Changing Investor Concerns | Seeking Alpha

Over the last few decades, investors in the United States, and in other areas of the developed world, have faced a situation in which, in general, a better performance was achieved by investing in aggregate market behavior and in accepting a world in which globalization was the dominant market driver.

And, stock prices went up, the wealthy got wealthier, and the U.S. economy, along with many others, grew at a steady pace.

This performance was achieved thanks to modern monetary policy behavior and because of the growth and spread of information.

Under the leadership of Ben Bernanke, the Federal Reserve System, in the United States, explicitly worked to drive stock prices higher so as to create a wealth effect that would help underwrite steady economic growth.

The Fed was successful.

Focus was taken off of building investment portfolios based on value investment and moved to the investment in portfolios based on the general increase in stock prices.

Now, for the time being, Federal Reserve attention is not on generating rising stock prices. It is on fighting inflation.

Furthermore, globalization seems to be a concept that is on the decline.

As Sonja Laud, chief investment officer at Legal & General Investment Management writes in the Financial Times,

“Ever since the emergence of China as a superpower, we have been traveling towards a world in which tensions between global powers–and their proxies–appear harder to contain.”

“And Russia’s invasion of Ukraine, together with growing jitter over China-Taiwan relations, show that the pace of change has only accelerated.”

“In light of intensifying geopolitical risks and pandemic-induced disruptions, companies are reconsidering where they operate and how they construct global supply chains.”

Globalization, according to Ms. Laud, is on the downswing. Ms. Laud joins a band of doubters that now see globalization as a thing of the past.

Ms. Laud concludes,

“As investors, we need to switch our mindset away from chasing asset appreciation in a world of easy money and instead allocate capital to companies that advance the global energy transition, restore stable supply chains and bolster global securities.”

“In a multipolar world, those that achieve this are likely not just to survive but to thrive.”

In other words, the world has changed, investment strategies must change as well.

The World Has Changed

The world has changed, there is no doubt about that.

Investment strategies must also change, there is no doubt about that.

But, we must be careful.

First, the Federal Reserve hopes to win the battle against inflation.

If the Fed is successful in the current battle against inflation using existing strategies, the Federal Reserve plans to go right back to supporting an inflation target, still at 2.00 percent, within the framework of a Phillips Curve strategy.

Note: the Federal Reserve’s monetary policy strategy, for much of the last thirty years or so, has been associated with a Phillips Curve foundation, where the Fed assumes that there is a tradeoff between a lower rate of unemployment and a modestly higher rate of inflation.

This policy has led to a smooth rise in asset prices, like stock prices, with mostly steady, but modest, economic growth.

This is what the Fed seems to want, once inflation is brought under control.

The big question here, however, is whether or not the Fed can return to such a policy approach.

The general feeling, one associated with the article by Ms. Laud, is that globalization is breaking down. Globalization will lead to a fragmentation of countries and markets, and a breakdown in the efficiency of a policy like the Federal Reserve would like to conduct.

That is, investment strategies must move back toward decisions based on investment value, rather than upon aggregate portfolios.

This is why Ms. Laud makes suggestions about what industries would be good to invest in, going forward.

My Picture

My picture is somewhat different than that of Ms. Laud.

Ms. Laud represents a group of analysts that believe that the age of globalization is over.

I don’t agree with this assumption.

To me, globalization will continue and even expand further into the global community.

Globalization, to me, is based upon the growth and spread of information.

History has shown that the expansion of information cannot be stopped. It may be slowed down from time to time, but it is never really stopped.

Consequently, to me, globalization will continue because information will continue to grow and spread. There is really no stopping it.

The only thing I can really add to this conclusion is that the growth and spread of information will speed up in the future, not slow down.

So, regardless of what happens or what is done, the growth and spread of information is going to dominate all else. That is just the age we are in.

Investors must see and understand this development and how it will impact their investment decisions.

This is the future.

Secondly, I believe that the Federal Reserve will not be able to return to their previous approach to quantitative easing as their monetary policy.

I believe that the dislocations and situations of disequilibrium that exist within the economy are so substantial and spread throughout the economy that a program of quantitative easing would not be good for the economy, it would tend to return the economy to greater disarray.

Then we would be right back where we are today.

Monetary policy is going to have to be conducted differently in the future.

The Future

The investment world is changing, and investment strategies are going to have to change as well.

Globalization will continue, but it will continue because of the growth and spread of information.

Investors must pursue this thread and work hard to understand how information is, actually, growing and spreading. But to really see and understand how this “growth” is taking place, we must disaggregate the economic data and get back to working with firms, sectors, and industries.

We must see how the information is contributing to the prosperity of the economy. So, we require a more value-based investment approach here.

Secondly, the Fed is going to have to modify its approach to monetary policy. The Fed cannot exist on a policy procedure that just inflates asset prices, something I have, for the last ten years of so, referred to as “credit inflation.”

The Fed has to get away from forcing investment strategies on investors like it has done for the past thirty or forty years. The Fed must get away from creating asset price inflation that benefits, primarily, wealthy investors.

This will not be an easy thing to do, but the economy has changed.

The Fed must also change with it.