Why Gold Stopped Being a Commodity (AllianceBernstein’s Inigo Fraser Jenkins) | #649

Inigo Fraser Jenkins (0:00)

AI presumably does raise productivity, but the central case of that is that it just keeps us running at the growth rates that we've seen in recent decades, not an extra uplift to growth. Gold is actually no longer a commodity.

Gold is money in this kind of environment. If you look at the sectors where AI is expected to make the biggest difference, with our sector being number one on the list, and then overlay it with unionization rates in different sectors, then it looks starkly different from attempts at automation in, say, heavy industries, auto industries, etc. in the last 20 or 30 years. So it implies in the near term, at least, that I think we should expect some level of job dislocation. If you rank markets by market cap in 1899, then obviously US works spectacularly well, and the UK worked reasonably well too. The next six or seven went to zero, sometimes more than once.

Meb Faber (0:52)

Today's guest is Inigo Fraser-Jenkins, Chief Investment Strategist at AllianceBernstein. Inigo, welcome to the show.

Inigo Fraser Jenkins (0:59)

Thank you for having me on.

Meb Faber (1:00)

My figure will start with US exceptionalism.

And you talk about that, defend the case, pros, cons, all that. You want to start here?

Inigo Fraser Jenkins (1:09)

I think we need to split up the topic really into two. So there's the question about the US equity exceptionalism, and then there's the dollar. And these are two slightly separate things. And I would like to take the view, I'm not sure if it's popular or not, but to defend US equity exceptionalism, but to decline to defend dollar exceptionalism. So I guess we have to unpick those things and why they're not necessarily the same kind of thing. I mean, I guess the reasons why we want to defend US exceptionalism, even after years of performance and potentially high valuations, come down to a few things. I mean, first, obviously, we can't go five minutes in the industry without talking about AI.

There are huge uncertainties in terms of what the productivity gain of AI is going to be, and maybe we can get into that later. But whatever you think the productivity growth of AI is going to be, it's likely that the US benefits more from that, and sees a greater productivity growth in the US than elsewhere. I guess for a few reasons already. One, is there's a long history of evidence that US firms are better at exploiting IT advantages than rivals elsewhere. And there's a less good or less hopeful side of the reason, which is the US firms are able to fire people faster. And in the initial stages of a productivity growth, especially if it's a big one from AI, it's like it would involve a rationalization late before. So you have that kind of rational going on.

At the same time, you've got a completely different kind of reason that supports the US, which is very slow moving. It's just old-fashioned demographics, which is that the projection for the size of the working-age population in the US is basically flat over the next 10 to 15 years. Now, maybe we should be clear, that is much lower level of growth than we've been used to for the last 40 years. So it's not great in absolute terms, but it's better than everyone else. You know, in Europe, we're seeing something like a projection of about a half percent per annum decline in the working-age population over that time. In China, it's close to one percent per annum decline. So a real difference in base growth rates coming from demographics. I guess then there's other reasons for US equity exceptionalism, which is obviously normally thought of as a good thing from the point of view of equity investors. But part of it is this extraordinary growth in profit share of GDP by US firms through administrations of both colors over many decades. You look at the sort of effective tax rate of US firms, there's almost a monotonic line down over decades. That's been a big part of the earning story, and there's been real growth elsewhere, but it's a big part of the earning story of the US. I don't think there's any appetite to reverse that, and that's an advantage US firms have over firms in other parts of the world. I do think there are some limits to that. Presumably the profit share of GDP can't just grow indefinitely because there would be social consequences and presumably a backlash against that, but so far US voters have declined to engage with that and decline it. So that looks a little bit like regulatory capture perhaps, but it's an extra reason for US equity exceptionalism. So I think all those forces support the case for US equities versus those in other regions. The dollar I think is a bit different though. There are, in the case of dollar, more balanced pros and cons. So I guess the most obvious case against the dollar, retaining its reserve currency status, for example, is this question which is now a front and center of many people's views, which is this question of fiscal sustainability. And this is a can that can be kicked down the road for a long time, and you never know when a limit comes.