Let’s Hope Cathie is Right

Last week I was privileged to be one of two keynote speakers at a financial services conference in Florida. The other speaker was Cathie Wood, CEO of ARK Invest. Cathie has become famous for investing in disruptive technology companies and for her media friendly evangelism of technologies like decentralized finance, robo-taxis and artificial intelligence. Cathie articulated a view that these emerging technologies will drive not only disinflation but outright, what she calls “Good deflation”. Additionally, Cathie said recently, “AI is going to produce the most massive productivity increase in history. The productivity gains are going to be astounding and shocking.”

The good news is that if Cathie is right, our current yawning budget deficits won’t be a problem (nor will nosebleed tech sector valuations). Remember, GDP growth is driven by two factors: workforce growth and productivity growth. We know with relative certainty that the former is going to be a growth drag. Demographics simply are what they are. Our population is aging, and the growth of the US workforce is stagnating. Additionally, the four-decade disinflationary tailwind of increased globalization has come to an end. So, if we are going to grow our way out of our debt and deficit problem, productivity is going to have to do all the heavy lifting. The problem unfortunately is that the current trend of productivity is going in the wrong direction as the chart below illustrates. Over the last four years, productivity has been running at half the long-term average and over the past one year, productivity has been negative. Technology is an important factor that impacts productivity, but there are other key and relatively unpredictable variables like the evolving composition of the workforce and level of investment.

Productivity Change in the Nonfarm Business Sector 1947-2023

If Cathie isn’t right, and real GDP growth muddles along below the projections of the CBO our feckless leaders in Washington are somehow going to have to make some very tough decisions on both spending cuts and the always popular tax hikes. The CBO forecasts a tepid 2.4% real GDP growth from 2024 to 2027 and 1.8% from 2028 to 2033 reflecting the aforementioned demographic headwinds to our economy. The former Treasury Secretary Larry Summers describes this issue as “the debt doom loop”. Below is a slide from WealthVest illustrating summers’ fear.

Debt Doom Loop

Currently, we are at about 6 O’clock on the doom loop: the Fed has raised rates considerably, so debt service costs are rising, growth is slowing and 2022 tax receipts have come in weaker leading deficit projections to rise. The question is what happens next. The chart below, from Harvard’s Jason Furman, makes clear why the current deficit outlook is so dire. The chart shows that historically, when unemployment is low deficits are low and vice versa. But our current times are an outlier and not in a good way. Unemployment is low and at risk of rising, but deficits are already high.

So, what happens in a recession? What will happen is that we will see deficits as a percentage of GDP approach the temporary pandemic era spikes. Levels where one can confidently posit that there will be upward pressure on long-term interest rates. There are economists who will make the case the 7% and 8% deficits to GDP can be consistent with a return to the low interest rates we have enjoyed over the past two decades. These are the economists who ascribe to Modern Monetary Theory (MMT) which I will over simplistically describe as: keep the monetary faucets open to ensure full employment and poverty reduction and use fiscal levers to rein in inflation and long term rates. The catch, however, is that for MMT to work, those “fiscal levers” require policy makers that are willing to raise taxes when deficits balloon and the threat of inflation arises. That brings us back to D.C. Recent experience of the debt ceiling kabuki theatre which featured both parties negotiating a resolution that will do virtually nothing to either raise revenues or seriously impact spending, leaves me dubious of intelligent compromise and any political sacrifice in the halls of Congress

Deficits are Growing as Spending and Revenue Diverge

So, Let’s hope Cathie is right. Maybe she is. There is obviously a very long history of technological innovation that both drove down costs and benefited economic growth. Could AI be the next steam engine, the next telegraph, the next light bulb? I have no idea. But I do know we need it need to be, and that is a really high bar.


Tim Pierotti is WealthVest’s Chief Investment Officer. 

Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.

WealthVest makes no representation or warranty, expressed or implied, with respect to the accuracy, reasonableness, or completeness of any of the statements made in this material, including, but not limited to, statements obtained from third parties. Opinions, estimates and projections constitute the current judgment of Tim as of the date indicated. They do not necessarily reflect the views and opinions of WealthVest and are subject to change at any time without notice. WealthVest does not have any responsibility to update this material to account for such changes. There can be no assurance that any trends discussed during this material will continue.

Statements made in this material are not intended to provide, and should not be relied upon for, accounting, legal or tax advice and do not constitute an investment recommendation or investment advice. Investors should make an independent investigation of the information discussed in this material, including consulting their tax, legal, accounting or other advisors about such information. WealthVest does not act for you and is not responsible for providing you with the protections afforded to its clients. This material does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product or service, including interest in any investment product or fund or account managed or advised by WealthVest.

Certain statements made in this material may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such statements. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.

The S&P 500® is a trademark of Standard & Poor’s Financial Services, LLC and its affiliates and for certain fixed index annuity contracts is licensed for use by the insurance company producer, and the related products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC or their affiliates, none of which make any representation regarding the advisability of purchasing such a product. WealthVest is not affiliated with, nor does it have a direct business relationship with Standard & Poors Financial Services, LLC. 

Tim Pierotti, Chief Investment Officer

Tim Pierotti is WealthVest’s Chief Investment Officer  Tim has over 25 years of experience in various aspects of the equities business.  Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management.  Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund.  Tim is a graduate of Boston College and lives in Summit NJ.

Previous
Previous

Thinking Out Loud On Housing

Next
Next

Compelling Economic Data for Every Bias