Economists Gone Wild: The World Economic Forum In Davos

What Is The Davos World Economic Forum?

No event in contemporary culture fuels internet conspiracy theories like the World Economic Forum–held each winter in Davos, Switzerland. Davos is attended by a bit less than 3,000 guests, including business leaders, politicians, and top journalists. In contrast to the laid-back, nerdy image of the Fed’s summer Jackson Hole Economic Symposium, the cast of characters is different here. Stories from Davos evoke pure decadence– caviar & champagne parties hosted by celebrities and billionaires, legal prostitution, and big-time political meetings. If this sounds surreal for a forum based on economic policy, it’s because it is.

The World Economic Forum is a lightning rod for controversy and conspiracy theories, famously for a 2030 prediction that “you will own nothing and be happy,” as well as a strange-sounding proposal about replacing meat with insect protein. As a former economics major, I can tell you that in almost every case, there is a cogent economic point behind these ideas, but the delivery is off-key. Elon Musk has slammed the WEF on Twitter, calling it “ominous” and declining his invitation. But beyond the conspiracy theories, there is a lot of truth to what’s being discussed at the WEF, and understanding the key ideas and questions can give you years of head-start to understanding where the world is headed.

What’s The Agenda of The Davos World Economic Forum?

This year’s theme is “cooperation in a fragmented world,” while the unofficial opening theme is “master the future.”

The overwhelming majority of society is blissfully unaware of the debt, demographic, and geopolitical issues rolling down the tracks, but Davos attendees are keenly aware of them, making the event a must-watch for investors. Those attending know the status quo is not in any way sustainable, and it’s a matter of time before the party stops. Conservatives will tell you that crippling debt and government deficits are plundering the wealth of America and other Western democracies, while liberals will tell you that pollution and overpopulation will cause big problems for the planet. These arguments are merely two sides of the same coin.

Of course, there’s some hypocrisy here. Many WEF attendees are flying in private jets while preaching about climate change. But at the same time, they’re right that securing cheap, sustainable sources of energy could potentially remake the US and European economies to be fundamentally more prosperous and sustainable. There is actually a huge potential to use information tech and energy tech to improve living standards.

This could be an economic opportunity disguised as a threat! The average American who commutes now spends about $6,500 per year on commuting to and from work (assuming the IRS standard mileage estimate and an average roundtrip commute of ~40 miles. For a married couple who both work, you can double this to about $13,000 per year. That’s nearly 20% of the median income in the US. Imagine being able to cut this expense in half– it would boost living standards more than any government welfare program ever could.

Every situation is different, but this disproportionately affects the working poor, while much of the money spent on fuel goes overseas to unfriendly countries. It also makes life hard for employers, because if employees are rational they won’t accept jobs that are too far from home. This is the most low-hanging fruit in the global economy to boost living standards.

• Can we cut mileage costs in half by 2030 with better technology (i.e. electric cars or plug-in hybrids?)
• Can we use the internet to eliminate commutes for those who don’t need them and split the surplus between employers and employees?

The answer is likely yes to both, and is broadly supportive of the idea that US (VTI) and developed market (VEA) stock indices can continue to have positive (if modest) returns going forward. These are all intermediate-term issues, but we’re also going to have to deal with longer-term issues around sustainability. The lion’s share of the debate around this revolves around carbon emissions in the US, but there’s a much broader problem with pollution and resource depletion. The global issues range from overfishing to plastic pollution to slash-and-burn agriculture to horrifying levels of third-world air pollution.

The other issue at stake when we try to think about “mastering the future” is government deficits. Simply put, you can’t permanently increase debt to GDP without either massive inflation or default. At some point, either taxes need to come up or spending needs to come down. Politicians have made huge promises to voters without having the tax money to pay for it. US taxes will need to be raised over the next 5 years to fund our pandemic-spending “adventures”, and we’re likely to see an increase in the Social Security age as well. The bond market is likely to revolt at some point against massive deficits, which may force Congress’s hand in raising taxes. Europe is further along than America demographically, and we get a glimpse of our future challenges with French President Emmanuel Macron’s valiant but deeply unpopular effort to fix France’s broken pension system that devours 14% of the entire French economy.

How Will Governments Deal With The Cost of Living Crisis & Inflation?

The coronavirus pandemic gave policymakers free hand to do some really experimental stuff, economically speaking. There were some early successes in averting a deep recession from the pandemic, but the fiscal and monetary policies from 2021 on have been failures for the middle class in the US, UK, EU, and Japan. Global policymakers theoretically thought they could increase the money supply at will and it wouldn’t cause any problems, but when they actually printed a bunch of money in practice they caused the worst inflation in 50 years. These policies are failures. Despite rising GDP on the coattails of a few people who are doing exceedingly well, middle-class incomes are falling in real terms, while savings are down. This signals future trouble for stocks.

For the US, here’s an example. GDP went from about $21.7 trillion annually to $25.7 trillion, increasing by 28%.

But the real GDP numbers show most of this was inflation and not a real improvement in the standard of living or supply of goods and services. In the aggregate, on average we’re still slightly better off than before the pandemic, but the typical worker is no better off. We redistributed about 3x as much wealth as we created in terms of GDP, and we may come out behind in the end, as evidenced by inflation-adjusted weekly earnings for workers.

This inevitably leads to deadweight losses in the economy that increase with the amount of inflation you allow. Moreover, these kinds of crazy policy gambits have historically led to asset bubbles and crashes in the end, for example, if we take out debt to build a bunch of condo towers in the desert that no one lives in, it counts towards GDP, but it’s clearly a waste of resources. This is currently crushing China because they have a more active role in the economy but are often investing unproductively. Redistributing trillions of dollars in wealth via money printing had predictably negative consequences, such as a booming gap between the rich and middle class, a drop in labor force participation, and an unprecedented increase in violent crime in cities.

In the end, these policies are failures and the damage likely has yet to fully show itself (consumers are now spending down savings to make ends meet). To stabilize prices, global central banks have rapidly hiked interest rates, and I don’t think they’ll ever be able to pull off a zero-rate policy again after breaking the trust of the markets and of creditors. To the extent that we’ve massively misallocated resources during the years of zero rates, this means we’re going to have a recession, followed by a recovery driven by long-term, incremental improvements in technology.

The bill is about to come due for the free money pandemic years. When the stimulus money fully runs out, we’re going to have a recession, and the Fed won’t be able to pivot its way out of it. In the long run, however, if we can “master the future,” living standards can continue to increase. Despite being the weirdest conference in contemporary history, the hearts of the Davos attendees do seem to be in the right place, and while their ideas are scary and sometimes crazy, they’re much better informed about the future than the average person.

Davos Key Takeaways: What The WEF Conference Means For Stocks In The Long Run

• Davos is fascinating to watch, but it isn’t going to have a big impact on the short-term direction of the financial markets.
• However, the various topics of the conference confirm that the world faces serious problems with debt, demographics, and the sustainability of resources. If you’re paying 4000 points for the S&P 500 index (SPY) right now, you’re not getting enough compensation for these, and you could see some serious write-downs of your investment in the next couple of years when the rest of the world catches on.
• To this point, there is no easy fix for the current cost-of-living crisis fueled by previous money printing. Increased government borrowing and inflation are going to put a lot of upward pressure on bond yields, which will be a long-term problem for valuations in speculative areas of the markets, as well as housing. This means long-term Treasuries (TLT) are still in some trouble as real yields continue to rise.
• There is no way to win from governments overspending on entitlements (unless they’re spending it on you!), but companies involved in sustainable energy are going to be a huge driver of stock market returns over the coming years. You have to pay attention to valuations if you’re buying this, but I’ve covered the Solar Energy ETF (TAN) as a potential winner from changing government policy.
• The simplest Davos-related plan for investors? At the risk of sounding like a broken record, I believe your best bet is to keep some powder dry to let the inevitable inflation-hangover bear market play out over the next 12 months and then invest heavily in broad-market index funds when stock prices are 20-30% lower. Eventually, advances in technology should carry the markets to positive returns. Gold (GLD) and Bitcoin (BTC-USD) are always options as well. And as always, this shouldn’t dissuade you from investing in the stocks of businesses you like at reasonable valuations.