Where Are We Headed?

October 5, 2020

I recently had the pleasure of introducing two significant individuals in the world of finance at the Society of International Business Fellows’ (SIBF) first Virtual Annual Summit: Mohamed El-Erian, https://en.wikipedia.org/wiki/Mohamed_A._El-Erian and Dennis Lockhart https://en.wikipedia.org/wiki/Dennis_P._Lockhart . Before I share some of their comments I should caution you with the old joke about economists. There are only two types: those that don’t know, and those that don’t know that they don’t know.

They do not see us going back to where we were, either financially or economically. The recovery will likely be neither v-shaped, nor u-shaped, but like a square root sign with extended low or slow growth. They also expect interest rates to remain low for a long time. The implications for the bond market as well as the stock market are of course significant, and returns are likely to be underwhelming.

Low interest rates will have a significant impact on estate planning strategies, including sales of assets to grantor trusts for future generations. The Applicable Federal Rate (AFR) for a loan of less than 3 years is 0.14%, and for 3 to 9 years it is currently 0.38%! These are historically low rates.

They also spoke of a “K” shaped recovery in which the wealthy will get wealthier, and the poor, poorer. Neither felt it was healthy for society to have such a vacuum building in the middle class. The best way out of the huge debt that overhangs the US is through economic growth. Optimistically, Mohamed El-Erian feels that the US economy is only in the third of five gears! He even felt there may be a silver lining in all this and that we could land up in an even better place, with a heightened awareness of “tail events” such as climate change, collaboration of scientists in solving problems, and advances in data collection.

We are seeing the re-wiring of supply chains brought about by the need to ensure that events like the current pandemic do not jeopardize “just in time” deliveries. In the near term, this may lead to higher prices, but they do not see inflation as a threat at present.

In summary, three things will be critical to survival in the new world: Resilience: being able to take a hit and get back up; Agility: acting quickly and with flexibility; and Optionality: having the means and ability to change your mind if you are wrong.

The final thought we were left with is that the enormous advances in the digital world leave us on the “second half of the chess board.” What does that mean? The metaphor comes from the story of the sage who was asked by an Emperor in India to name his prize for winning a game of chess. The sage asked only for rice in a quantity calculated by placing a grain of rice on the first square of the chess board, two grains on the next, and then doubled on every square. The Emperor granted the wish, only to find that by the fifth row he owed the sage all the rice in India, and by the seventh row all the rice in the world!

Fasten your seat belts and prepare to be resilient, agile and keep your options open.

Nick Hoffman