Power Up Wealth podcast – Economic Cycles Can Teach Us A Lot About the Future – Episode 55 transcript:
Sharla Jessop 0:00
The global economy is ever-changing. How can we prepare for the future, and what can we learn from the past? I’m Sharla Jessop, president of Smedley Financial. Today, my friend and colleague, James Derrick, will share his insights on lessons learned.
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
James, thank you for joining us today.
James Derrick 0:49
I’m happy to be here.
Sharla Jessop 0:50
James is Chief Investment Strategist at Smedley Financial. He holds the CFA designation and an MBA. James, following, studying, researching economic cycles is your jam. What do you learn that intrigues you?
James Derrick 1:03
Well, I’ve have been looking at the cycles since I started working here about 23 years ago, and we are in the middle of what I would call just a classic business cycle or a classic economic cycle. And as I take a step back and think about what’s happening, I see that these are completely natural, although we try to fight them, you know, we want this perpetual growth without interruption. But that’s not a reality. The reality is, is that these cycles happen, and they bring positive and negative but mostly positive changes over time.
Sharla Jessop 1:37
Change is good. If could have $1 for every time somebody said, but this time, it’s different. Thank goodness.
James Derrick 1:44
Yes, every time is different. But you know, history rhymes, as they say. And so we certainly see that going on right now.
Sharla Jessop 1:51
You know, in the newsletter, the Money Moxie, you provide an interesting graphic that contrasts 2010s to the 2020s. What stands out as dominant changes that are impacting us today?
James Derrick 2:04
Well, the graphic is titled, and this is in the July/August 2023, Money Moxie. The graphic is titled New Paradigms of the 2020s. And I mean, this was published back in 2019. And it was the author’s best guess at what was going to happen. And I found it very intriguing. I put it into an article I wrote way back then. And in a presentation, I gave to some peers way back then as well. And some of these we can already see are coming true. For example, at the very, very top human capital, human workers in the 2010s. And in the 2020s, we are moving more to robots or AI. I mean, that’s been a gradual process for probably the last 150 years. But it does feel like we are at a tipping point.
Sharla Jessop 2:51
And people worry about things. People worry about the change. They worry about things like robots losing their jobs. What’s that going to do to me personally, what would you say about that?
James Derrick 3:00
Well, throughout history, it’s always been a concern. And in the industrialization in the United States, things went very smoothly. Back in Britain, where that began in the 1800s, it was actually very disruptive. And so we had the benefit of of implementing industrialization a little bit slower here. And it allowed workers to adapt, I think it is a very real concern. I wouldn’t dismiss it completely. But I would say that we see it coming. And so we should be prepared. And there’s going to be a lot of benefits. And I think everybody who looks at World History can see that there’s a lot of benefits to technological progress, and it’s not going to be any different right now.
Sharla Jessop 3:41
I agree. What else did you find that was interesting?
James Derrick 3:44
Well, I’m fascinated by this, the quantitative easing, you know, we had extremely low inflation over the last 10 years, probably averaging about 2%. And at times, it seemed like the Federal Reserve was more worried about falling prices than rising prices, falling prices are bad, because if you know, cars are going to be cheaper a year from now, you’ll just wait. And so the government actually likes a small amount of inflation. But in the 2010s, inflation was so low that the Federal Reserve was worried about falling prices. And so it seemed like they could print money in the ways that they do and we won’t go down that rabbit hole today, but in the ways that they do, they could print money, and there was no consequence. In fact, they gave it a name. They called it modern monetary theory. MMT. And it basically was like in the modern world, we’re so smart, we can print money without inflation. Yeah, we just laugh now. Yeah, I mean, it’s only it’s only 2023. And we already see the folly in that one. And we’ve gone from quantitative easing to quantitative tightening. It’s the exact opposite. The Federal Reserve has to pull money out of the economy and deflate the value of assets. In order to stop inflation. Basically, I would say this though, what they bought in so heavily into modern monetary theory that when 2020 came along, they doubled down, and then they doubled down again. And we see the consequences when there’s too much money given away, there’s too much demand and prices go up. It’s sort of a sad reality. But it’s, it shouldn’t be a surprising one. And so the next decade will probably be one with quantitative tightening that lasts for quite some time.
Sharla Jessop 5:31
We’ve heard a lot about interest rates staying higher, longer. Does that play into this?
James Derrick 5:36
Yes, the higher for longer absolutely does. And I think it’s also the fact that not everyone is convinced on the quantitative easing the need for quantitative easing to change. So the Federal Reserve is tasked with bringing down inflation, so they get it, they’re not openly talking about mistakes of the past. But I think that they get it. The rest of the government and the politicians don’t seem to get it yet. And we saw this in the 1970s, something very similar, where the Federal Reserve kept raising interest rates. 1968, beginning all the way back in 1968. And then, for the next 15 years, the Federal Reserve kept raising interest rates trying to bring down inflation. But until everyone understands the challenge that’s being faced, it won’t work. I mean, the Federal Reserve is shoveling sand against the tide, and they have a really big shovel, but they don’t control everything. And so this is a long answer to your question about inflation. But basically, there’s still a lot of spending going on. And so I think that inflation, it’ll cycle, but it’ll stick around.
Sharla Jessop 6:45
Hopefully, at a more reasonable level, even if it’s not lower. Even if we could maintain that would be much better.
James Derrick 6:52
Yeah, we’ve averaged maybe around 2% over the last, you know, in the 2010’s, and maybe will be closer to three for the next 10 years.
Sharla Jessop 7:01
Which is more like a historical average, really, if you go back to 1929 period, it’s about 3.1%.
James Derrick 7:08
It’s manageable. And if we can go off on this tangent for a minute, I mean, what do you do about that? Well, there’s a lot of options. Bonds are difficult in inflationary times. And so they will work at times, if we’re in a high inflationary environment, especially when interest rates are falling, they should be a good protection if a recession comes. Or if a recession comes multiple times they should be good. Stocks actually tend to do all right in inflation, unless we see 9% inflation, which is what we had about a year ago. But you know, if we average three or three and a half percent inflation over the next 10 years, historically, stocks do, okay. That’s a good way to try to keep up. Investing and staying invested.
Sharla Jessop 7:50
Sticking with your plan.
James Derrick 7:51
Stick with your plan, as we often remind people.
Sharla Jessop 7:54
Right! What else on this chart stands out to you?
James Derrick 7:57
Well, you know, this ties in a little bit with inflation. But globalization has been the mantra since I would say, since World War II ended, and manufacturers have been looking for low cost places around the world to manufacture, to produce, you know, sometimes that’s been in places like Mexico, but the infrastructure hasn’t been as good there. And so the cheapest and perhaps the best place to manufacture has been China over the last 30 years. And suddenly, we find ourselves valuing things differently. You know, instead of lowest cost, we’re looking for resiliency. Instead of sharing with our global neighbors, we are looking to protect what we have. And so we’re going from globalization, which kept inflation low to, I guess what you’d call de-globalization or protectionism or on-shoring, or near-shoring. These are all phrases, or words that you will hear. And every one of them is basically a way of saying that we’re no longer looking for the cheapest place to produce things. And we’re looking for better places and better is defined differently than cheapest. And so a whole nother reason why inflation could increase. It has happened before. Again, it’s a cycle like other things. Prior to World War I, and especially World War II, globalization went way down as well, global trade basically dropped.
Sharla Jessop 9:31
What I find interesting about that is that this was something that was a focus before we even had the pandemic. And then we have the pandemic and it really comes to light to everybody that maybe we need to protect ourselves. You know, we’re producing everything in other countries. We need to bring some things back home or closer to home or even diversify our manufacturing.
James Derrick 9:51
Yeah, these cycles have been going on and it’s easy to look at the pandemic I think maybe because that was the tipping point in a lot of these, these things that we’re talking about, but the changes have been in motion for decades, and these cycles have been going on forever. You know the economic cycle lasts about every five to eight years, you know, there are larger cycles that are, as long as a generation we’ll say 25 years, and they are bigger cycles, you know, that might last 80 to 85 years that take place in society. So there’s just a lot of cycles, so you can’t blame it on any one event. A lot of these things were already taking place. I mean, one of the things that’s on here, that I don’t want to dive too deep into was the Occupy Wall Street movement. And at the same time, we had the Occupy Wall Street, we also had the Tea Party. And these were two contrasting movements about 10 years ago that you just don’t hear anything about anymore. But it’s just proof that these things cycle.
Sharla Jessop 10:46
And what we’re experiencing now isn’t much different than what we’ve experienced in the past, it’s just different.
James Derrick 10:51
We’ve been here before.
Sharla Jessop 10:52
This isn’t a new trail, it’s just a branch of the same trail.
James Derrick 10:56
Some of the other things in here that I see taking place, are more gradual changes. More equality with women in the workforce, and in society. A move towards cleaner energy. Personally, I don’t think we will ever be able to move away from fossil fuels, we need them. And the more we move away from them, let’s say in the United States, the more some other countries that are developing will be in need of them as well. And so, so it’s a process that will keep going on and nothing mind blowing. And, in reality, these transitions, if they happen slowly give us plenty of time to adapt. Another one I see on here, you know, low taxes to high taxes. Now, this is we could debate this all day. We don’t know what taxes are going to be like in the future. The reality is, is the government doesn’t go broke, contrary to what we like to say. They can print money, they have control of the printing presses, and they can print money if they want to. And so there are multiple ways that our challenges could play out right now. And I think a little bit higher inflation is probably likely and who knows if tax rates will be higher or not. I certainly don’t hear any politicians getting elected lately that have talked about it so.
It’s a big concern with the looming deficit. The increasing deficit and the trajectory we’re on right now, for the future.
Yeah, it almost seems inevitable. And that’s why I like to remind people, though, that inflation is also a possible scenario, where if the country owes $34 trillion, which is a lot of money, they could try to raise taxes, or they could just allow a little bit more inflation. And then 34 trillion is to tomorrow won’t be what 34 trillion is today.
Sharla Jessop 12:43
James, we’re so glad that you have the desire to follow all of these changes in the economy, because our clients really benefit from that, from that, from your knowledge and understanding of what’s going on. Because it really ties back to what you do in portfolios and management, understanding these things.
James Derrick 12:58
Yeah, it helps. I hope that people listening, get a sense of perspective, more than anything so that as they see changes they can be, they can expect them, they can embrace them, they can be optimistic about what they see going on. You know, I think it helps emotionally so that you can be prepared, and hopefully also financially prepared, knowing that change is inevitable. And we may not know exactly how it’s going to play out, but we know, we know the future will bring change and we want people to be optimistic and prepared.
Sharla Jessop 13:28
I like that embrace the change. James, thanks for joining me today.
James Derrick 13:31
You’re welcome.
Shane Thomas 13:37
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
