History Changes, But Trends Can Last a Long Time, Too

Responding to the Richard Hanania essay about Fukuyama, I think Freddie is somewhat nitpicking. The heuristic that trends can last last a long time, longer than most people anticipate/expect, is a useful one. It’s not about having a chauvinistic view of one’s place in history or something to be taken literally, but more about a useful way of seeing the world. Sure all trends must end (death of sun, heat death of universe, etc.), but consider that:

The US passed Great Britain 100 years ago in terms of GDP, and never looked back. Of course, one could have argued that Great Britain had it’s ‘end of history’ moment in the 1800s, much like the US now, but I think that it’s possible that once a threshold is crossed that history may really end. 200-1000+ years ago there were many empires vying for territory (Portuguese, British, French, Prussian, Spanish, Russian, Persian, Austro-Hungarian, Ottoman, etc.), so it was anyone’s game, but now there are just two major players: the US and China (Germany, India, and Japan are big but are not competing with the US in the same way that China is). Russia is a wildcard, but as mentioned earlier, it is really struggling at expanding.

The British monarchy has so far lasted over a thousand years. China has resisted Western influence until only very recently. The Ottoman empire lasted 600 years even twice that of the Mongol empire. Iran/Persia was led by various shahs and dynasties for 2500 years, until it all came to an end in 1979. The Magna Carta signed 800 years ago ended the era of absolute monarchy in England, and the split between Protestants and Catholics is still ongoing 500 years later.

Regarding finance and business trends, 40 years since its founding Microsoft is bigger than Janet Reno could have ever imagined when her agency sued it in 1998 for already being too powerful. This defies the hackneyed business-talk notion that dominant companies ‘come and go’. Maybe after a certain threshold of size and market penetration is reached, they don’t ‘go’. Even IBM, GM, Ford, and GE are still around a century later and are still big, although no longer as dominant as they once were.

For example an article by Inc. alleges that half of S&P 500 companies will be replaced in the next decade, suggesting that mismanagement plays a role. However, this is misleading: A company may fall off the S&P 500 not because it goes bankrupt, suffers mismanagement, or loses market share, but because it simply gets replaced by bigger or faster-growing companies or it merges. [As the name suggests, only 500 companies at any given time can be on the S&P 500. For a company to enter the S&P 500, another one must fall off.]

Google has been dominant for the past 20 years, easily beating all challengers such as Duck Duck Go, Yahoo, and Bing. A common narrative or trope of popular business books and TED talks is that big companies become sclerotic and are surpassed by smaller, more nimble competitors. But Amazon and Apple despite being decades old (45+ years for Apple), are among the five biggest companies in the world and are constantly innovating, whether it’s new iterations of the iPhone or the logistics of Amazon’s massive delivery network.

Visa and Mastercard after half a century are still the biggest players in payment professing and credit cards. The Apple Store and Google Play store duopoly does not seem to be going away anytime soon either.

Inflation stayed low for a decade in spite of endless deficits and massive expansion of the fed balance sheet. That is longer than the vast majority of experts expected, even though it did eventually end, rather abruptly. Some pundits are taking a victory lap, but the S&P 500 is still 470% higher than its 2009 lows and 150% higher than its 2000-2007 highs. It’s even 18% higher now than right before Covid (Jan 2020), and this is after a 25% decline for 2022. (Dividends are ignored in these calculations, but that adds another 2%/year in gains.) So to be vindicated the S&P 500 would have to give up much more than 25%.

Japan has been in a lost decade for 30 years now? (Maybe more like a lost quarter-century.) The Pound and Euro peaked in 2008 and keep making new lows. I don’t see either of those recovering anytime soon, maybe never.

The 40-year bull market in bonds looks like it finally ended, but 40 years, again, is way longer than anyone expected.

For trends to reverse, something has to fundamentally change. Things don’t change for no reason, especially regarding macro or finance trends. There are trillions of dollars at stake in these huge markets. How do you get so much money managed by presumably some of the smartest people in finance to reverse course, like out of the Dollar and back into the Pound? There has to be a really compelling reason.

People think finance is hard. “Markets are so unpredictable” they say. Yes, but trends persist. Passive investing in an index fund beats the vast majority of fund managers, and in the long-run beats inflation. Same for rental properties or the superiority buying compared to renting. It does not take someone with Terence Tao’s IQ to make money this way. You don’t need to be a voracious reader like Tyler Cowen to figure this stuff out. The trends are staring you in the face, and there is historical precent or justification for the trends persisting. Europe’s 15-year long malaise is not something that is suddenly going to get better, if it ever does, hence there is no reason to invest in European equities (I am mostly talking about Western and Southern Europe, and also Turkey, which has also done poorly).

On finance communities the question to diversify into foreign equites often comes up. My answer is always ‘no’. The performance gap is huge. Why is this suddenly going to change? The S&P 500 and Nasdaq in blue and purple have crushed European equities:

And even if it does change, time wasted in European equities is money left on the table (opportunity cost) when the S&P 500 and Nasdaq are always going up, save for the occasional down year like 2022.

Bay Area and Seattle homes have posted huge real returns for decades due to the usual combination of scarcity and demand attributable to the tech sector; does anyone expect this to change? Highly unlikely. The chorus to ‘build build build’ falls on deaf ears, as always. No one know where or how to begin to untangle the Gordian knot of special interest groups, regulation, bureaucracy, and stake holders.

Maybe no one knows anything and we’re all just throwing darts at the wall blindfolded. I refuse to accept this. Two centuries ago people knew far less about the universe than is known today, even though obviously a lot is still unknown. No one knew anything about antibiotics, rockets, or electricity. The frontier of knowledge is always expanding: to say that we have to accept unknowingness or throw our hands up when confronted by uncertainty or our epistemic limitations, seems defeatist.

Maybe one day people will tire of iPhones. Maybe the sun will set on America. It’s just not a bet I would be willing to make.

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