"How to invest in a low growth world (Part 2 of 2)"

In a low return environment the usual approach is to use as much leverage as your prime broker will allow, at 30:1 you turn those 0.20% yields/spreads into a solid 6% return on equity.
There are, of course some drawbacks to this method.

If you are wrong the market only has to go against you 3% before you've lost everything.
Or if you get yourself into a bit of a liquidity jam you are likely to discover this is exactly the time your lender would like their money back.

From Absolute Return Partners, November 1:

Computing power can be expected to double every two years as a result 

of increases in the number of transistors a microchip can contain.

—Moore’s Law

The devil’s advocate

Do you recall that, in part 1 of this Absolute Return Letter, I argued that GDP growth will remain painfully low for many years to come unless we can somehow get productivity growth flying again? The argument was based on the simple fact that, at the most fundamental level, there are only two drivers of GDP growth (a view that I will actually challenge later in this paper), and one of the two – workforce growth – has started to shrink in many countries and will continue to do so for many years to come.

In the second part of this paper – the one you are holding in your hands now – I will zoom in on the other basic driver of GDP growth – productivity growth – and I will ask two very simple questions: In the digital age, does it really matter that the workforce will shrink? Won’t robots just replace humans in the work process?

Before having a shot at those questions, please allow me the joy of playing devil’s advocate for a minute or two. Think back to the mid-1990s and think of this wonderful new gadget called the internet which was only made possible because of a new technology called digitisation.

Now, look at the impact digitisation (more so than the internet) had on productivity growth. The ten years from the mid-1990s to the mid-2000s have gone down in history as one of the fastest growing ten-year periods ever as far productivity is concerned, and the reason is simple - productivity growth exploded as a result of the first wave of digitisation. Fast productivity growth led to robust GDP growth, even if workforce growth had already started to slow in many countries, but productivity growth slowed again and has been rather pedestrian since the mid-2000s (Exhibit 1).

We are now in the early stages of the second wave, and rarely a day passes by without me asking myself why productivity growth is so ordinary in the midst of the digital revolution. How come advanced robotics, AI, smartphones, blockchain, IoT, driverless cars and other new disruptive technologies have had nowhere near the impact on productivity that everybody expected? In the following, I shall do my best to answer that question. 

Exhibit 1: Compound annual growth rate of real GDP per hour worked 

Source: “The Productivity Paradox”, Oxford Martin School 

ARP+
Before I begin to untangle that mystery, allow me to mention ARP+ again. As you may recall, we launched it earlier this year in response to new and tighter regulations as to what we can and cannot share with you in the Absolute Return Letter, assuming we don’t charge for it (which we won’t).

Provided I don’t get run over by a bus or, what is probably more likely in my case, fall off my bicycle (again), the Absolute Return Letter will continue to be freely available for years to come.

Having said that, sometimes I cannot be as explicit as I would like to be, and that is where ARP+ enters the frame. For what I believe is a very reasonable amount of money, I can be much more overt when discussing the opportunity set. You can subscribe to ARP+ here.

The link between automation and productivity
Given how lethargic productivity growth has been for the past 15 years or so, it is very tempting to conclude that digitisation has had precisely the opposite effect on productivity than everybody expected. “No wonder”, my cynical wife would argue. “With all these youngsters glued to their iPhones, it is not difficult to understand why.”

The smartphone generation certainly appears to be lost for words the moment their phone runs out of battery power and, to quite a few in the younger cohorts, Instagram seems to be more important than a decent evening meal. I still don’t buy my wife’s argument, though. You may recall from part 1 of this Absolute Return Letter that there are two measures of productivity – labour productivity and total factor productivity (TFP) with the latter measuring different components of productivity....

....MUCH MORE

Here's part 1