The Great Reset

 

How to Navigate the ‘Great Reset’
The closest parallel is the post-World War II era, which led to massive economic and societal changes.
Bloomberg, May 31, 2021

 

 

 

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Pandemic lockdowns are coming to an end in the U.S., and with them, a massive economic recovery has begun. The closest parallel is the post-World War II era. That period created a massive societal “reset” in terms of employment, housing, infrastructure, wages and financial markets — just like now.

Consider the circumstances of both periods. The nation is forced into difficult circumstances by a frightening enemy. Shortages are commonplace. The government and private sector focus on obtaining sufficient ammunition to vanquish this foe. Workers are furloughed, people are fearful even as the economy starts to recover. It takes time, but soon victory is at hand. The reopening begins with surging inflation, spot shortages of commodities, a dearth of housing, difficulty finding workers, and a very challenging transition as factories and offices struggle to restart and return to a more normal setting.

Call it the Great Reset. Whether its stock prices, bond yields, the primacy of cities, inflation, wages, housing, office space, government, politics, technology, cryptocurrencies and even lifestyle – there is no area not being reset. Using the post-war period as a useful analogy, we can make some assumptions for what normal looks like in a post-pandemic economy, and how the next decade may compare to the last one.

Technology: Big tech looks like the big winner of the pandemic. The reality is a little more nuanced. Most of the tech that became stars of the lockdown/work-from-home era has been around for years if not decades. The pandemic accelerated adoption rates for existing trends, pulling the future forward. This is less reset and more catch-up – welcome to 2024.

The big getting bigger is a trend that predates the pandemic by decades. Robert H. Frank and Philip J. Cook’s book, “Winner-Take-All Society” was first released in 1995, and detailed an already top-heavy economy. At the time, the world’s top 50 companies had a combined value of about 5% of global gross domestic product. Today, the top 50 companies are 28% of global GDP. Can the big get even bigger? It is hard to fathom, but it is certainly has been the recent trend.

Work from home: Does less commuting and more family time add up to a more productive and happier workforce? 1 That is the debate between traditionalists like JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon and the latest generation of startups that believe less in the primacy of corporate culture and more on quantifiable work product. As researcher Simon Wardley observed, traditionalists are “strongly dependent on procedures whilst the next generation are more biased towards remote work and the use of guiding principles.”

Office work will reflect what is most efficient and cost-productive. We will be in offices for collaborative work, but elsewhere for work that can be done solo. Regardless, the nature of the office has already changed.

Suburbia: The rediscovery of bedroom communities outside of cities was the direct result of an intense desire for more space during lockdowns. Once cities closed everything down (museums, restaurants, theater, etc.), all of the advantages of urban living disappeared, leaving only the higher costs. No wonder those who could afford to made the move to the suburbs, which caused prices to spike higher.

Rising home prices are partly due to the financial crisis more than a decade ago. The lack of supply is because new home construction plunged after the crisis and only recently has begun to recover. It may take a decade for the supply of new homes to catch up with demand. Affordability still remains an issue for young families.

Office/Real Estate: By some estimates, we have about 20% excess office space in larger cities. Those metro regions also have the most expensive apartments to buy or rent in the country. An obvious solution beckons: convert that excess office space to residential space, attracting young workers, and revitalizing neighborhoods in the process.

Recall how the neighborhoods around Wall Street and the World Trade Center have changed. Those conversions were enormously successful the past two decades pre-pandemic. It’s a model for what could be done elsewhere.

Rising Wages: After three decades of widening income inequality and slow gains in the national minimum wage, salaries at the low end of the scale are rising. A shortage of workers has become endemic. Construction workers, hospitality employees, nurses, waiters, and bartenders have all been in short supply. Employers are learning that if they need more workers they must increase wages.

Some have blamed the lack of child care for the shortage of workers, while others see too generous unemployment insurance at fault. Regardless, low-end wages have been lagging behind just about every metric you care to name: Productivity, profits, executive compensation and, of course, inflation, especially health care and education costs.

Inflation: With the post-war period as a guide, we should expect commodity shortages, challenges in hiring, rising wages and a spike in inflation. But we should also expect this to be temporary, as more production comes online and the marketplace pivots to satisfy increased demand. Rather than persistent inflation, this might be a short, sharp reset upwards.

It is worth noting that the inflation cranks have been fighting the 1970s stagflation for decades. I question their motives, and marvel at how wrong they have been about inflation in both directions. I see no reason to suspect their approach has changed for the better this time, either.

The caveat to all this: Past claims of significant “change” failed to pan out, including after the Sept. 11th terrorist attacks and the 2008-09 financial crisis. Mean reversion often makes modest, incremental change more likely. The post-pandemic re-opening may not be as significant as the post-war era in terms of change, but it will still be very significant.

 

 

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1. When we launched our firm in 2013, we had no choice but to set up a virtual shop in multiple locations around the country. Remote WFH was the obvious solution, and all of the tech to do so was easily available since the 2000s.

 

 

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