The current COVID-19-induced economic and financial shocks aside there are some fascinating trends developing in the United States with equally fascinating socioeconomic implications.

OBSERVATIONS

People are angry.  It isn’t hyperbole to suggest the country has never been more divided at any other point in time but for the issues of slavery and states’ rights in the years preceding the Civil War.

Government isn’t interested in solving problems.  Politicians want to get elected and re-elected.  Having conviction of opinion, crafting solutions and executing is more difficult than simply blaming someone else for the current state of affairs.

Big Media fuels the fire.  It has a vested interest in selling controversy and outrage.

PROBLEMS

Kicking the can down the road works only when there’s road ahead.  Issues such as affordable housing, healthcare and education are close to their breaking point if not already there.

Housing.  In none of the fifty states can a renter working a full-time minimum wage job afford a two-bedroom apartment.  The National Low Income Housing Coalition estimates there is a shortage of 7.2 million affordable and available rental homes for households in need.  A Harvard University study found the stock of low-cost rental homes has fallen by four million units since 2011.  These shortages impact family formation and wealth creation for younger people – particularly Millennials.  Baby Boomers are living longer which soaks up more housing stock than previous generations.  Retirees often trade down putting upward pressure on low-end homes.  Millennials are having a difficult time finding affordable homes which in turn stunts their ability to begin building equity – the single most important driver of wealth for much of the population.

Healthcare.  Quality of care is on the decline as available options become inconvenient and limited.  Deductibles continue to increase.  Premiums are up 22% in the last five years – 54% in the last ten.  They long ago lapped the growth rates of wages and inflation.  The Affordable Care Act (i.e. Obamacare) expanded access (mostly through the expansion of Medicaid) yet did nothing to address the cost of care.

Education.  On an inflation-adjusted basis the average cost of a four-year college degree has more than doubled in the last thirty years.  The same cannot be said of wage growth.  Without sufficient parental aid these increased costs have been covered by student loans.  Outstanding student debt balances are over $1.5 trillion.  That’s nearly 7% of GDP.  At the same time costs are rising enrollment is declining.  Skepticism abounds about taking on so much debt relative to the value of a degree.  Consider that our society celebrates dropouts such as Dell and Gates.

POLITICAL IMPLICATIONS

It is clear if these issues are not addressed people out of desperation will latch on to any politician promising to address them.  It’s naive to think otherwise.

Single-issue politicians are quite common.  Donald Trump rode a wave of backlash (e.g. immigration) right into the presidency.  His predecessor did much the same (e.g. ending overseas military action).

Contenders to unseat Trump are following the single-issue playbook.  A big reason for the popularity of Bernie Sanders is his focus on healthcare.  Similarly a big reason for Elizabeth Warren’s decline was when she backed away from Medicare for All after detailing a $20.5 trillion price tag for the program.

RISKS/UNKNOWNS

Tribalism.  Will our society move away from acting in self-interest to acting purely out of spite and hatred for “the other side?”

Complacency.  Our society has ignored these issues for so long.  What will move us to act on them?  Not talk about them – act.

Execution.  Conceptually we can address issues but the efficacy of implementing solutions is uncertain – particularly when they may take longer than an election cycle.  Even if private and public institutions work conjointly the downside of failure and/or delay is immense.

INVESTMENT IMPLICATIONS (I.E. NUMBERS LIE)

It’s easier to lie with numbers than words.  People equate math with science and science with facts.  The price of stock is $x per share so that must be the right price.  It’s a number so it’s a fact!

Insufficient information distorts pricing.  While there’s lots of noise surrounding market efficiency so little attention is paid to what we know and how we behave.  While good ideas are important it’s arguably more important to remain dispassionate while grappling with what we (think we) know.

Similarly investors often expect a fundamental, company-specific reason for stock price movement.  Rarely is that true.

Passive Investing.  The more popular indexing through mutual funds and ETFs becomes the greater the demand (relative to supply) for the largest of stocks that dominate cap-weighted indexes.  This pushes prices higher for no other reason than it must go somewhere.

Mandates.  Institutional investors often make buy/sell decisions for non-price reasons.  They may be limited to holding a stock in no greater than x% of the total.  They may be limited in holding stocks that lack a certain level of liquidity.  They may have social mandates (i.e. impact investing).

COVID-19

Now layer in the current virus-induced economic dislocations.  Morgan Housel does a fantastic job breaking down wounds that will heal vs. scars that last.

TAKEAWAY

Maybe more than at any point in time it is important to understand not what is happening but why.  With an understanding of imperfect information and the likely resulting societal decisions (rational or otherwise) we can make better individual decisions.  Otherwise we are left to suffer the fate implied by Voltaire:  “History never repeats itself.  Man always does.”