As companies recover, will they invest more in labor-saving technology as they did in previous recessions? Accelerating automation would have a major effect on corporate profitability as well as ramifications for the most vulnerable socioeconomic groups. With the virus deepening existing inequalities, investors may opt for new ways to responsibly allocate capital in response. Matt continues the discussion on the enduring potential impact of the pandemic on both our lives and the economy with Chris Brigham, a Senior Research Associate on our Investment Strategy team.
00:00 - 00:34
Hi, everyone, and welcome back to The Pulse, where we cover trends in the economy, markets, and asset allocation for long-term investors. I'm Matt Palazzolo and this episode will be the second installment of our A Post-COVID World podcast, which is rooted in the research we detailed in several blogs published earlier this summer under the COVID as a Catalyst title. Now, joining me once again for this conversation is Chris Brigham, senior research associate on our team and the individual that did the heaviest lifting on these important topics.
00:34 - 00:58
So, Chris, thanks for joining us again. Yeah, thanks again for having me back, Matt. So just as a reminder, everybody, our research looked into what was likely to change in the economy and in politics and in society due to the coronavirus. And we concluded that while some elements were likely to be altered, much less would change relative to current expectations. And then in many ways, the virus simply accelerated trends that were already playing out.
00:59 - 01:31
And in the last episode, Chris, you and I discussed the risk of higher inflation due to the necessary fiscal and monetary actions taken to offset the crisis. And so in today's episode, let's discuss two other major topics, automation and inequality. So let's start with that first one, Chris, automation. Why don't you share with our listeners what our research led us to expect on this front in the wake of the crisis? Absolutely, Matt. One question that almost comes to mind first is why is automation different today than it is
01:31 - 01:55
typically? Automation is a process that's been unfolding for decades, for centuries. Why do we care about it so much right now? And the real reason why we care about it more today than we typically do is the fact that in some cases we're being forced by circumstances to replace labor with technology in a way that we aren't normally as a part of the normal economy.
01:55 - 02:11
So if you go to a restaurant today, you're going to potentially encounter contactless ordering to help maintain the safety of the waitstaff and the customers. And if you go to a factory, you might see that they're replacing some of the people at the factory with equipment to help reduce the crowding.
02:12 - 02:37
And that's a form of automation and a reason for automation that we just aren't as used to and we've not seen in the past. So, Chris, just to be clear that you're saying that this is unique relative to other times where there's been a push towards automation. It's unique in that there's been a catalyst in the form of health and safety, whereas normally the automation pushes is more to cut costs and given weaker demand.
02:37 - 02:57
Exactly, Matt. And that said, there's still that underlying normal economic rationale for automation. And so that kind of brings us to point two, which is that recessions are catalysts for automation. So people kind of think that automation is a process that just unfolds evenly over the business cycle.
02:57 - 03:21
But you actually do see this acceleration in it during the recovery phase, because when companies are letting people go in the downturn, they tend to let everyone go fairly broadly. But as the economy recovers, the workers they bring back first are the more skilled workers. And rather than bringing back the less skilled workers right away, they couple those more skilled workers with more technology.
03:22 - 03:34
And the reason why that matters today so much is the fact that the pace at which we recover, the speed with which we come out of this recession is going to depend on how quickly demand comes back.
03:34 - 04:01
And if you look at what underpinned a lot of bull cases for the economy and for the market, even as recently as a few months ago, a lot of that came back to the idea that this was an unusual recession and that people could just return right back to their old jobs. But if this is more like a normal recession in that regard and people come back more slowly to their old jobs, that could delay the pace of the recovery and keep it more in line with what you see in a typical recession.
04:01 - 04:27
And then the third reason why we really care about this and one other big conclusion of this work is just there's much more focus today on the balance between labor and capital and the social and the political effects of that than at any time in recent memory. And what we kind of are seeing is that if people can't get what they need out of the economy, they have two choices. They can turn out to the polls or they can take to the streets.
04:27 - 04:49
Chris, on that last point that you made, one notable estimate that we found in our research that I think our listeners would be interested in came from the Brookings Institution and it identified 36 million jobs in the United States, 36 million jobs out of the roughly one hundred and fifty million pre-COVID jobs that were highly susceptible to automation.
04:50 - 05:23
Yes, so automation is going to have a bunch of effects and that statistic, I think is kind of jarring. We're talking about roughly one in five jobs that existed before the pandemic is susceptible to automation. And so the question is, how quickly will those recover and how quickly will those be replaced? But the one thing we haven't talked about as much is what all of this means for investors, aside from the impact that has on the recovery or the impact that has on that balance between labor and capital. Right. I think that's fair.
05:23 - 05:51
So far in this podcast, we've discussed automation as a risk, a risk to those who might potentially be losing their jobs. But I think it's also important to highlight that there could be benefits, higher productivity, higher standards of living. And for investors, as you mentioned, there can be value in the companies behind that automation, whether it's industrial equipment makers or enterprise software companies and the companies who make the chips and the networking hardware enabling all of that.
05:51 - 06:08
Yeah, and with all big changes, you see that in addition to those potential risks, of which there are several, there really are these potential opportunities. And so we want to make sure we're cognizant of both of those. As we think about those risks and the opportunities in the wake of the coronavirus,
06:08 - 06:41
One topic that's very prominent is inequality. That's our second big topic today. And whether that's income inequality or digital inequality or racial inequality, those three things tend to be correlated. I think it's fair to conclude. So, Chris, let's move on to this second topic, which is inequality. Why do or why should investors care about inequality? So there are kind of two things to think of when you think about why investors should care about inequality. One is, why should they care generally?
06:41 - 06:50
What good is it to an investor to have more equality? And second is, why should they care right now? So this is a podcast on markets.
06:50 - 07:23
Why are we talking about inequality? And the first is just morally, inequality matters. Structural racism matters. And it's incumbent on everyone, not just some subset of people, to understand and address it. And then second is a little more cynical and self-interested, and this might be more what you hear about it in econ class or corporate finance class or when you turn on CNBC. And that's, but there is going to be a certain amount of inequality in any modern economic system.
07:23 - 07:35
But once you go beyond a certain point, that starts to create headwinds. So headwinds to growth. So if educational opportunities aren't available, we're squandering people's talents.
07:35 - 08:06
If entrepreneurs can't easily access funding, not because of the quality of their ideas, but because of the color of their skin, then we're losing out on the businesses they create, the products or services they offer and the people they hire. And if things go too far, you can get political volatility and that political volatility can affect investors' willingness to put their capital at risk. So ultimately, economic growth is at the heart of all of this, is at the heart of what drives the returns of stocks and bonds.
08:06 - 08:25
And so anyone who owns those things or wants to own them has a built-in reason in addition to just kind of being a person, they have another reason, selfishly, really, to care about inequality. So let's look at where things stand today on this score, Chris. Just a couple of statistics.
08:26 - 09:00
Deaths due to the coronavirus in the United States for Black and Latino Americans far outpace their share of the population. The fall in business activity was hardest on Black- and Latino-owned businesses. Estimates show the number of active Black-owned businesses fell by 41 percent from February to April, compared to only a 17 percent fall in active White-owned businesses. And a recent Fed paper shows that Black entrepreneurs face a funding gap relative to White entrepreneurs. So, Chris, what can investors do about it? That's a great question, Matt.
09:00 - 09:28
And obviously one thing is that in their everyday lives, anything that they can do to help on these issues, whether that's helping make sure that everyone has access to good education, making sure that entrepreneurs have access to financing, whether people can have good access to healthcare and help them find a safety net to reduce the shocks of recessions, anything like that that they can do is going to help. But on top of that, there are ways to invest that actually focus on these issues.
09:28 - 09:49
And one that immediately leaps to mind is ESG investing. So environmental, social, governance, and on both the S and the G, the social and the governance count, investors can tackle these issues. And in fact, that's what our ESG teams do in their engagements with companies on these types of topics.
09:50 - 10:12
Another way that investors can tackle this is in municipal bond investments. And I know most people hear, municipal bonds, and they immediately think, oh my God, boring. But actually we have a team in-house that has a unique angle on municipal bond investments that's really interesting. So what they do is they invest in infrastructure that addresses the societal issues.
10:12 - 10:42
So, for instance, they'll fund communities that are looking to replace lead pipes and those lead pipes can lead to brain damage in children. So by helping fund their replacement, we're helping kids go on to live healthy lives and contribute to society. They'll also fund the hospitals that keep not only those children, but also their families healthy and active in the community, and they'll fund the schools that get more people access to a good 21st century education.
10:42 - 11:00
So all of those are examples of ways that we can put primary capital to work, take cash, and put it freshly into the economic system and have a real impact, make a real difference in the world around us as investors. Well, so, Chris, it's good to see that investors can make a difference.
11:00 - 11:22
And I thank you for highlighting that and what we're doing at Bernstein. So, Chris, we're going to have to leave it there. These three topics that we've touched on over the last two podcasts, inflation, automation and inequality are just three of several post-COVID topics that we explore in that recent blog series, COVID as a catalyst. And so please check that out on our Context website.
11:22 - 11:51
And Chris, thanks again for joining us and for all of your good work on this topic. Yeah, thanks again for having me, Matt. It's always fun to discuss what the future might hold. We'll certainly have you back soon. And to all of you out there listening, thanks again for joining us today. And before we sign off, just a heads up that we'll be recording new podcasts over the coming weeks in which we discuss the impact of the coming election on markets and investing. So please check those out when they're released and until next time, be well.
11:52 - 12:11
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- Matthew D. Palazzolo
- Senior National Director, Investment Insights—Investment Strategy Group