Expected Returns: An Investor's Guide to Harvesting Market Rewards

27

Secular trends and the next 20 years

• The analysis of secular trends is inherently discretionary and speculative.

• The period from the 1980s to 2007 was exceptionally benign for many financial assets.

• I highlight several secular trends that may be reversing: free market capitalism, disinflation, rising leverage, financialization, and asset richening.

• I sympathize with consensus views that the coming decade will be characterized by the continued rise of emerging economies and eventual resumption of inflation.

I start this discussion with some numbers, highlighting how exceptional the two decades before 2008 were. Then I identify major secular trends—some of which are now reversing while others are persisting—and review many of them graphically. Finally, I comment on the shadow of the recent crisis and speculate more broadly on the next 20 years.

This chapter is more impressionistic in its analyses and more tied to the current situation than the rest of the book. It has more the style of discretionary view-takers, while the rest of the book tries to learn from history without resorting to subjective market views. In practice, many smart investors want to combine both approaches.

27.1 CONTRASTING 1988–2007 WITH 1968–1987

The period 1988–2007 was in many ways a more benign period for financial markets than the preceding two decades, 1968–1987, and probably also more benign than the next two decades. It was a period characterized by increasing globalization and market capitalism ...