Financial news from CNBC and Fox Business focuses investors on the micro picture while overlooking the macro picture. When I started investing in the early 1970’s as a graduate student the world looked quite linear. It seemed reasonable to look at a 30-year investment horizon. Banks, insurance companies and governments assumed they could either loan or borrow money with a 30 year investment horizon. Conversely, employees could look forward to 30 year careers and generous pensions from the iconic companies of the time: GM, AT&T, Sears and others. What changed?
The Financial World Becomes Non-Linear
There is no longer a linear 30 year path for either investors or employees. Look back to the early 80’s and the Route 128 research highway around Boston. Revolutionary companies were spawned at the time that threatened the old IBM order: Prime Computer, Digital Equipment, Wang, Data General, Bowmar and others. Where are these companies today? Either out of business or subsidiaries of giant technology conglomerates. Even outside the technology arena, look at traditional manufacturing companies that previously dominated the economic landscape: GM, Chrysler, Bethlehem Steel, and National Steel, to name a few. Where are they now? Bankrupt! My own career exceeded 30 years with a Fortune 25 company. My former company has laid off employees each and every year since 1981 and has frozen its traditional defined benefit pension plan.
Oh To Be A Long Term Investor in Early Twentieth Century!
If we go back to the early twentieth century, an investment banker surveying the financial landscape would feel pretty confident about loaning money for 30 years to a large American company. For example, a US Steel or General Motors had formidable barriers to competition: large plants with sophisticated machinery needing large numbers of workers, plentiful and cheap local natural resources such as oil, iron ore and coal, two oceans as barriers to imports, proprietary technology and the ability to attract capital. Lending for 30 years in a burgeoning American consumer market was like shooting fish in a barrel.
The Investment Landscape Today
A 2009 investment banker surveys an entirely different scene. Technology and freely available capital have democratized business formation. Anyone with an idea can go into business. Until the current recession business seed money gushed from pension funds and venture capitalists. Technology has made it easier to establish a virtual company. You no longer need large plants with heavy machinery and thousands of employees to produce goods. Regulatory barriers have been reduced so anyone with capital and some ingenuity can start a telephone company, bank or airline. But the inverse side of this phenomenon is that businesses and careers are unlikely to be around for 30 years. Technology has the capability to destroy companies as well and at the speed of light. see Why All Irrational Structures Fail? Would you want to lend money to Dell or Cisco over a 30 year period and bet they will be the survivors?
Implications
To those who started investing more than 30 years ago the implications of the new landscape are pretty radical:
- investors should invest in equity rather than debt and expect higher returns over a shorter period of time
- debt of any duration should carry a higher risk premium than is now being accorded in the credit markets
- pension funds and insurance companies that have written annuities are going to have a hard time matching long lived liabilities with suitably safe and predictable long term investment vehicles
- concomitantly shortfalls in pension plans will be a drag on corporations and governments
- employees can no longer count on 30 year careers and a guaranteed pension at the end
- employees will have to save more for their own retirement and reduce consumption
- the government is being unrealistic in thinking that there will be a recall of large numbers of workers to their jobs as employers have learned to substitute technological capital for labor.
In short, all of our time horizons have become much shorter and the expendable factor in all of this is human labor.
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Tags: Bowmar, CNBC, Data General, Fox Business, GM US Steel, pension plans, Prime Computer, Route 128
