Investors would do well to prepare for greater dispersion
Rick Rieder and Russ Brownback argue that – in contrast to the past decade of monetary policy lifting all economic boats at once – the years ahead are likely to be characterized by great dispersion between economies, industries and markets. Understanding that dynamic will be the name of the game for investment success.
For most people, the word “blob” conjures the image of an enigmatic green object that lacks a defined shape or size. But in the data-driven tech world, the word BLOB stands for “Binary Large Object,” a collection of binary data stored as a single entity in a database management system. “BLOBs” (as opposed to “blobs”) are used primarily to hold multimedia objects such as images, videos, and sound, though they can also be used to store programs or even fragments of code. As investors, we endeavor to avoid focusing on a blob of superficial themes and rather attempt to stay focused on the existence of the more modern and complex macro “BLOB” that consists of the deeper investment influences that truly matter today.
Indeed, the explosion of social media and rapid information dissemination seamlessly feeds the innate human desire to oversimplify complexity. Contemporary investors love to sum, benchmark, aggregate, and/or reduce a multi-faceted macro backdrop into comfortable portfolio solutions that miss important alpha-rich nuances. While these themes can be interesting, the conclusions can be meaningless and, at times, downright misleading.
Dispersion across economies and markets is critical for investors to consider
From a macro perspective, the U.S. has critical sectoral dispersion beneath the “GDP blob,” such as the increasing prominence of services sectors over goods sectors, investment in technology over physical capacity, and the resilience in housing versus cyclical (and political) constraints on exports. Dispersion also exists between real economy sentiment and actual economic activity, such that as survey data has deteriorated, production data has remained steady. Also, at the level of household net worth, there are divergent influences on wealth from house price appreciation versus financial market gains, which are quite stark and result in contrasting motivations that drive decisions to spend versus to save. Moreover, the subtle evolution in wage growth that is now dis-proportionally accruing to lower income households is a profound development with lasting macro implications. Similarly, the global economy has massive dispersion across regions and within both developed markets (DM) and emerging markets (EM), as a myriad of secular and cyclical influences collide with cultural, political and demographic diversity.