Each scenario portrays a different outlook for the nation’s wealth and productivity.

The first scenario is a continuation of the last 15 years. That means more paper gains and economic stagnation.

This is possible, although not ideal. It means we are kicking the risk of serious investment recession into the future, as asset prices surging without the economy backing it is unsustainable.

The market for equities has been bullish over the past 15 years, with a real annual growth rate of 5% over the last 20 years, inclusive of the Great Recession. A continuation scenario from 2023 to 2030 could yield a 6% real CAGR for equities.

However, this growth is unsustainable. The underlying investments are not productive, and 50% of the growth would be contributed by real estate appreciation, which is a non-productive asset. GDP growth would be mediocre, as investors allocate more money to capital appreciation rather than productive investment.

This would lead to rising wealth inequality. Household wealth would increase, but the benefits would not be evenly distributed. The demand for labor would fall, and wages would stagnate. This would leave the labor force with less negotiating power.

Independent contractors may see a decrease in the number of jobs available to them as the unemployment level will start to return to the natural rate. In a loose labor market, they may also find their work to become less stable.

The second one is a high inflation scenario like the U.S. in the 1970s. It foresees a strengthening economy while asset prices suffer.

Again, this is possible. But inflation has already started to come down. This time, it is much like in the late 1940s and not the 1970s, which makes this outcome less likely.

If investment continues despite macroeconomic headwinds and the savings glut subsides, GDP growth will rise above recent levels, but not significantly.

The Federal Reserve will raise interest rates in an attempt to control inflation, but it will not be able to bring inflation down to its 2% target. Instead, we are likely to see inflation remain around 4%, which is significantly lower than the 9% inflation seen in the 1970s.

Workers will gain more bargaining power, and as competition policy becomes more stringent, corporate profits will grow more slowly than labor income and GDP. This will lead to higher consumption levels and gains in nominal wealth, but a loss in real wealth by a cumulative 8.5 percent or $12.6 trillion.

Independent contractors operating as independent business units will be faced with higher costs that will squeeze their bottom line. Those operating as employees may be more favorable as companies become more cost-conscious amid declining profitability and hire independent contractors instead of full-time employees.

The third one is the worst outcome possible: The Japanification of the U.S. economy. Investments and the economy would completely stagnate, and companies would shrink.

For reasons we talked about back in May, we believe the U.S. has the strength and position to avoid this.

However, if it were to occur, here is how it could potentially play out…

As companies ignite the deleveraging process, a decline in economic growth would follow suit, meaning fewer jobs and lower wages.

The decline in asset prices would lead to a decline in household wealth by a cumulative 20 percent or $30 trillion by 2030. This would make it more difficult for consumers to borrow and buy homes. Furthermore, the increase in economic uncertainty and increase in risk premiums would make it difficult for companies to invest.

Independent contractors would be especially vulnerable as business activity would falter as clients would be looking to cut costs. Additionally, the decline in asset prices would make it more difficult for independent contractors to get loans, as their collateral would be worth less.

The last one is the “golden” scenario. It is the scenario where we have a real productivity boom, and actual economic productivity drives the market higher.

McKinsey compares this scenario to something long-time readers have read from us before: the post-WWII economic boom.

The supply-chain supercycle will be a huge factor in making this scenario a reality.

As we talked about last week, construction spending is booming, and we think it can keep driving higher for years.

With companies investing in infrastructure and supply chains, and the government supporting them, the path of GDP growth is visible.

As the economy grows, the labor market will continue to tighten, putting upward pressure on wages. This will benefit workers, as they will be able to demand higher wages for their labor.

Additionally, the acceleration of productivity growth in the technology sector and other industries that are driving innovation will lead to new job creation, especially amongst independent contractors. This will provide more opportunities for workers, and give them more flexibility in how they work.

In parallel, companies will invest further in the adoption of digital and automation technologies, stimulating productivity. This will lead to higher output and profits for businesses, which will benefit workers in the form of higher wages and more job opportunities.

McKinsey highlights that while this will lead to a lot more GDP growth, it will lead to less wealth creation. Inflation will be slightly higher, so multiples will not expand as much. But for setting the U.S. for long-term wealth creation, it is obvious this scenario is ideal.

These are long-term outlooks, and a lot can change.

The scenarios presented by McKinsey all depict long-term changes.

That said, in the near term, it shows how important it is for us to focus on and invest in our real manufacturing capacity.

As the government and companies ramp up investments in facilities, roads, bridges, and other kinds of infrastructure, the country will become more efficient in production and supply chains.

That is why we continue to be so bullish on the supply-chain supercycle. The country’s long-term wealth and economic health depend on it.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

This portfolio analysis highlights the same insights we share with our FA Alpha Members. To find out more, visit our website.