Average is Over

I’m going to write about a book I haven’t read.  Not good form.  And I can’t even say I own it, which is pretty close to having read it.

I’m reacting to a review of Average is Over by Tyler Cowen, a Harvard-trained economist who teaches at George Mason University.  It appears in the September 21st edition of  The Economist.  

Professor Cowen is a prolific, and controversial author (the latter being the economic key to high book sales).  I’ve just snagged four of his other books on Abe Books (like almost everything else, a division of Amazon) for less than $17.  They haven’t arrived yet, so I really shouldn’t talk about them either.

the big picture

On the other hand, it’s the idea of Average is Over that I’m interested in–which is:

–that the dual forces of globalization and the ongoing internet/computing revolution have barely begun to exhibit their effects on the US economy, and

–that only 15% of American workers have the education, training and insight to position themselves on the right side of these trends.  Everyone else is a loser.

Scary, huh.

Of course, if Mr. Cowen had said 20% of Americans will be left behind, that wouldn’t be too far different from where the US is now–and no one would buy his book.

Maybe we have to take the 15% winner percentage with a grain of salt.  But suppose he’s directionally correct, even if he has the exact magnitude wrong.  What are the consequences for stocks?

consequences for stocks

I can see several.  You can probably see more.  Please feel free to comment.

1.  Interest rates won’t get back to “normal” for a real long time, as the Fed continues to try to battle continuing high unemployment.  Washington could change the situation with effective fiscal policy.  But it seems to me that neither party has anything to offer.  I’m assuming the federal government will continue to be a net GDP-subtractive burden.

The political commercial aside, rates could remain surprisingly low.  That would imply better upside for stocks in general.  Bad for bonds.

2.  There’s already considerable grassroots pressure for improvement in education.  This will intensify.  Existing publicly traded for-profit education companies can be a bit on the sleazy side (Title IV problems).  And they face increasingly effective competition from the online divisions of state-owned colleges.  Startups?

3.  Anything to do with the internet will continue to expand rapidly.  Again, startups are a reasonable area to explore.  But even old warhorses like MSFT (assuming they have competent management) may get a new breath of life.  (Hard for me to believe I just wrote that.)  At the very least, IT firms will act as a hedge against Mr. Cowen’s predictions coming true.

4.  The economic gap between haves and have-nots will expand.  If you’re positioned like I am, with my domestic consumer exposure focused on firms that cater to average Americans, the issue of when to flip back to companies that have mostly affluent customers is an important one.  It’s not time yet, however, in my opinion.

5.  Lots of M&A.  Old-economy firms will consolidate.  New-era firms will buy technology expertise when they think building it themselves takes too long.  An investor who wants to play the M&A game should be holding the target companies.  A little risky, though.

6.  Millennials who have skills/jobs are the big winners if Mr. Cowen is right.  Baby Boomers and the retired are big losers–they want what they won’t get, i.e. high interest rates on their fixed income and no cuts to Social Security or Medicare.  Therefore, traditional companies that cater to the latter group will be in a longer-term weak position–that’s jewelry, cruises, retirement communities.

7.  Higher growth will come outside the US.

I’m sure there’s a lot more.  Let me know what you think.