The world is going to a long-cycle adjustment, and not just an economic recovery which is and will continue to be quite weak.
The transition and re-structuring the world is going through will create many investment opportunities, but they will not be found using the historical record to find them.
Government policies will continue to create asset price inflation as governments try to create faster economic growth, and this will create investing opportunities.
The idea of long economic cycles is out of fashion. Everyone, especially politicians, are only interested in the short run.
But, long economic cycles do exist, and they take place in spite of being ignored and in spite of, or regardless of, politicians.
The world is constantly changing, even though many humans fight to prevent that change from taking place. We, as humans, generally like things as they are. I like to keep the job I have been in most of my life. I don't like to continually keep learning new things. I don't really like to move to places I am not familiar with. And so on, and so forth...
We construct economic policies to put people back into the jobs they previously held before being laid off. The government tries to force spending on existing structures and infrastructures. Government tries to set minimum standards that keep things as they are, rather than allow for standards to rise.
In terms of economic thinking, the government tends to look toward Keynes and not toward Schumpeter.
Postponing change, however, does not mean that change will not take place.
Postponing change only means that when the need for change builds up, the transition is just that must more dramatic and causes that much more displacement.
The United States and the world went through a transition stage in the 1930s into the 1940s. The post-World War II period showed a dramatic difference from the 1920s. There was a whole new technological base to the 1950s and beyond.
The United States and the world are going through such a transition right now!
"Keynes" doesn't work in transition times like these. We can't just try and keep putting people back into the jobs they used to have. The world is different now. The world will be dramatically different tomorrow.
And, as we have seen over the past fifty years or so, trying to force resources back into the jobs that used to be does nothing but inflate asset prices - notice I did not say consumer prices - and create more and more income/wealth inequality.
Why should people working in manufacturing, let's even say car manufacturing, be worried about anything else but their existing jobs when the government says that it will stimulate the economy every time car sales drop, in order to put the unemployed worker in the car industry back into the job that he had before becoming unemployed.
This government stimulus, credit inflation spreads through the economy and results in increases in housing prices and the price of pictures and the price of gold and so on and so forth...
Economists of the behavioral persuasion now split up people into System 1 thinkers, those that respond automatically to things, and System 2 thinkers, those that respond deliberatively and reflectively. Guess what... the System 1 thinkers say, "Credit inflation is good and I am going to get my job back!" System 2 thinkers say, "With housing prices going up by 15 percent a year, I am going to borrow a lot of money and take advantage of the increase in the price of houses and become very rich!" And, if this credit inflation goes on for fifty years or more, you would think that more and more of the society would catch on. The skewing of the income/wealth distribution toward the top only seems to confirm the fact that the System 2 thinkers are in the minority.
In the longer term, however, Schumpeter rules and not Keynes. Societies transition, and when the transition takes place, "creative destruction" takes place and cannot be avoided.
We say that we have been in the information age. I think that we have only seen the front edge of the information age. Just check out these books: "The Zero Marginal Cost Society" by Jeremy Rifkin (Palgrave Macmillan) and "The Second Machine Age" by Erik Brynjolfsson and Andrew McAfee (W. W. Norton & Company). You don't even have to get into the work of Ray Kurzwell. Read these and let me know if you think we have seen much of the information age.
Economic growth right now is tepid, at best. And, this is not just for the United States, but is true worldwide. Current expectations for the near term are not really making anyone really happy. To coat this view of growth in the United States as a return to "the Great Moderation" is, I believe, overly generous.
We are going through a "Great Transition," and this great transition is being accompanied by low or declining inflation. Europe right now is getting all the headlines on this score. Almost everyone is looking toward the European Central Bank to do more... and more... to combat this phenomenon. Yet, European companies and even European governments are now looking at structural reforms to the economy and to the society. And, in going through these structural reforms to individual companies, as well as to the society as a whole... firms are not thinking about increasing prices or... for that matter... outputs. They are thinking about re-organizing and re-structuring.
Monetary policy is concerned primarily with an increase in consumer prices and, in times of re-structuring like this, monetary policy is, as we are seeing, largely ineffective in these circumstances.
Does this mean that there is no inflation in the times of transition and re-structuring?
The answer to this is, "No." Credit inflation leads to the inflation in the price of assets. And, we are seeing how this inflation of asset prices is playing out in the press. Allan Meltzer, monetary theorist and historian of the Federal Reserve, has coined a new term to go with those that are "hawks" on potential inflation and those that are "doves." Meltzer has referred to Chairperson Yellen as the "gooser" for trying to "goose up" stock prices. Of course, the Fed can also "goose up" housing prices, commodity prices, and other asset prices. And, this "goosing" can take place without spilling over into consumer prices, as we are seeing during this recovery.
What does this mean for investors? I believe the idea of stocks that follow the economic cycle does not work very well in a time of transition like this. To really make money in such an environment, I believe that there are two places to look. First, one needs to try and pick industries or subsectors of industries that will participate in the transition and become winners in the advancing information age. Second, one needs to identify the areas where credit inflation is "goosing up" asset prices. Here we need to watch what hedge funds, private equity funds, and other accumulators of wealth are doing. We may not be able to get in all the "games," but we might be able to play in sufficient numbers of them that we can gain some benefit from their System 2 thinkers.
These are the ways that I see forward for those that would like to participate at the upper end of the skewing of the income/wealth distribution.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.