As a private investor, I find a lot of my time is taken up reading around the latest trends and economic data in an attempt to glean investment ideas. In its latest press release, AJ Bell’s investment director, Russ Mould points to five themes to watch in 2024. Of the five, these are my top two.
Public debt
The eye-watering sums of public money borrowed over the past few years, both in the UK and US, showed no sign of abating in 2023.
In the US, the Congressional Budget Office recently published its projection for the fiscal balance relative to gross domestic product (GDP), for the next decade. As shown in the chart below, the average works out at about 6% of GDP.
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Source: CBO and Bloomberg
If this prediction is accurate, it means that over the next 10 years the gap between the amount the government spends and what it takes in from taxes will widen. This is known as a fiscal imbalance.
Today, total US public debt stands at over $33trn. Assuming a 6% fiscal budget, that debt will double in just 12 years. As an investor, this matters hugely.
First, it means the government will need to issue a huge number of bonds in order to finance its spending. A surge in supply means that yields on those bonds will likely need to rise. That makes bonds highly unattractive as a long-term investment.
Secondly, surging public debt means that tangible assets are likely to be sought after by investors. Particularly gold and silver.
It’s no coincidence to me that only last week gold reached record highs. When one considers the lack of investor capital allocated to gold mining stocks today, this presents me with an incredible opportunity to buy at depressed prices.
Wage-price spiral
One of the hallmarks that emerged from the inflationary decade of the 1970s, was the concept of the wage-price spiral.
Inflation might not be running quite as hot in 2023, but that didn’t stop a wave of strikes emerging both across the public and private sector. A related feature was the re-emergence of trade union power.
The pay deals that some Unions have being able to negotiate with employers, would have been unthinkable just a few years ago. UPS and Ford’s huge pay deals certainly helped them hit the headlines, but they just represent the tip of the iceberg.
Rising inflation
One of the consequences of rising wages is structural inflation. As households continue to see cost of living pressures, they begin to demand even higher wages. Ultimately it leads to stagflation. This is where inflation remains elevated while growth is low.
Structural rises in wages and salaries is one of the reasons why I remain so bearish on big tech, including the ‘Magnificent Seven’ stocks. As profits at many of these firms have reached record highs, I find it hard to believe that employees won’t end up demanding a bigger slice of the pie.
The re-emergence of the inflation narrative over the next few years, is one of my higher-conviction investment themes.
This conviction is rooted in an impending shortage in many of the metals needed to make net zero a reality. That’s why I’m invested heavily in various commodities stocks.
