A Goldman Legend, Crypto Star And Top Banker Warn Of Next Big Risk
(Bloomberg) -- In a year in which Russia’s invasion of Ukraine is sending shock waves through global politics and markets, inflation is soaring worldwide and supply chains are unraveling, the largest investors are assessing the long-term consequences of the events they didn’t see coming.
We asked three market visionaries about the next big risk in the coming five to 10 years: Abby Joseph Cohen, the former Goldman Sachs Group Inc. strategist known for bold market calls who now teaches at Columbia University; FTX Chief Executive Officer Sam Bankman-Fried, who’s boosting his charitable and political giving while his cryptocurrency exchange is becoming a lender of last resort in his industry; and Ken Moelis, the billionaire whose investment bank advises some of the world’s largest companies.
Their comments have been edited for length and clarity.
Fading American Dream
ABBY JOSEPH COHEN
The secret sauce for US growth has been that we’ve had strong population growth and strong gains in the labor force. I’m concerned about that right now.
One of the reasons the US economy has outperformed the economies of other developed nations for the last 30 or 40 years has been that we’ve had faster labor force growth. It’s a very simple arithmetic equation: More workers, more GDP. And in the US we have been very dependent on immigration. That’s not new. This has been a nation of immigrants since its founding. If we’re not viewed as welcoming to talent from around the world, we’ll have a problem going forward in terms of long-term growth.
When we look at the information from individual companies and industries, we see that there is a labor shortage at all ends. We all know, for example, that right now one of the reasons behind the rise in service inflation has to do with an inadequate number of workers at airports, in hotels, in restaurants and so on.
I spent a lot of time looking at the other end. Do we have enough new scientists? Do we have enough new engineers? Do we have enough new doctors? And the answer is: No, we don’t.
Keep in mind you have to also create a pipeline, right? The students who are now K-12 are the future pipeline of scientists and engineers and doctors. And we’re not doing a very good job with them right now in terms of their skills.
The promise of the American dream has to be defined. And that is: Is every generation doing better than the previous generation? Does every new family in the US have the opportunity to do better than their parents did? And what we have seen over the last 30 or 40 years is that median household income in the US adjusted for inflation has not risen.
That is a problem. It creates a sense of political discord. It creates a sense of unease among people in the US. And it is worrisome because we have to think about how we get out of this.
One way is to focus on the industries that we think can create good paying jobs, and to protect our workers in that way. The standard role of 19th century, early 20th century protectionism — accomplished through tariffs and so on — it’s a Band-Aid. It doesn’t really fix the long-term problem of staying ahead of the curve, making sure that the industries that you’re supporting are creating jobs. And those jobs are paying well enough that individuals and households feel they are moving forward and not falling behind.
Investment comes from the government, but also from private enterprise. And we have seen that private companies in many industries are very actively investing in the future. They’re investing in cap-ex. They’re investing in research and development. And they’re now investing — because of tight labor markets — in worker training to try to reduce attrition and increase the skill set of their workers. All of that is terrific.
Many economists, myself included, believe the so-called golden era of the 1950s, 1960s US economy was linked to our willingness to invest heavily in the future. As a percentage of GDP, we were dramatically above every other nation, we were No. 1 in that category for a century. We no longer are. There are almost a dozen other countries that are outspending us relative to their own GDP. That to me is worrisome.
Another thing that concerns me is there’s some discussion now that any kind of interference by the government is bad news. That’s clearly not the case. We have a history in the US in which the government provide some guidance so there’s not unfettered competition and an absence of protection for consumers. For example, in the two or three years following the introduction of OSHA (Occupational Safety and Health Administration), productivity went up in the US. Profit margins went up. What happened is workers felt more comfortable that the equipment they’re using is safe. That the company is looking out for them. So I think we have to recognize that good regulation is very good news for long-term economic wealth.
The strength of economic growth and long-term prosperity — not talking about stock market prosperity, I’m talking about the prosperity of the people in the nation — is very much tied to the health of the middle class, and to whether the wage increases for those families are adequate. What has happened is that this rise in inflation has pulled apart the curtains. Now we see much more clearly where these problems are and where the issues are.
I, for one, am happy to see that wages are now rising. I’m happy to see that workers have more flexibility in how they want to conduct themselves. That’s a good start. It’s not the end solution. We need to recognize that a 40-year problem is not going to be corrected in four months. It’s going to take longer.
A Deadlier Pandemic
One thing that has seemed particularly important to me is how we handle future pandemics.
Covid doesn’t show us a worst-case scenario. The really worrying case is that we have a repeat of what happened — where we are not prepared at all beforehand — and it ends up spreading to much of the world, but with a way higher fatality rate and ends up killing a lot of people. That we are unable to contain it as a society, and in addition to causing potentially a lot of deaths, the economy grinds to a halt amid the chaos and lockdowns — a more extreme version of what we saw during Covid.
It was pretty clear to see in retrospect that we were not ready for Covid. There was no coordination in terms of what the response should be. If you look at where we are today, we have not started putting any of those processes in place that we should have had last time.
The biggest problem is that there weren’t that many lessons we really learned as a society. We are in much the same place we were beforehand. There’s almost no discourse about a future pandemic and almost no momentum.
It played out pretty poorly this time when all was said and done, and at the very least you could see a repeat of that, where not only did we have massive supply chain problems, but, in retrospect, we had a massive monetary supply increase to try to mask over what would have been probably a devastating economic hit otherwise.
As Covid winds down and our economic and monetary countermeasures wind down, it becomes clear that in fact we never really averted economic impact from Covid. It had a massive negative impact. You can look at runaway inflation. You can look at rising interest rates, a slumping economy and slumping markets — which, in the end, all trace back to Covid or our responses to it to try to mitigate the short-term economic impact.
When all is said and done, we will have spent tens of trillions of dollars as a world trying to contend with the fallout from Covid. That is a really huge expense. And we’re still not done. It’s sobering to see the scale of impact combined with not even solving the problem. And that’s with a workforce that is able to mostly go back to work in person. If you have a more deadly strain, there can be a lot more worry about getting back to work and you could see a much more protracted productivity decline.
It put a lot of political and partisan strain on the US and many countries. What you really want to do is nip this in the bud so that you stop a pandemic from getting out of control in the first place. Cut it off way closer to the source. And then you don’t have to make these hard trade-offs later on. That means instead of arguing about masks, we should have been focusing on how can we get in place good ventilation inside of buildings so there is massively less spread of pandemics through them. That would have been a much healthier focus for us as a society.
One of the fortunate things is that this is bipartisan: No one wants pandemics. This isn’t one party against another, in the way that some debates over some specific mitigation techniques ended up being. I have been spending a fair bit of effort, time and capital on trying to advance pandemic prevention legislation and policy.
A lot of the discourse around Covid and pandemics in general has focused on things like masks. By the time that’s the debate, we’ve already failed at the much more important goal. By having early detection systems, by having good ventilation in buildings, through a combination of common sense, the goal is to get to a place where outbreaks don’t become pandemics in the first place. Where we don’t have to shut down the economy, where people don’t have to die, where we don’t have to make trade-offs. Where hopefully we can spend tens of billions of dollars today to save tens of trillions of dollars later.
The End of Globalization
What we’re seeing in front of us right now is deglobalization. You’re going to see nation-states look internally and make sure they have the ability to support themselves.
Take Germany for example. Germany’s strategy up to this point was to outsource their military to the US, their financial management to the EU, their energy supply to Russia, and their end market to China. This was the complete globalization of an economy. You can see at this point, I think they’re in extreme trouble.
Throughout history, most countries would not outsource items that were important to their well-being — food being one of them, and energy is showing up as extremely important. What’s going to happen now is each society is going to have to think about: Did I outsource something that I’m not comfortable with?
In the US, we have a spectacular country filled with the resources we need. The fact that we don’t have an energy supply right now has been a choice. But we can make that policy choice. It’s not immediately reversible, but I think it will be reversed. We have food supplies.
Germany has gotten itself in a position where it does not have energy supplies. It turned off its nuclear. It’s right at the center, near the war and the ramifications. We’re seeing the elements of deglobalization and its cost to ordinary people.
If you look at what’s happening in the Russia-Ukraine war, I think there’s more going on there in terms of supply chains and sense of security. I’m horrified by the war and the invasion, but I think the motivations and the rationale and what’s happening are going to highlight to people: Can I provide the basics? Each country will move to protect their own citizens. And as a result, they might deglobalize ahead of you.
Populations all over the world want to eat and be heated in the winter. They want access to cheap electricity. All these things are going through the roof. To the extent we’re feeling the political pain in the US, I believe we’ll solve this problem. It might take a couple of years, but it’ll work its way out. Not everybody has that choice.
It’s much harder in the rest of the world. We have incredible land to farm and supply food, we have incredible energy. But much of the rest of the world has depended on flows of those food goods. Part of Africa is totally reliant on Ukrainian wheat fields. And Russia was a gigantic exporter of wheat. This is the basic food ingredient that keeps people from rioting. We saw it in Sri Lanka, where you’re nine meals away from having a very unhappy citizenship that’s willing to take extraordinary action to get their families safe.
The vast amount of society is trying to reach middle class. If we raise their energy costs dramatically, they’re not going to be happy about that. I think the Arab Spring, fundamentally, started over food prices. Their basic instinct is to feed, heat, clothe and take care of their family.
Some of our policy moves here are going to have very long-term ramifications. The global financial system was put together to ease global transactions. And by doing that, a lot of people kept money at the Federal Reserve — they felt that money is free from risk. But it was there to lubricate transactions. We froze the bank reserves of Russia. A substantial number of finance ministers around the world have to rethink: Are their assets secure?
I’ve had many people ask me: What do I do with my assets in China? What do I do with my assets in Hong Kong? There’s a lot of Western investment in Hong Kong — what happens if we end up in a similar disagreement or conflict, are those assets subject to immediate abandonment? These are questions everybody’s going to ask, whether they talk about them a lot or not. I’m not saying we’ll go to 100% investment in your own country. But boy, the risk premium has significantly gone up.
The US is well positioned for this. What makes me concerned is that there’s a possibility this leads to revolution in populations that do not have control over their food and energy. I get concerned as to what can happen in countries if oil and gas gets to be $200 a barrel, and if the food supply gets disintermediated. You could have ramifications we haven’t seen.
I’m pretty bullish on the world. So I think people figure these things out. But I think the quicker the world focuses on it and admits that they have to supply and be independent of global trade, the better for their populations.
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