The problem is this innovation is going to be very disruptive to the traditional world order. So the benchmarks today are constructed based on companies’ past successes. But if disruptive innovation is evolving to such a rapid extent, there’s going to be disintermediation and disruption. Companies that have learned to satisfy short-term shareholders—who want their profits and want them now—have been leveraging up to buy back shares and pay dividends.
Companies haven’t been investing enough in innovation, and we’re going to see a lot of carnage out there increasingly during the next five to 10 years. At the beginning of the S&P 500 indexes initiation, the average lifespan of a company was 100 years. We believe it’s down to a little over 20 years now—but it’s going to collapse going forward.
We’re also seeing some interesting signals in cyclicals.
Lumber prices shot up last year because of all the remodeling and demand for new homes in suburbs. Prices went to $1,700 and that’s down to $600 now. And a lot of people find that hard to believe because housing still seems so hot. I think it’s a leading indicator that prices probably went a little too far, too fast.
Consumers feel their purchasing power is going down. Prices of goods and services are moving faster than incomes are increasing. So there’s another reason we’re probably going to see a slowdown.
But even more important is what has happened with supply chains. If you looked at how businesses were positioned before the coronavirus, they’d been pulling back on inventory building and capital spending for about a year to 18 months. And the reason was the U.S.-China trade war, saber rattling, fear of the conflict blowing up in some way. When the coronavirus hit, businesses that had already been cautious slammed on the brakes. And what did the consumer do? The consumer started—after a month or so with the PPP payments—to stimulate the economy. They started spending because their savings rate in the previous few months had skyrocketed.
Businesses were caught flat-footed, and they’re still caught flat-footed. They haven’t been able to catch up. Inventory liquidation in the second quarter was near record-breaking levels. And so what I believe is happening now is businesses, in order to catch up, have been double- and triple-ordering. That’s what happened with lumber prices and why the decline has been so steep since mid-May. And once they see prices coming down, they’ll pull back on those orders. So I think there could be a big drop in commodity and other prices as the consumer has shifted from consuming goods, which are only a third of consumption to consuming services, just as businesses are scrambling aggressively.
A World of Inequality
MOHAMED EL-ERIAN
Chief economic adviser, Allianz SE, and president of Queens’ College, Cambridge
What worries me the most is inequality, both within and across countries. And it’s something that financial markets puts aside as a social problem, not really an economic or financial problem. And we’ve risked seeing the issue of inequality gather momentum. Covid has already been the great un-equalizer, but rather than go back to where we’ve come from, we are now creating the dynamics for inequality to worsen and to assume greater importance in disrupting all sorts of things in our society.
A highly unequal society is not an economic healthy society. But the thing that worries me even more than that is inequality of opportunity. We know what Covid did to people who had no WiFi at home, who had no computers. We know that public school districts lost touch with a lot of their students and these students were not only becoming unemployed, but unemployable, which means a lost generation of young people.
As we slowly emerge from Covid, its aftermath creates different dynamics around the world. If you’re in a developing country today, you can no longer assume that companies will come to you. The onus is increasingly on you coming to the employer. And that is the real issue when education is lagging, when technology is lagging. So I do worry that we’re going to see this massive process get larger, if we’re not careful.