A very different kind of supercycle

The green revolution, not China’s industrial one, will drive commodity prices

The editorial board 

Attempts to reduce advanced economies’ fossil fuel emissions and rising US infrastructure spending will mean more demand for certain metals and other materials © Andrey Rudakov/Bloomberg

China’s long boom, like so many industrial revolutions, relied on pulling people and things into the cities. 

That contributed to the commodities “supercycle” of the 2000s. 

The entry of about a billion people into the global economy raised demand for iron, copper and oil. 

Factories needed raw material as well as workers. 

While the country’s population probably fell last year — although China’s official census data, to be published on Tuesday, may say otherwise — commodity prices are still rising. 

On Monday in Singapore iron ore futures prices reached a record in dollar terms, increasing by 10 per cent during the day’s trading. 

The metal, used in the production of steel, is not alone. 

Copper prices have similarly hit record highs. 

Aluminium prices have rallied, as has timber. 

The price of palladium, used in catalytic converters for cars, has risen. 

Even the prices of agricultural commodities such as crops and livestock are higher.

While China may not play the role it did in the last period when commodity prices surged, predictions of another supercycle are not without foundation: attempts to reduce advanced economies’ fossil fuel emissions and rising US infrastructure spending will mean more demand for certain metals and other materials — copper, as well as lithium, is vital to make electric cars. 

The green transition has had an effect on supply, too. 

Few fossil fuel companies are investing as they once did in exploration and production.

Right now, short-term factors are playing a role. 

Lockdowns have meant that consumer spending in rich countries has switched from services to goods, increasing demand for the raw materials that go into producing consumer electronics. 

Meanwhile closures — a freeze in Texas shut refineries, for example — have led to bottlenecks. 

This combines with a faster than anticipated reopening, leading to higher consumer demand in rich countries. 

Commodities also appeal to investors looking for a way to bet on the recovery and hedge against inflation.

When these factors start to fade there are longer-term trends to consider. 

Even if China’s population is shrinking, it is growing richer. 

While government investment spending on the kind of infrastructure that requires steel and copper is helping to drive the immediate recovery from the coronavirus pandemic, eventual rebalancing towards consumer spending will boost sales of cars and white goods. 

Lower state spending on high-speed rail does not mean the end of demand for industrial metals.

Rich country governments, led by the US, are also planning increased infrastructure investment in ports, roads and highways. 

That, too, will fuel demand. 

So will replacing internal combustion engines with electric ones and building the infrastructure to charge their batteries. 

The green revolution will require some of the same materials as the industrial one.

Not all of them, though. 

While oil prices have risen along with lithium, this partly reflects lower supply. 

The Opec cartel has restricted output and could increase it as prices rise. 

But other oil and gas majors cut spending last year when the pandemic forced an end to international travel and other economic activity; many are preparing to adjust to a world with structurally lower demand. 

US shale, which met most of the world’s demand growth since 2015, is no longer growing.

China’s role as the world’s workshop in the 2000s lifted all boats. 

If there is to be a repeat of the supercycle, with prices rising beyond their long-term trend, it will not be an exact replica. 

This time there are likely to be very different stories for different commodities.

Will the Productivity Revolution Be Postponed?

US President Joe Biden clearly has bet on faster productivity growth to pay for his $4.1 trillion American Jobs Plan and American Families Plan. But history suggests that any acceleration of productivity growth is likely to be delayed – perhaps by decades.

Barry Eichengreen

BERKELEY – Productivity growth changes everything. 

In advanced economies with a slowly growing labor force and already-large capital stock, it typically accounts for the majority of output growth.

This means that boosting productivity is the most direct and immediate way to improve economic performance. 

For example, were annual growth in total factor productivity in the United States to rise to 2%, from the 0.5% experienced in the five years before COVID-19, the GDP growth rate would double from the 1.5% forecast by the International Monetary Fund for 2023-26.

Such rapid productivity growth is not unprecedented. 

It would almost exactly match that of the US business sector between 1996 and 2004, the so-called New Economy years when innovative digital processes were adopted in wholesaling, retailing, and finance.

Imagine all the good things that would follow if productivity grew at such a rate once again. 

Incomes would double in one generation, not two. 

Governments would have more revenue and smaller budget deficits. 

Growing the denominator of the debt-to-GDP ratio would make it possible to stabilize and even reduce the debt burden. 

Of course, the problem is that we have been unable to replicate the fast productivity growth of the New Economy period.

Will COVID-19 now change this? 

Optimists such as McKinsey & Company point to the rise of remote work as evidence that firms are organizing their operations more efficiently. 

Efforts have been renewed to automate operations, such as in meatpacking, long resistant to mechanization. 

And the pandemic has spurred a shift to online retail transactions, the rise of telehealth, and the embrace of technology even by my own hidebound sector, education. 

All of this holds out hope of greater efficiency.

But other trends are more worrisome. 

Investments in digital technology are concentrated in large firms. 

Small firms are falling behind, and greater dominance by large firms will mean less competition and less pressure on the market leaders to innovate.

With herd immunity from COVID-19 increasingly unlikely, firms in the hospitality sector will face permanently higher costs. 

If your hometown has reopened indoor dining, you will have noticed that restaurants are spacing their tables more widely and serving fewer meals, despite renting the same square footage as before.

Scientific advances – epitomized by the rapid development of RNA-based COVID-19 vaccines, but extending also to metamaterials, human genomics, nanotechnologies, and artificial intelligence – are the most fundamental reasons for optimism. 

But the most fundamental reason for pessimism is that these advances will most likely take years to show up in the productivity statistics.

Consider the aftermath of the 1918-20 influenza pandemic, which came on the heels of advances in the internal combustion engine and Henry Ford’s development of the assembly line. 

It followed the invention of the superheterodyne receiver, which enabled the Radio Corporation of America, the leading high-tech company of the era, to sell radio sets that could pick up signals from longer distances. 

It arrived after chemical processes developed during World War I that lowered fertilizer costs, to the benefit of the agricultural sector.

But while there was some acceleration of productivity growth in the 1920s, the full impact was felt only in the 1930s. 

Firms used downtime during the Great Depression to reorganize production, and those least capable of doing so exited the market. 

Government invested in roads, allowing the nascent trucking industry to boost productivity in distribution. 

But more than a decade first had to pass before the innovations in question – dating from the 1910s –showed up in the productivity statistics.

This extended delay suggests two important lessons. 

First, some lag is likely before faster productivity growth materializes, and budgeters and central banks should plan accordingly. 

Second, government can take steps to ensure that the acceleration commences sooner rather than later. 

In the 1930s, this meant investing in roads and bridges in order to encourage trucking. 

Today, it means investing in broadband so that the efficiency advantages of digitization accrue to the entire economy.

US President Joe Biden clearly has bet on faster productivity growth. 

This is the only way to square the additional $4.1 trillion of spending in his American Jobs Plan and American Families Plan with an economy that is at most $1 trillion smaller than it would have been absent the pandemic. 

Faster productivity growth is the only reasonable basis for dismissing worries about economic overheating and inflation.

It would be counterproductive, obviously, to curtail infrastructure spending, because this would only worsen the prospects for productivity growth in the short run, or spending on early childhood education, which would similarly damage prospects in the long run. 

But the more concerned you are about a delay before faster productivity growth materializes, the more strenuously you should insist that Biden’s spending plans be financed with taxes in order to avert the overheating scenario.

Barry Eichengreen is Professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. He is the author of many books, including The Populist Temptation: Economic Grievance and Political Reaction in the Modern Era. 

Imagining the Next 100 Years in Business, Science, and Investing

By Lauren R. Rublin

From left: Tom Slater, Karen Karniol-Tambour, and Jerry Yang / Photographs by Matt Marcus; Michael George; Courtesy of Jerry Yang

A hundred years ago, when Clarence Barron founded Barron’s, it was impossible to imagine the world we inhabit today. 

The birth of television was six years in the future. Computers, smartphones, the internet, the Dow Jones industrials at 34,000—all would have seemed preposterous to Clarence and his contemporaries.

Imagining the next 100 years might also seem preposterous. 

Yet, that’s the challenge Barron’s put before three investment experts at our recent centennial roundtable. 

The group included Karen Karniol-Tambour, co-chief investment officer for sustainablity at Bridgewater Associates; Tom Slater, head of U.S. equities and portfolio manager of U.S. equity and long-term global growth funds at Baillie Gifford; and Jerry Yang, founding partner of AME Cloud Ventures and co-founder of Yahoo!

How should investors think about the next 100 years? 

How should they prepare for the next five or 10? 

Here’s an edited version of our centennial conversation.

Barron’s: A hundred years ago, the world had just emerged from a pandemic and the Roaring ’20s had begun. 

History seems to be repeating, so let’s start with the immediate future. 

What are the most disruptive and long-lasting changes likely to come out of the Covid-19 pandemic?

Jerry Yang: First, happy 100 to Barron’s! 

The past 15 months sped up the digital revolution we’ve been talking about for a decade and a half, whether it’s contactless transactions, or running your life through Zoom, or more mission-critical things like virtual doctor’s appointments and schooling and working from home. 

These changes are here to stay.

Tom Slater: There are also things we won’t go back to doing. 

It isn’t an intrinsic part of human nature that you host all of your enterprise information technology yourself in your own warehouse [as a result, the cloud has continued to grow]. 

That’s just a product of accumulated accidents. 

Distributed working has changed people’s attitudes toward that.

Similarly, something like selling television advertising, which historically has been done at the “up-fronts” in New York at the start of the year, with no knowledge of which shows are going to be most popular, is going to change. 

We will move to a much more data-driven system.

Central banks have implemented fairly radical policies to deal with the economic impact of Covid-19, including zero interest rates. Karen, how long will the monetary authorities let this cycle run?

Karen Karniol-Tambour: Just as the Covid crisis accelerated the shift toward digitization, it also accelerated a shift into a different policy paradigm. 

Since 1980, policies were aimed at making sure inflation didn’t get out of control. 

The main tool to fight inflation was interest rates. 

The Federal Reserve tightened monetary policy by lifting rates whenever inflation popped up. 

In more recent decades, we’ve experienced big deflationary forces, like globalization. 

Interest rates fell lower and lower.

In 2009, as we came out of the financial crisis, the Fed switched to a new policy paradigm. 

It started printing money. 

Rates hit zero, and quantitative easing became the main policy tool. 

Now, the Fed is printing money to allow the government to spend. 

It is monetizing that spending. 

The shift is likely to be pretty long-lasting—until the excesses get out of control.

Central banks have many incentives to let the cycle run. 

A lot of deflationary forces are behind us, and we’re going to get inflationary forces instead. The one thing pushing in the other direction is automation. 

The question is to what extent digitalization will be an inflationary force, letting the cycle run for much longer without creating the risk of overheating.

Government has taken a growing role in the economy. How will that play out in coming years?

Karniol-Tambour: Since 1980, there has been a strong prevailing ideology that says government should set the rules of the games and get out of the way, without determining where capital should be invested. 

That is shifting rapidly, and government now is much more comfortable running fiscal policy in order to achieve specific goals. 

The shift could run quite some time. 

Government needs to have goals, whether it’s attacking climate change or competing against China or improving the country’s education system, when it is out there spending a lot of money. 

This is a very big shift from what we have experienced in the past 50 years.

Time for a lightning round. Yes or no: Will capitalism survive the next 100 years?

Karniol-Tambour: Not in its current form. 

The idea that the market should do whatever the market wants is dead. 

Consider issues like environmental degradation and modern slavery. 

If we let capitalism advance without regard to ethical issues, what kind of world will our grandchildren and great-grandchildren live in? 

The idea that capitalism will survive without an overlay of societal goals seems unlikely.

Slater: Capitalism will survive, but I agree that in its current form there are challenges. 

Younger generations are much more interested in the impact their investments are having. 

We will have to reclaim impact investing from specialists, and it will have to become much more of a mainstream concept. 

I also think there is real bloat in the financial sector, relative to the rest of the economy. So much of what capitalism has become is trading pieces of paper with other people in finance, and not actually providing risk capital to the real economy and entrepreneurs. 

The size of the financial sector, relative to the rest of the economy, needs to shrink substantially.

Jerry, what are your thoughts?

Yang: Capitalism is changing, but the marketplace will also try to define winners and losers based on some of the externalities Karen and Tom talked about. 

Competition has worked really well in entrepreneurial areas, such as start-ups. 

But the marketplace is much more complex; it is no longer just about profit.

As we have seen with the rise of stakeholder capitalism, there are a lot of things to maximize for. 

I’m looking forward to seeing start-ups adjust to that. 

We are seeing a lot of great entrepreneurs start to take into account impact as part of their overall goals.

As a venture capitalist, you’re getting a sneak preview of the future. What kinds of innovations are most needed in the next 100 years to sustain the world?

Yang: We may not have 100 years. 

We may only have a decade or two to ensure the sustainability of the Earth, and do it in a just and equitable way. 

The amount of energy required to build the world in a sustainable way needs to be double today’s level, and we need to get to net zero [emissions] quickly. 

The food supply and supply chains for just about everything need to be moving toward much more innovation, much faster, and in a much less impactful way to the environment.

Some say the 20th century was the century of technology, and the 21st will be the century of biology. Tom, do you agree?

Slater: It may well be true. 

Certain sectors of the economy, such as media and retail, experienced massive transformation due to the impact of technology over the past 20 years. 

But there are some huge swaths that are much more important to the quality of our lives that have seen relatively little change. 

Healthcare is one. 

There has been a lot of cost inflation and relatively few achievements in improving patients’ lives. 

In the companies in which I’m invested, I see real excitement at the intersection of information technology and healthcare, including the ability to use tools, such as artificial intelligence and big data, to lead to dramatic improvements in outcomes. 

At the same time, some technologies within the field of biology—gene sequencing and editing are good examples—are on trajectories as good as, if not better, than Moore’s Law.

Yang: Think about how Moore’s Law changed IT, whether it was advances in the size of semiconductors, or process automation, which allowed for high-quality, high-volume, low-defect manufacturing. 

Not only will we see a similar sort of marriage between technology and healthcare, but also, more specifically, whether it’s drug discovery or new treatments or processes, there will be much more rapid development, more shots on goal, and much more interesting ways of developing industrial manufacturing through biological processes. 

Not everything we invest in is going to work, but if the kinds of savings and productivity and volume increases we’ve seen in IT are applied to biology, we’re going to see some significant improvements.

What are some other emergent technologies and innovations that excite you?

Karniol-Tambour: We are seeing much greater investor enthusiasm for, and willingness to allocate capital to, innovations that will make a difference in dealing with environmental and social problems. 

There is a clearer yardstick on environmental than social issues because we can measure emissions, but our social problems are significant. 

Gross domestic product alone was a good yardstick to measure progress back when Barron’s was founded. 

Rising GDP was associated with better outcomes across the board. 

The most recent expansion was probably the first that saw significant divergences: GDP measures looked pretty good; environmental and social ones, a lot less so. 

I am most enthusiastic about innovations that will make a difference in areas that many investors seem to care about. 

That’s where they will allocate capital.

Also, it may be beneficial to invest alongside government in areas where it doubles down. 

You are much more likely to be able to make a return where large players like government are willing to do the foundational work to make sure that industries exist to solve particular problems.

Which of today’s dominant industries will be gone in 100 years?

Karniol-Tambour: The mining of industrial commodities won’t be gone, but will change. 

To get to net zero, we must get copper and other commodities out of the ground. 

We need to make electric vehicles, which require these metals. 

Today, extraction entails pollution, and the mining industry has had issues with slavery and child labor. 

If investors keep pushing the industry to change, hopefully, it will exist in a very different form in the future.

EVs are already here. What is the future of autonomous vehicles?

Slater: As usual, financial markets show little interest in things happening beyond a 12-month time frame. 

If you extend the time frame, massive progress is being made. 

Making autonomous vehicles 99.999% accurate is what matters.

Why stop with cars? What about autonomous planes?

Slater: They don’t have to be passenger aircraft. 

Jerry and I are both are investors in Zipline, a company that operates autonomous drone-delivery vehicles. 

They were first used in the medical-supply industry. 

From there, you could see the space expanding to the transportation of human passengers.

What is the future of robotics?

Slater: One of the most interesting applications of robotics is in healthcare, but there are few large, investible companies. 

Intuitive Surgical [ticker: ISRG] is one. 

Its robotic surgery system is able to be more precise than humans, and reduces the strain on human surgeons. 

The company has achieved a significant market cap [$100 billion] in this area in a way that few others have.

Food production is likely to change significantly in the next 100 years. What lies ahead?

Yang: That’s a nice segue, because robotics plays a huge role in agricultural technology. 

Think about hydroponics and other sorts of indoor agriculture. 

Also, we’re using robots to harvest certain crops. 

Robotics are replacing many traditionally labor-intensive tasks in the industry.

More broadly speaking, if the goal is to build a sustainable food supply for 10 billion people, we will need alternatives to the traditional supply. 

We’re familiar with plant-based meats. 

We’re now looking at [laboratory] cultured meats whose production can bypass traditional production methods that consume lots of natural resources. 

This is a huge area. 

We are seeing a lot of energy and resources going into start-ups studying how to produce safer, less resource-consuming food.

Let’s dive into the future of money. It seems more than coincidental that Coinbase Global [COIN], the cryptocurrency exchange, came public last month, on the eve of Barron’s centennial. 

The next 100 years promise enormous changes in our conception of money. 

How should investors prepare?

Karniol-Tambour: Let’s go back to our first topic—the paradigm shift from inflation-fighting to monetary and fiscal policy working together through money-printing. 

There are a lot of incentives to monetize the debt. 

There is a lot of debt in the world, relative to the ability to repay it. 

It isn’t surprising that, at a time when governments are willing to issue huge amounts of debt and run large fiscal deficits, investors are looking at different ways of storing wealth.

Right now, cryptocurrencies aren’t store-holds of wealth; they are very volatile. 

But they move us into a world where there is a wider array of store-holds of wealth, and a wider array of ways to pay for things without being encumbered by whatever monetary system central banks have established. 

In the next 10, 20, 30 years, investors are going to get a lot more diversified in the assets they hold. 

Gold will still have a role, because you wouldn’t want to have all your eggs in one basket, and gold is the oldest store-hold of wealth. 

But investors will want to think about money in more fungible ways. 

Many people are asking, how do I store wealth if I’m worried that inflation is coming? 

You want a wider array of ways to deal with that.

Tom, should crypto be a part of an investment portfolio?

Slater: Crypto doesn’t have an internal rate of return. 

There are no fundamentals to predict, so it is in some ways dangerous to call it investing. 

But there are some interesting businesses doing things in the crypto space, and they are increasingly achieving a scale that is investible. 

It would be wrong to write off an area where there is so much talent and focus from venture capitalists, and some potential efficiency gains for the financial system.

Jerry, what do you see ahead for cryptocurrencies and payments?

Yang: The ability for people to transact with other kinds of currencies is probably accelerating. 

But there is a speculative aspect to it. 

To Tom’s point, as blockchain-based technologies and ecosystems are built up, real value potentially is being created. 

Whether things are priced correctly today, we can all have our opinions. 

A lot of coins are being developed to allow people to exchange private records securely or authenticate certain digital assets. 

There is value associated with those coins and the economies in which they represent transactions. 

Long term, some may be very successful. 

I feel you’re better off betting on blockchain cryptocurrencies tied to a real ecosystem, but it’s hard to argue with what Karen said. 

Bitcoin and other cryptocurrencies are starting to be seen as a hedge against the buildup of debt and potential inflation, so personally, I have a basket of all of them, just in case.

That’s the ultimate hedge. 

So far, we’ve talked about the next 100 years on Earth, but we are likely to become an interplanetary species in the future. 

Where is space exploration headed?

Yang: Elon Musk has said that humans need to be an multiplanetary species. 

We got involved in investing in space-tech companies six or seven years ago. 

There is now a push to leverage the polar ice caps on the moon and build a moon station, and we are exploring Mars. 

A hundred years from now, we might look back and say that we not only have been able to take some strain off the Earth by expanding into space, but also we’ve been able to use other planets to help humanity sustain itself.

The rise of China is certain to be a key feature of the next 100 years. At some point, China’s economy will be larger than America’s. What does that mean for investors?

Slater: It isn’t the scale of China’s GDP that is most important. 

It’s the quality of their entrepreneurship. 

It is the lead that new Chinese companies are taking, and the model of innovation that we have really only seen at scale on the West Coast of the U.S. 

Today, in China, we are seeing entrepreneurs invest significant amounts of their own capital in their businesses. 

Companies are emerging from the competitive maelstrom of their domestic market battle-hardened, at a size that domestic companies in any other country struggle to match, and with a determination to pursue long-term goals that is often lacking in some Western companies we look at. 

It is all of those ingredients that make me excited and optimistic about the investment potential of Chinese companies over the next 15 to 20 years.

Karen, what are the biggest risks and opportunities associated with China’s rise?

Karniol-Tambour: I couldn’t agree more with how Tom phrased it. 

Many investors are still stuck in the old world of thinking about China as an emerging market, and therefore regarding its growth as catch-up driven. 

China is a very, very large place: Some elements need to catch up with the rest of the world, but China is also becoming its own innovation ecosystem. 

It is figuring out how to grow at scale in ways that others haven’t, and with a vibrancy we haven’t really seen outside of the West. 

Limited investment exposure to China is probably the most significant investment bias we see. 

There is a significant lack of geographic diversification in portfolios.

It is clear that China will play a very significant role in the world economy in the future, even if we don’t know exactly what it is. 

Tom talked about Chinese companies, and I’ll mention Chinese bonds. 

China is the largest economy in the world whose interest rates haven’t hit zero. 

China isn’t yet following the U.S. policy paradigm, so its fixed-income market represents diversification for investors.

Speaking of investments, the 60/40 portfolio—60% stocks, 40% bonds—was the gold standard for the past 50 years. What is the optimal asset mix for the next 20 or 50?

Karniol-Tambour: A 60/40 portfolio has a few problems. 

The biggest is, it offers no inflation protection. 

Both stocks and bonds don’t do well in periods of significant inflation. 

The portfolio of the future will have more inflation hedges, such as gold, inflation-linked bonds, and direct exposure to commodities. 

Second, nominal bonds aren’t the same asset class they used to be. 

The reason to hold them was that, if growth slowed, the central bank would have room to lower interest rates and your bonds would do well. 

Once rates are at zero, there is only so much room for bonds to act as a diversifier. 

I wouldn’t be surprised, if we get more yield-curve control policies in coming decades, that bonds become even more useless. 

Now, they are a lot less useful than they need to be.

Slater: I’ll pick up on Karen’s earlier point about matching your portfolio to the most exciting opportunities.

A market index reflects the incumbent pool of profits. 

But when so much change is occurring across such a variety of areas, being invested in a portfolio matched against the structure of historic profits, as represented by the indexes, is quite dangerous. 

People need to have more invested in companies that are taking risks and pursuing big and exciting opportunities.

Take SpaceX [Elon Musk’s aerospace manufacturer and space-transportation company]. 

We don’t know if it is going to be successful, but if it is, the returns and scale that come from that are vast. 

Over the long run, we have seen that excess investment returns are concentrated in a very small number of exceptional companies. 

The impact of these extreme outliers is what really matters in stock markets. 

If you can identify companies with the potential to be outliers, and hang on to them long enough, that return accrues to your portfolio.

Imagine that 100 years have passed. Science has fulfilled its promise and you’re all still here. 

In fact, you look younger than ever at Barron’s Bicentennial Roundtable, to be held on Pluto. 

What will we be talking about 100 years from now?

Karniol-Tambour: Impact investing will be synonymous with investing. 

Almost no one will invest money for any other purpose.

Slater: To answer that question, you have to think about the things that won’t have changed in a 100 years. 

Fundamental traits of human nature won’t have changed. 

We will still be gossiping about celebrities. 

We will still be excited by the newest entrepreneurs and the latest companies. 

But as for which technologies we will be talking about, I haven’t a clue.

Yang: We’ll probably talk about how bad the food was on the way to Pluto, or which avatar we should use to represent ourselves.

Thanks, everyone.