By Andy Mukherjee
(Bloomberg Opinion) -- Temasek Holdings Pte is bringing back into vogue a six-year-old doomsday idea: secular stagnation.
The concept of a persistent downturn that doesn’t respond to easy money featured in the Singapore state investment firm’s annual report for the first time since 2016, one of three possible troubling scenarios alongside a hard landing in China and a severe escalation in trade and tech tensions.
The return of secular stagnation is a call to action for sell-side researchers. If a patient investor with S$313 billion ($230 billion) in assets is barely able to turn in a 1.5% annual return, even with a global remit to invest in both listed and unlisted equity, then other asset owners and money managers will want to know if this is a blip or a potentially permanent shadow over their performance.
The modern iteration of secular stagnation was popularized by former U.S. Treasury Secretary Larry Summers, who gave an influential speech in the fall of 2013 in which he speculated that the “natural” real interest rate at which savers and borrowers would agree to exchange funds may have been falling for decades and even turned negative. This complicated the task of monetary policymakers, who couldn’t push short-term rates too far below zero without destroying banks’ profitability and fanning asset bubbles. And yet, without meaningful inflation, real rates under secular stagnation would – even with zero or slightly negative nominal rates – stay higher than what borrowers could afford, stifling productive investment. Without aggressive fiscal policy, the economy would remain stuck in a low-rate, slow-growth rut.
Many investors took the warning seriously. In 2016, Temasek modeled “global stagnation,” a situation in which policy support for growth reaches its limit, as a risk scenario alongside China credit vulnerabilities in its annual review. But as the U.S. started to raise interest rates from ultra-low levels in December 2016, concern faded. In 2017, Temasek dropped global stagnation from its negative scenarios in favor of China corporate credit bust, a global trade war and a Eurozone breakup. If the modelers did investigate the impact of long-term stagnation on likely future returns of Temasek’s portfolio, they didn’t report it.
Even last year, Temasek’s thought experiments featured a U.S. monetary shock, along with the usual suspects of a China credit meltdown and a global trade war. This year, though, Fed Chairman Jerome Powell exited, and Summers glided back in.
For investment bank analysts, it’s time once again to consider the twin effects of an aging global population and the rise of the robotic arm. Pension pools are swelling, but where can they find returns? Certainly not in government bonds: More than $13 trillion of them are trading at negative yields globally. How will wage growth and wage-led demand take root as algorithms make a lot of human work dispensable?
If you can’t beat the robots, then join them. Temasek is investing heavily in early-stage AI. Companies it’s funding include: Eigen Technologies, which is targeting finance, law and professional services with machine learning; ThinCI Inc., which makes chips to support artificial intelligence applications; AirMap Inc., a traffic management platform for drones; and Zipline International Inc., a commercial drone delivery company for medical products.
Temasek needs to find winners because Singapore is also graying rapidly. It’s one of the world’s most open economies, meaning the trade and tech skirmish between Beijing and Washington comes a little closer to its shores with every tweet by President Donald Trump. The investment firm needs to earn decent returns so that each future generation of Singaporeans can afford a better lifestyle than previous ones. That’s the social construct under which the city-state’s population keeps the ruling People’s Action Party in power.
Secular stagnation first gained currency in the late 1930s as a conjecture for why U.S. growth might never rebound from the Great Depression. It had a short shelf life: The aggregate demand that had gone missing in that decade returned after World War II. In 2017 and 2018 it appeared that Summers’ reprisal would have an equally brief history. But with large investors such as Temasek putting it back on their radar, secular stagnation is once again for real.
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