Green Alpha's 2018 Economic Outlook
In some form, the Next Economy already exists. This highly efficient, technology-leveraged, sustainability-first economy is growing across the globe and in every sector. Yet the inefficient legacy economy still has claws and is winning some dramatic victories in its campaign to remain relevant and profitable for as long as possible. As the tension between what was and what’s next plays out, 2018 and 2019 will expose several bright areas of fast technological growth, with unsupportable bubbles (e.g. things with fiat value only, like cryptocurrencies) on one side and malaise (legacy commodities, like oil and biofuels, entering their decline phase) on the other. But short-term gyrations in specific sectors are impossible to predict, so let’s zoom out to the bigger picture.
From a macroeconomic view, things look good—for now. “The global upswing in economic activity is strengthening,” as the IMF has it, and U.S. wages are expected to increase by 3 percent nearly across the board in 2018. This will be driven by continued high workforce participation, with the U.S. unemployment rate hitting 4.1 percent in November 2017, the lowest since December 2000. The picture appears so rosy that Goldman Sachs says “the Fed will need to stop it from overheating next year,” CNBC reports.
This growth period may not have been the best time for Congress to introduce a $1.5 trillion “stimulus” via tax reform, but leaving that aside, the prospect of an overheated economy is actually far from the most damaging outcome of the bill. In fact, much of the tax cut isn’t likely to actually find its way into the economy, which is precisely the problem. If passed, the bill will sow the seeds for long-term economic sabotage in the form of deepening inequality, as money that could have been invested in social safety, healthcare, education and infrastructure is instead sequestered in stocks and offshore bank accounts. Brokerages, asset managers, investment banks and private banks in Switzerland and the Cayman Islands might be the places that see the most stimulus from U.S. tax reform. Could tax reform result, as sold, in a surge of companies hiring, giving raises and spending on real capex? History says no, experts say no and executives say no.
What else is on the horizon? A Bloomberg headline predicts that “The Global Economy Looks Good for 2018 (Unless Somebody Does Something Dumb).” This rings true; we all know there are a lot of things in this world that could mushroom into civilization threatening-level events: nuclear war, pandemic(s), a tipping-point climate event and regional issues like the Saudi consolidation of power could metastasize. Yet the economy-threatening phenomenon we appear to be heading inexorably toward in the near term is, again, ever-widening inequality. As society becomes sharply unequal, social cohesion is undermined with all but predictable political upheaval and even violence ensuing.
With such dire potential outcomes, why do we remain oblivious to this insidious trend? It appears that the U.S. is in the midst of cultural decline. We are told down is up, and more than a third of us somehow believe it. The Trump administration’s most awesome accomplishment may be in further convincing his followers that reality doesn’t matter. We see this with climate change, where the official U.S. position has slipped outside of the global mainstream, as the administration tries to keep the 20th-century economy rolling unchanged. This is like trying to keep the tide off the beach, but it is trying hard.
Innovation increases global productivity while reducing planetary impact.
While the U.S.’s cultural erosion and policy avenues proceed to endanger its economic and social stability, the sustainability-driven economy will continue to pick up pace globally.
By looking to the Next Economy, we can find areas that will continue to grow in 2018 and well beyond. Ultimately, the global economy must become efficient enough that each individual’s ecological footprint will keep us well within our planetary tolerances and carrying capacities, while still providing a good standard of living for everyone. Therefore, the Next Economy must be characterized by efficiency gains: more economic outputs from fewer inputs.
The only way to that goal is via the fastest-growing tech and innovation in the markets, powered by renewable energy and supplied by reusable materials. High tech delivers efficiency gains by way of big data—including, at least in some capacity, blockchain tech—and distributed sensor networks, machine learning and AI, robotics, and automation and interconnectivity to coordinate it all.
For some emerging technologies, like blockchain tech, we must proceed with some caution. We can foresee its disruptive potential, but we don’t know what direction it will take, what rivals will surface, or what unforeseen emergent phenomena may occur. For now, the best investments may be far upstream from applications and directly into the leaders developing the backbone of the technology itself.
Overall, this means the indefinitely sustainable Next Economy will stand on the three pillars of renewable energy, tech-driven productivity gains and waste-to-value feedstock working as a nexus. These will be the best places to look for growth in 2018 and beyond. I would go as far as to argue that these are the only avenues for pursuing long-term growth as the risky, destructive, inefficient practices of the 20th century fall out of favor.
For example, one of the stories to watch in 2018 will be the continuing rise of electric vehicles, which stand to fundamentally transform the global economy via expansion in China, the U.S., India and numerous European states. It’s remarkable to observe EIA’s reported year-over-year changes in car sales in the U.S.; internal combustion engine, light duty vehicles were down 1.7 percent, while sales of electric vehicles were up 30 percent. If these trends continue for long, simple compounding shows America’s vehicle mix is about to radically change, and gasoline and oil demand will slow proportionally. Watch electric vehicles for indications of the fossil fuel-use trend continuing or slowing. Many nations are far ahead of the U.S. on this front, including the world’s largest car market, China, as it schedules outright bans of internal combustion vehicles. It’s becoming hard to see where long-term demand growth for oil might be.
Technological change is happening fast, and nowhere is that easier to see than in the renewable energy sector. As economist Gregor Macdonald has put it, this rapid change is “not just disruptive to powergrids. [It’s] disruptive to expertise.” How disruptive? Just look at Auke Hoekstra’s analysis of how completely wrong the International Energy Agency continues to be in attempting to predict the growth of renewable energies. Hoekstra has to conclude that there is a possibility “that the IEA has a habit of dramatically underestimating photovoltaic growth,” because “the difference between predictions and reality is too staggering for my taste.”
What about renewable electricity generation and possible changes to U.S. policies? For the careful and long-term stock investor, any resulting decline in renewable energy stocks will provide a fantastic long-term entry point. As the energy mix tips in favor of renewables, the economic and scale dominance of these newer, tech-based energies will be so undeniable that holding shares in the leading firms will be status quo and no longer considered “impact investing.” It will be important to have been in before that time comes. If politics creates headwinds in the markets, we can simultaneously curse negative short-term performance and be thrilled with the long-term opportunity. And here again, let us remember that the U.S. is diverging from the global mainstream in this area, and global opportunities abound; the rest of the world is moving ahead with or without the United States.
The truth is we will never realize a perfectly de-risked economy, but we can and surely should strive to set a positive course. Technologically, we’re making progress; culturally, we’re sliding backward into the darkness of disdain for science and education.
As innovation is valued and encouraged, this coming year will be exciting for sustainability-driven technologies. The constellation of extreme productivity gains, renewable energies and waste-to-value is where we believe the global economy may realize optimal growth that can endure. Gaining portfolio exposure to these areas of tech- and innovation-led growth means thinking more like a private equity investor and less like an indexer. Because the economy 10 years hence will look very different from the economy of 10 years ago, it’s time to move beyond legacy investing styles. As for the state of inequality, we’ll have to stay watchful and get creative. Perhaps these same technologies can be a force for mitigating that risk as well.