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 sustainability 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 globalisation. 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 monetising 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 labour-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.
