spread are the essences of globalization.

Most people think about globalization as dealing with people working with other people, people importing and exporting products and services, and people cooperating with one another.

This may be one aspect of globalization, but it is the only part that can hinder or accelerate the actual spread and growth of information.

History shows us very clearly that the growth and spread of information cannot be stopped. It can be slowed down, here or there, but stopped…never.

And, this is what is happening today, as, on the surface, many parts of the world seem to be growing farther apart from one another on various things.

This is what many analysts talk about when they argue that globalization is declining.

Today, the growth and spread of information throughout the world have never been greater.

This is what is driving the world. The surface disruptions cover up this performance.

And, this is what the future will be like. Information growth and spread as you have never seen before.

Conclusion

My argument: the Federal Reserve is going to have to become less “quantitative” than it has been, either in terms of easing or tightening, and must focus on creating more disturbances than it resolves.

The Federal Reserve needs to act in a way that no one talks about it. That is certainly not the position the Fed is in right now.

Second, investors must focus on the real source of globalization and pay attention to all of the innovation and change that is taking place almost everywhere.

The focus must be on “making products for the future” and this depends upon the greater globalization of the growth and spread of information.

These two factors should dominate investors’ changing concerns.